It is important that businesses that have interest rate hedging deals (SWAP’s) which are subject to the current review do ensure that they are engaged with their bank through the process. This review has been instigated by the FSA and the first pilots have recently reported their findings, concluding that there is indeed a potential mis-selling issue to be addressed. The fact that over 90% were sold with some kind of breach of the processes laid down by the regulatory authorities is a big disappointment but perhaps not a surprise.
However this doesn’t automatically mean that the banks will conclude that the business is entitled to compensation. Firstly the FSA have ‘refined’ their definition of a ‘sophisticated’ borrower – so the criteria for who will be eligible for the review has changed. Secondly the decision as to whether compensation should be paid (and how much) will be a result of a complex process that the banks have put in place using ‘independent’ reviewers. These independent reviewers are basically a combination of accountants and consultants, many of whom are retired bankers.
The process will end with the business customer being invited to a meeting to be presented with the banks conclusions, which could include an offer of financial compensation. The calculations behind that will be exceptionally complicated and it remains to be seen how transparent that can be. What we do know is that the banks are already setting aside massive provisions for this. Barclay’s (who many believe were the most aggressive sellers of these contracts) have budgeted for compensation of £850m but some analysts believe this is not enough.
Meanwhile the vultures are circling (you only need to google ‘SWAP Mis-selling to see the lists of firms prepared to ‘enter into battle’ on behalf of clients).
The important message for businesses is:
- Ensure that you know how your bank is reviewing your case (letters will have been sent out to those concerned)
- Ensure that your input is sought from the independent reviewers (that includes your paperwork, recall of discussions and emails etc). If you ignore the opportunity to do that the bank will review the case just based on their ‘facts’
- Most importantly, do not attend the meeting with the reviewers alone. It will pay to have a professional with you, not least as there is a chance that there could be at least three people there from the bank and the issues will be complex and emotive.
There are more pilots due to report their findings imminently so watch out for the press coverage on the back of those.