It is certainly true that the whirlwinds surrounding the interest rate swap controversy have been swirling for quite some time. However, only just recently have actual steps been taken to start remedying the harm inflicted by banking institutions and to attempt to make whole the parties who suffered the most from the nefarious practices involved in the selling of interest rate swaps.
Recent days have seen the publishing of the Financial Conduct Authority’s four month update on the financial institutions’ study of previous sales of swaps, which are essentially products used to hedge against interest rate fluctuations. The report serves as the only instance thus far in which the FCA has offered specifics of potential liability of the nine institutions agreeing to participate in the customer compensation system. It is anticipated that subsequent FCA updates will occur on a monthly basis.
FCA Interest Rate Swap Update
The FCA reports that upwards of 25,000 of these sales are currently under review by the financial institutions and initial rounds of compensation offer letters are going out. It is expected that the majority of customers will learn the results of their individual review by year’s end and will receive information regarding potential repayment of the amounts they paid out in the swap itself.
It is worth noting, though, that the FCA has cautioned that compensation offers to those who have lodged a claim for consequential losses are likely to be slower in coming. This is because such claims are far more complicated and are more difficult to assess based upon the existing compensation guidelines.
The concept of consequential losses encompasses losses suffered by customers in excess of the actual amounts paid to banks directly attributable to the swap transaction. This category of losses can include things such as overdraft assessments, lost business revenue and extra borrowing expenses. It is often the case that these losses far surpass the direct costs paid in the swaps.
If a financial institution determines that a given swap has been improperly sold, the swap is suspended and no further payment collection on the swap will be made. Banks then offer compensation in the form of a direct refund of previous payments. Customers will also then be asked if they believe they have suffered consequential losses.
Participating financial institutions have declared that basic compensation payments will not be made to customers unless there has been a complete settlement of any existing consequential loss claim as well. A single offer is all that will be made, and additional negotiation will not be entertained. Should an individual customer refuse the offer of compensation, their swap will be reactivated and the payment suspension will no longer be in effect. At that point, customers are liable for backlogged payments, breakage costs and ongoing payments as well.
Customers in such situations will have no other option but to initiate litigation to attempt to recover their full claim. The fact is, however, that many such individuals are in such weak financial positions that they are unable to pay the costs of such a battle and will therefore have little choice but to accept potentially low offers. Also significant is the fact that courts apply different standards than those conducting compensation reviews and appear to be relatively reluctant to side with customers in cases of improperly sold swaps.
Maple Leaf Financial reports that potential claimants are often told by the FCA that they have the ability to pursue compensation without having to enlist the aid of lawyers or other professional firms, but doing so can actually place them at a real disadvantage. This is because the financial institutions involved make liberal use of legal advisors and have specific frameworks within which they assess consequential loss claims made by customers. Some of the factors banks examine include things such as whether or not the customer truly incurred losses due to regulatory breach on the part of the bank and whether or not their losses were foreseeable when the breach occurred.
The bottom line is that in cases of interest rate swaps, claims of consequential losses are heavily fact dependent and require the assistance of skilled legal professionals who have the ability to marshal relevant evidence and mount persuasive arguments. Customers who feel they have suffered this type of loss would be well advised to enlist such help in order to increase their chances of securing quicker resolution and fair compensation from the banks.
Tim Capper reports on Financial Mis-Selling by Banking and other Financial Institutions. Financial reporting does not construe Financial advice.