Swaps mis-selling – What now and what next?

Author: Alexander Wildschütz

In 2012, the Financial Services Authority identified failings in the way that some banks sold interest rate hedging products, including interest rate swaps. In response in 2013 the major banks started their own reviews of such sales with these reviews and the banks’ redress determinations expected to be completed by June 2014.

To date over 90% of bank sales of swaps products to “non-sophisticated” customers have been assessed as non-compliant (1). Yet whilst over half of those offered redress have accepted it, the banks have only paid out one fifth of the £3.75 billion they reportedly set aside to deal with this issue (2). This is according to information released by the Financial Conduct Authority on 8 May 2014.

These figures raise questions regarding the offers being made to customers mis-sold products and whether customers should accept them. For example, is the 8% simple interest being offered by the banks on top of the redress payments really, as the FCA has suggested, “a straightforward and fair alternative to putting together consequential loss claims” (3) or is it undervaluing such losses?

Customers need to consider carefully the potential level of their consequential loss claims before deciding what to do if/when they receive an offer of redress from the banks and they should be aware of their alternative options, including the fact that recent cases have made court action against the banks a more viable option.

The importance of the recent cases should not be underestimated as these have led to some interesting decisions against the banks. In them, we have seen:

  • A bank’s attempt to argue that certain customer losses were unforeseeable due to the extreme events of the financial crisis rejected (Rubenstein (4));
  • Customers being allowed to amend pleadings to include claims against banks in respect of the LIBOR scandal (Graiseley (5));
  • Banks’ reliance on the specific disclaimer and entire agreement clauses in contracts with their customers being said to be misplaced when the allegation is that the contracts were fraudulently induced (also Graiseley);
  • Customers being seen to have a viable claim against a bank based on a misrepresentation as to a credit break (Hockin and others (6)); and
  • A bank’s pre-trial application to block a claim on grounds that the customer was out of time fail as the customer had a real prospect of establishing it could rely on a rule extending time based on when it first had the knowledge required for bringing a claim. As such, the full factual picture (which would emerge at trial) would need to be considered. (Kays Hotels (7))

These decisions indicate that legal claims against banks may yet be the next step for customers mis-sold products. As such, there are alternatives available to customers in the FCA review process if they are not offered redress or if the offers of redress fall short of their expectations.

However, the ordinary rule is that claims must be brought within six years from when the cause of action arose. Whilst there are possible exceptions, as shown by the Kays Hotels case, as many swaps were entered into in or before 2008, those with potential mis-selling claims against banks should seek legal advice without delay.

If you would like more information on the above, or any related matter, please contact a member of Fladgate’s banking and financial litigation team.

Alexander Wildschütz, Partner, Fladgate LLP (awildschutz@fladgate.com)

(1) 12,704 of sales of interest rate hedging products assessed as non-compliant out of a total of 13,615 of those assessed (according to the FCA’s “Progress of sales through stages of the review as at 30 April 2014” factsheet (the “FCA Factsheet”)).
(2) £797.6m paid out (according to the FCA Factsheet) with press reports stating £3.75b set aside.
(3) See http://www.fca.org.uk/consumers/financial-services-products/banking/interest-rate-hedging-products as at 8 May 2014.
(4) Rubenstein v HSBC Bank plc [2012] EWCA Civ 1184 (12 September 2012).
(5) Graiseley Properties Limited v Barclays Bank PLC and Deutsche Bank AG v Unitech Global Limited [2013] EWCA Civ 1372 (8 November 2013).
(6) Hockin and others v Masden and another [2014] EWCH 763 (C).
(7) Kays Hotels Ltd v Barclays Bank Plc, Queens Bench Division (Mercantile Court) (Hamblen, J.) 16 May 2014

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