Time to Review – the FCA commission an investigation into the IRHP Review

What is the IRHP Review?

In 2012, the Financial Services Authority (“FSA”) (now known as the Financial Conduct Authority (“FCA”)) identified significant issues and failings in the way some major high street Banks sold Interest Rate Hedging Products (“IRHP”) such as structured collars, swaps or cap products to UK Small and Medium Enterprises (“SMEs”).

Many customers did not properly understand the terms or nature of the products and were given false or mis-leading information as to the features, risks and benefits of the products.

As a result, the Banks; including but not limited to Barclays, HSBC, Lloyds and NatWest/RBS, were required to engage in a redress scheme whereby they would review the sales of IRHPs made to SMEs since 2001. The review started in May 2013 and all but a handful of claims have now been concluded.

It has been confirmed that 18,200 redress determinations have been made to customers, with 13,900 having accepted redress offers. A total of £2.2billion has been paid out, including circa £500 million to cover consequential losses.

FCA’s investigation into the IRHP Review

There are many mixed opinions in regard to the IRHP Review; some feel that the IRHP Review was a ground-breaking model for resolving large-scale mis-selling scandals, whilst others are of the opinion that the IRHP Review was a risky experiment, questioning the independence and fairness of the review, and reasonableness of the redress being offered.

In our experience, many customers who shunned the scheme and instead litigated against their banks obtained more favorable
outcomes than those who trusted that a fair and reasonable outcome would be achieved via the IRHP Review.

Lawyers and financial consultants who advised clients within the IRHP Review have questioned the independence of
the assessors, finding that the awards of compensation, particularly in relation to consequential losses, sometimes lacked transparency and justification.

In light of the above, on 20th June 2019, the FCA commissioned John Swift QC to undertake an investigation of the Bank’s implementation and operation of the IRHP Review. The FCA published a detailed ‘Terms of Reference’ and Protocol, setting out the parameters of the investigation. Examples of what will be assessed are as follows:

1. Whether the FCA’s approach to the intervention, including the potential benefits over alternative options and parameters for the scheme, was a reasonable response to the FCA’s concern about the mis-selling of IRHPs;
2. Whether the criteria for eligibility to benefit from the scheme were appropriate;
3. Whether overall, the scheme delivered fair and consistent outcomes for in-scope SMEs in a proportionate and transparent way, including the approach to consequential losses; and
4. Whether the redress exercise was delivered in an effective and timely way.

What is John Swift QC trying to achieve?

Mr Swift QC has confirmed that the investigation is not intended to be an assessment of the appropriateness and/or reasonableness of individual redress offers, nor it is intended to open the floodgates for individuals to re-open the review. The purpose of Mr Swift QC’s investigation is to “Set out the lessons, if any, that should be learned from the Review”.

The deadline to submit information to Mr Swift QC closed on 31st January 2020 and a final report will be made publicly available in due course, setting out his findings.

What do we think?

Ellis Jones Solicitors LLP’s Banking & Finance Litigation Department specialises in the mis-selling of financial products and experienced first-hand the FCA’s IRHP Review. Ellis Jones recovered in excess of £45 million in relation to mis-sold IRHPs, acting for over one hundred clients via the IRHP Review, Court proceedings and Financial Ombudsman Service complaints.

Whilst we obtained many successful outcomes for our clients we felt that some may still not have achieved the fair and reasonable outcome they deserved as a result of deficiencies with the IRHP Review. Unfortunately, a number of our clients were barred from engaging in Court proceedings as an alternative avenue because important limitation deadlines had already expired. Ellis Jones’ solicitors also question the IRHP Review structure, the Banks’ approach to dealing with complaints and the scope or effectiveness of the FCA’s ability to intervene.

In particular, Ellis Jones takes issue with the following:

• We found that there was a great disparity in the approach of certain Banks within the IRHP Review, with some Banks being more inclined to determine redress on the basis of substituted products, which were not always appropriate or fair;
• In our opinion, the Banks imposed an unduly harsh burden of proof in respect of consequential loss claims; we found that the Banks’ offers sometimes fell significantly short of our clients’ losses, despite such claims being supported by evidence;
• In relation to timescales, the Banks often took substantial periods of time to review and respond to our clients’ complaints and then unreasonably imposed tight deadlines on our clients to appeal or provide further submissions of information;
• We found that the Banks failed or refused to adequately disclose documents, often relying on evidence and information not made available to the business making the claim. There was generally speaking an imbalance of information between the Banks and its customers;
• The Banks refused to allow reviews to take place on a ‘without prejudice’ basis, meaning that they would be able to argue that anything provided by a customer under the review could be referred to the courts and used against them at a later date;
• We have concerns as to the impartiality of some independent reviewers. The reviewers often agreed with the Banks’ outcome of the complaint giving little to no reassurance that the Banks’ decisions were being analysed and challenged. We further understand that a number of the independent reviewers were large institutions that would have had significant existing commercial relationships with the Banks.
• The Banks often refused to meet all of the legal costs for advising clients who were entering into the IRHP review, stating that it was not a legal process and that legal assistance was not required. This is despite the products in issue being complex and many customers not understanding them or the process involved; and
• We discovered that some clients who failed to seek independent legal advice were faced with the problem of limitation, with their claims being ‘time-barred’ and them subsequently losing their ability to successfully pursue Court proceedings.

In light of the above, Ellis Jones eagerly awaits Mr Swift QC’s Report as the findings will be of great interest to the Firm and its past, present and future clients. Despite the announcement that there is not an intention for a re-review, we maintain that this would be appropriate in a large number of cases where clients have not received appropriate redress as a result of the deficiencies of the IRHP Review. Regardless, we remain hopeful that Mr Swift QC’s Report will set out a fair and reasonable summary of the deficiencies in the IRHP Review and that the FCA and the Banks will learn from this when it comes to dealing with other redress schemes.

How can we help?

Ellis Jones’ Banking & Finance Litigation solicitors have specialist knowledge and expertise across a broad range of areas, acting for both commercial and individual clients who have suffered as a result of mis-sold financial products. If you feel you may have been mis-sold a financial product or are unhappy with a recent complaint outcome received from the Banks, please contact William Fox Bregman, or Paul Kanolik of our Banking and Finance Litigation Department on 01202 525333 or via an email enquiry.