Swaps mis-selling – SMEs and the sophistication complication

Author: Alexander Wildschütz, Charles Proctor

This April saw the start of the compensation process by the banks(1) taking part in the review regarding the mis-selling of interest rate swaps and other interest rate hedging products (IRHPs)(2). However, despite this, the news is far from good for some SMEs.

This is because there is a significant obstacle on the road to compensation and it is important that SMEs are aware of this and how to face it. This obstacle is the sophistication test.


When the Financial Services Authority (now, as regards this review, the Financial Conduct Authority (FCA)) confirmed the way forward for the banks to review their sales of IRHPs at the start of the year it set out a revised sophistication test.

The test looks at the following objective measures for companies (and groups) in respect of the financial year in which the sale was concluded:

  1. turnover – over £6.5m (group aggregate – over £6.5m net (or £7.8m gross));
  2. balance sheet total – over £3.26m (group aggregate – over £3.26m net (or £3.9m gross)); and
  3. employees – over 50.

If all of the above, or (1) and (2) or (1) and (3), are met the customer is deemed ‘sophisticated’ and excluded from the review.

It also includes a £10m cap looking at the aggregate notional hedge value for a customer (including for the group/connected clients) immediately after the sale being assessed was entered into. If the value exceeds the £10m cap, the customer is deemed ‘sophisticated’ and excluded from the review.

Finally, or perhaps firstly, regardless of the above, if it is shown that the customer had the necessary experience and knowledge to understand the service and product being sold, including the complexity and the risks involved, then the customer is deemed ‘sophisticated’ and excluded from the review.

If an SME finds itself outside the review due to one of the above exclusions it will need to be pro-active if it wants its sale assessed, and may wish to seek additional advice in respect of such action. Fladgate can assist SMEs with these next steps.

Next steps

SMEs falling into the sophisticated customer category should consider complaints to their bank (or, if eligible, the Financial Ombudsman Service) or, more likely, consider legal action through court proceedings. Either way they should act quickly.

Even those customers eligible for the review and going through the FCA approved process with their bank may need additional advice if the process does not have the envisaged outcome e.g. in respect of recovery for consequential losses such as lost business.

Further advice

If you would like more information on the above, or any related matter, please contact a member of Fladgate’s Banking and Financial Services Litigation team.

Charles Proctor, Partner (cproctor@fladgate.com)

Alexander Wildschütz, Partner  (awildschutz@fladgate.com)

(1) Barclays, HSBC, Lloyds, RBS, Allied Irish Bank UK, Bank of Ireland, Co-operative Bank, Clydesdale and Yorkshire Banks, and Santander UK.

(2) Note that the review is in respect of sales made on or after 1 December 2001 and the different IRHPs are not treated the same within the review. By way of example, once identified as a sale to non-sophisticated customers, the banks will automatically provide fair and reasonable redress to customers of structured collars, whereas the sales of simple collars and swaps will only be reviewed to determine whether redress is due if the customer confirms they want them to be when contacted by the bank.

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