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For over three years, I have represented and advised over 60 small businesses and private individuals with claims or complaints in relation to interest rate hedging products. Each situation has been unique, and has been treated as such. However, the common theme has been that people have entered into contracts where they did not properly understand the features and risks of such contracts. Due to the magnitude of interest rate hedge mis-selling, over recent months there has been a proliferation in the availability of potential advisers, representatives and experts. How should a business go about choosing an appropriate representative, and is there a risk that some businesses are again entering into contracts for representation with risks that may not be made entirely clear?
There are basically three potential routes for redress for a hedging claim; the FSA review process, the Financial Ombudsman Service (FOS) and litigation. In its recent report (January 2013), the FSA states that “the process is straightforward” and suggests that representation, certainly by a claims management company, is unnecessary. It is correct that it is possible to use the FSA review process or the FOS without legal or other representation. However, many businesses feel that they have lost trust in their banks and that they would like to pay for representation of some sort. In the circumstances, this is a reasonable decision to take, and certainly where litigation is a potential option, is necessary.
With such a diverse range of advice and representation now available, I have noted below some issues to be aware of, to avoid unwittingly taking on additional risks:
Claims Management Companies are not generally obliged to carry professional indemnity insurance and are very loosely regulated. If something goes wrong with the handling of a claim, for example, if a limitation period is missed, there is likely to be no realistic redress against that company.
Bespoke or group representation – being part of a group of complainants / claimants may bring strength in numbers, but it should be considered carefully how an adviser will be pursuing your claim; will your claim receive individual attention and will any unique features be highlighted, will some matters be prioritised and others not. These are all questions which need to be asked.
Experts play an important role and have access to pricing information and market knowledge which is not accessible to other advisers. It is important, however, to assess the stage at which an expert is needed and what the breadth of their remit will be (specific questions or a wider brief) to ensure that money is appropriately spent on expert services.
Payment Structures. All advisers will offer different structures. Some may appear more attractive than others but a full understanding of the overall likely cost of representation, any hidden extras and exactly what will happen if a case is won or lost needs to be understood to properly evaluate the risks and benefits of different structures. This is particularly important where there is more than one route for redress because a structure that works well in litigation may not work so well for the FSA review or for the FOS.
Conditional Fee Agreements – by way of example, no-win no fee or no-win low fee arrangements (CFAs) work best in litigation, where the uplift on costs can be recovered from the bank (under current rules, due to change in April). What happens, however, if a case is won through the FSA review or the FOS? Some advisers’ CFAs will provide that an uplift is only paid if recoverable from the bank, other will require you to pay that uplift regardless of whether the uplift is recovered. A situation could arise therefore where a case succeeds in the FSA review, the uplift cannot be recovered from the bank because no costs order is made but the adviser expects a significant uplift to be paid. This could significantly diminish compensation, or even create a liability if the only redress has been to avoid break costs, or put in place an alternative structure. It is vital therefore that before agreeing to a CFA, a business understands how “success” is defined and exactly what the representative will expect to be paid if the case fails or wins, whether it is litigated or resolved in the FSA Review or FOS.
Limitation Periods – in most circumstances the banks are prepared to enter into Standstill Agreements to prevent the expiry of a limitation period for litigation, without incurring the expense of issuing proceedings. These are effective and important agreements that ought to be drafted by a lawyer to ensure adequate protection. In most situations a 6 year limitation period will run from the date of the hedge. This needs to be protected and your representative needs to be asked to and able to advise on limitation issues.
After the Event Insurance – there are important rule changes coming into effect in April 2013 so the window for arrangement of effective insurance is diminishing. There is a diverse range of ATE products available from a number of providers. Different policies will provide different levels of protection, will contain different definitions of success and will structure their premium payments in different ways. As with CFAs it is vital that before entering into an ATE policy, it has been fully explained and you understand the circumstances in which the premium will be payable, where it may not be recoverable from the bank and whether the extent of cover is adequate for your case.