News

The FSA Report on Interest Rate Hedging disputes of 29th June 2012 was welcome in that it found serious failings in the sale of these products, corroborating the claims made by large numbers of businesses, which to date, have almost all been vigorously defended by the banks. I report below on the current position in the immediate aftermath of this report, how the various banks and the FOS have reacted to date and what I consider to be the main issues of concern:
The Financial Ombudsman Service reacted swiftly to announce that all current hedging cases were to be transferred to a new dedicated “swaps” adjudication team, made up of senior adjudicators. The team wrote to the banks involved on each current case on 2nd July 2012, asking for a reconsideration of the banks’ previous position by 16th July 2012. The swaps team also specifically noted that they were aware that complainants were in difficult financial circumstances and “This is why we are keen to progress your client’s case as soon as possible”. I have been unable to ascertain from the FOS what the bank’s responses to these letters have been, and my letters of concern noting the potential delay and the impact of the FSA report on individual cases has been met with the response “We will review your comments and respond in full as soon as we are able to do so”.
I have written to each bank involved asking them to confirm the timescale for the FSA review, the identity of the review team and whether they intend to re-review cases which have already been considered by the complaints team / external solicitors. To date, the responses have been:
RBS have stated through their solicitors that they are working through what the report means for its customers and will be in touch shortly and “Our client is committed to the fair and timely treatment of its customers and will work closely with the FSA to achieve that aim”.
Barclays have indicated that they are finalising the detail of the review, after which they will be writing to customers to let them know the next steps, and that they have “agreed to prioritise contacting those customers who are in financial hardship”.
Lloyds have stated that they have created a website with questions and answers which will be updated periodically, and are in the process of determining which customers fall within the review and will be contacting customers directly. In the meantime, they have stated that they will not respond to requests for documentation.
HSBC have not responded to my queries, but on at least one case have transferred their instructions from Stephenson Harwood to Freshfields since publication of the FSA report. HSBC have also failed to respond to requests to put Limitation Standstill Agreements in place on cases and to respond to requests for release of documentation which have been outstanding for a number of months.
It is of course very early days but my view is that the manner in which the FSA report has put control of the review process firmly in the hands of the banks without stipulation of timescales has created a situation where there is a significant risk that this development will have a detrimental effect on many cases. The banks have been handed an opportunity to delay and the generic responses noted above, which all fail to give any commitment in relation to timing of the process, do not alleviate these concerns.
Limitation Periods for litigation (and probably also for FOS complaints) continue to run despite the FSA report. Many businesses do not understand the draconian effect of missing a limitation period and assume that if they have raised a complaint, they have stopped time running. This is not the case and in order to stop time running and preserve the right to litigate in the future if necessary, it is vital to either issue proceedings or agree a Limitation Standstill Agreement with the bank. Some banks are prepared to enter into such agreements, but this is not always the case. HSBC has failed to respond to a request for a Standstill Agreement, initially made in May 2012.
Changes in the civil costs rules are due to come into effect in April 2013 which will have a major impact on the commercial viability of many of these cases, should they need to be litigated. Most businesses affected would not be able to litigate without obtaining After the Event Legal Expenses Insurance to cover the potential risk of losing the case and meeting the bank’s legal costs. Under current rules, if the case is won, the premium for that insurance (which is likely to be a 5 or 6 figure sum) is recovered from the losing party, i.e. the bank. As from April next year, the rules will change so that if the case is won, the premium is paid by the winning party, i.e, the business itself. This comes out of the compensation recovered, and in many hedging disputes where a significant proportion of the redress sought is avoidance of the liability for break costs rather than an actual compensatory recovery, it may well be the case that many businesses will find that their cases are no longer viable as if they win, their net recovery will be minimal, after payment of this insurance premium. There is a significant concern therefore that if the FSA review is not concluded within a very short timescale (i.e. before the autumn) then many cases will be unable to pursue litigation if they are unhappy with the outcome of that review process.
It is also currently unclear exactly how the Financial Ombudsman Service intend to progress cases in tandem with the FSA review and whether they will honour their initial commitment to proceed with cases as quickly as possible. It is also unclear whether the general FOS approach will change in the light of the FSA report. If so, that will create a very unfair outcome for complainants who have already been through the FOS procedure and had their cases rejected.
In conclusion, my central concern is the potentially serious effects of delay, if the FSA review is not conducted expeditiously by the banks, coupled with the structure of the process which appears to have handed the banks the ability to control the timescale of the process. It is very much in the interests of the banks to delay the process for the reasons noted above and my view is that all efforts need to be concentrated on ensuring that delay does not prejudice the rights of businesses to obtain the correct level of redress for their individual circumstances.