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Compensation for Businesses: Mis-sold Interest Rate Hedging Products (IRHPs)

Thursday, 5 December 2013

Thousands of businesses have been mis-sold IHRP products by banks and could be in line for compensation.

In 2012, a FCA review found serious failings in the sale of interest rate hedging products (IRHPs) to small businesses by some of the UK’s biggest banks.

The Scale of Interest Rate Hedging Product (IRHP) Mis-selling

As a result of the review, the banks in question have agreed to review the sale of around 40,000 IRHPs.

Businesses were sold the IRHPs by banks as protection against interest rate rises on loan payments.

After interest rates fell, businesses were left paying increased monthly repayments. What’s more, they faced substantial “breakage costs” to escape from the products.

What are Interest Rate Hedging Products (IRHPs)?

IRHPs are essentially financial contracts between a customer and a bank.

They include swaps that allow customers to fix their floating interest rate (or vice-versa) and caps that place a limit on any interest rate rises.

They also cover collars that protect customers from interest rate fluctuations and structured collars that enable customers to restricted interest rate fluctuations to within a specific range.

How were Interest Rate Hedging Products (IRHPs) Mis-sold?

Could you have been mis-sold an IRHP?

The FCA review found a number of indictors of mis-selling.

In relation to the sales process, this included poor disclosure of exit costs, failure to ascertain customers’ understanding of risk and salesmanship that strayed into giving advice.

The products themselves were also dubious. The banks were guilty of “over-hedging”, or where the duration or amount of the hedge did not match the length or value of the underlying loans.

And the FCA found that rewards or incentives drove these practices.

Accordingly, the FCA working with the banks involved in the scandal has devised a scheme of redress.

Who is Eligible for Compensation?

Could you be eligible for compensation for mis-sold IRHPs?

The compensation scheme is only available to non-sophisticated customers. This is because it is thought that they lacked the expertise and understanding of the IRHP products that were being sold by the banks.

It applies to the sale of IRHPs made on or after 1 December 2001.

A non-sophisticated customer must meet two of three conditions. They must have a turnover of less than £6.5m, and/or a balance sheet total of less than £3.26m and/or less than 50 employees.

But even if your business doesn’t meet these requirements, it may still be eligible.

For example, farms that own a lot of property, land or machinery with a large seasonal workforce can struggle to meet this criterion, but for the purposes of the review they can still be classified as non-sophisticated.

Conclusion

Eligible businesses could be in line for compensation.

Compensation aims to put customers back in the position they would have been in had an IRHP not been mis-sold. It also includes consequential loss.

Banks are currently conducting a review of the sales process of 40,000 IHRP transactions. Each review is accompanied by an independent review, and the bank then decides if a business is owed compensation.

Caps will also be reviewed if a customer makes a complaint during the review.

For more information about making claims related to interest rate hedging products contact James Crighton jcrighton@rollingsons.co.uk or telephone 0207 611 4848.

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