21st December 2012



The Background

On 29 June 2012, the FSA published the findings of its review into the sale of interest rate hedging products to small and medium sized businesses.  By 23 July 2012 the FSA had reached agreement with Barclays, HSBC, Lloyds, RBS, Allied Irish, Bank of Ireland, Clydesdale, Yorkshire Bank, Cooperative Bank, Northern Bank and Santander (“the Banks”) to participate in the redress exercise to compensate customers who have been mis sold such products.

  • What is an interest rate hedging product?

The purpose of an interest rate hedging product is to enable the customer to manage fluctuations in interest rates.  The products are typically separate to the loan from the Bank, and include swops, caps, collars and structure collars.  In simple terms the agreement allows the customer to swop a fluctuating rate of interest for a fixed rate.  Swops products vary in their complexity and the FSA stated that when sold in the right circumstances, they can be of value to the customer.  However the FSA said that it had found a range of poor practices including;

  • Lack of clarity about the costs of stopping a product.
  • Failure to ensure that the customer understood the risk.
  • Selling products based upon personal rewards rather than customer needs.

The FSA recently increased its estimate of the number of interest rates swops sold to small businesses from 28,000 to 40,000. Estimates of the total costs expected to fall upon the Bank’s collectively are in excess of £1 billion.

  • What have the Banks agreed to do?

On 3 September 2012 the FSA announced that a number of the Bank’s had appointed their independent reviewers, approved by the FSA.  The independent reviewer will review all aspects of the redress exercise and ultimately determine whether redress will be appropriate. The Banks have agreed to prioritise cases where customers are in financial difficulty.  The Banks have also committed that, except in exceptional circumstances such as, for example, where this is necessary to preserve value in the customers business, they will not foreclose  on, or adversely vary existing lending facilities without giving prior notice to the customer, and obtaining their prior consent, until a final redress determination has been issued, and if relevant, redress provided to the customer  You should continue to meet your contractual obligations, however dialogue with your Bank in this period is crucial.

  • What is meant by sophisticated/non sophisticated customers?

In the view of the FSA, smaller businesses are unlikely to possess the specific expertise to understand all of the risks associated with these products.  The FSA have classified such customers as “non sophisticated”.  A customer would be classified as a “sophisticated” customer if at least two of the following were met, in the financial year during which the sale was made;

  • A turnover of more than £6.5 million
  • A balance sheet total of more than £3.26 million (gross assets)
  • More than 50 employees

The relevance is that only non sophisticated customers fall within the scope of the review. The review relates to products sold on or after 1 December 2001.

  • If I bought a swop or simple collar what should I do?

You will be contacted by your Bank to explain whether you are considered to be a non sophisticated customer.  If you are considered non sophisticated, then the Bank will ask you whether you want your sale to be reviewed. If you do want your sale reviewed then you will be asked to provide various information.  Following the review, the Bank will propose redress if appropriate which will be agreed by the independent reviewer.  If you decide to accept the redress proposal you will be issued with a final redress proposal.

  • I am experiencing financial difficulties – how long will this process take?

No timescales have been given other than the Banks must provide a response within 8 weeks.  It is likely that businesses in financial difficulty will be better able to negotiate with creditors and agree Time to Pay Agreements with HMRC on the strength of the likely redress.

  • How can KRE help my business?

KRE does not advise customers on how to administer their claims for redress against the Banks.  There are many organisations far more qualified to assist in this regard.  We are however involved in assisting businesses with finance difficulties as they continue to trade whilst going through the redress process.  Directors still face funding issues and we can help you negotiate with creditors such as HMRC to assist temporary cashflow.  Your relationship with your Bank needs to be maintained and we can assist in agreeing a short term strategy whilst a decision is awaited.

Finally, directors still have duties and responsibilities under the Insolvency Act 1986 and we will provide guidance and advice through this difficult period.