How the Banks Contracted Out of their Regulatory Obligations

by Paul Fairbridge on January 6, 2013

There has been much publicity regarding the recent agreement between the banks and the Financial Services Authority (FSA) regarding the mis-selling of interest rate swap agreements to SMEs. In an effort to protect their image and avoid another claims management company boom, the banks allegedly admitted their failings in the selling of these agreements to the FSA early into the thematic review. They then brokered a deal with the FSA whereby each bank would appoint its’ own independent reviewer to review each sale to customers who do not qualify as ‘sophisticated’ customers.

Much has been made of the inadequacy of a system whereby ‘independent’ reviewers, appointed by the bank itself, will provide redress for the consumer. Many of these agreements have forced small businesses to the verge of insolvency. I don’t propose to rehash all of the circumstances surrounding these agreements and their inherent flaws for SMEs, the parliamentary committee which now exceeds 50 members and campaign group Bully Banks will tell you all you need to know.

I currently act for several clients who have been sold these toxic agreements and are seeking redress. As the recent case of Grant Estates v RBS has effectively closed the doors of court to even the smallest business who implicitly trusted their bank, the independent review is what we’re left with, notwithstanding a few litigations which may succeed on other failings in the contract. In any event, this is not a moan and I have prepared all of my clients for a protracted battle in relation to these agreements.

I am generally not one to complain and have never written anything for public consumption. Iain Mitchell QC has adequately pointed out the inadequacies with the independent review process in relation to redress for the consumer. What has not been discussed (as far as I can tell) in any public forum is that the banks have given themselves licence to breach FSA complaint handling rules (DISP) by agreeing to the review.

Being forced to take an interest rate swap agreement

One of my clients was forced to take a rate swap agreement with a leading lender. A very simple proposition by the bank – no swap, no funding. As his business required the funding, he was left with no choice but to accept the swap. Over the years that the swap has been running his payments have risen ten-fold. My client consulted me and I duly sent a complaint to the lender. As agreed with the FSA, said lender are required to prioritise ‘distress’ cases. It was made clear to the lender that this complaint relates to a distress case as my client’s business has suffered over the past few years, in no small part due to the swap. The lender was well aware of the circumstances given that their business rescue team has stepped in. Interestingly the lender’s response was that all of their sales of these agreements are being reviewed and only after the independent reviewer has completed their review of all cases will they contact consumers potentially mis-sold these agreements. In accordance with DISP 1.6.2 a lender has 8 weeks to provide a consumer with a final response to their complaint. By agreeing with the FSA to undertake an ‘independent’ review, they have effectively bought themselves as much time as is required to undertake the review, bar those consumers that are able to pursue their complaint through the Financial Ombudsman Service (FOS). As FOS jurisdiction is limited to businesses with turnover of less than 2million Euros and less than 10 staff, many consumers are left without this option.

Having suffered irreparable damage to their reputations, the banks, with the assistance of the British Banker’s Association have begun a quiet charm offensive. This deal brokered with the FSA has very cleverly allowed the banks to appear proactive and avoid another PPI-like media storm. What nobody is saying is that the FSA have allowed this to happen, and even worse, have apparently allowed the DISP rules to be contracted out of. Assuming the independent reviews are not completed by the end of 2013 as several practitioners in this area have suggested, the banks have allowed themselves in excess of a year to deal with complaints that they are legislatively bound to resolve within 8 weeks. How many distressed SMEs will be left to fight the fight when that happens? It appears the banks have learned from their many failings of the past few years. Admit your mistakes and tell your regulator that you will make it right and they’ll give you as long as you like to ‘address’ the failings. We’ve all seen how well self regulation has worked and this is simply another example waiting to become a scandal.

In January 2013 the FSA’s regulatory arm will be transferred to the Bank of England and renamed the Financial Conduct Authority (FCA). This is intended to give the regulatory side of the FSA’s function more teeth and not merely be a rebranding exercise. In my opinion, looking at the deal that the banks have agreed with the FSA and the lack of progress that has taken place in the independent reviews of rate swaps would be a good starting project for the FCA.

About the author

Paul Fairbridge is a solicitor with CBC Solicitors in Glasgow and Rutherglen in Scotland and is an expert with interest rate swaps mis-selling and other financial claims litigation. Connect with Paul Fairbridge on LinkedIn here.

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