The interest rate swap scandal - An update

Posted by Kath Shimmin on
In July last year I wrote an article on the mis-selling of interest rate hedging products. I was pleased that the FSA was finally taking action on what I considered to be a long standing mis-selling issue with small businesses being pressurised, often at the last minute, to purchase these products with no explanation or understanding of the risks involved. 

Since the article was written I am pleased to say that there has been more progress.

1) On 31 January 2013 the FSA published the results of the pilot reviews (FSA Report) carried out by Barclays Bank Plc, HSBC Bank Plc, Lloyds Banking Group and the Royal Bank of Scotland Plc and National Westminster Bank Plc.

The findings in the FSA Report make interesting reading:

  • 173 sales to non-sophisticated customers were reviewed. 90% did not comply with one more regulatory requirements.

As a result of the FSA Report the FSA has announced changes to the way in which the reviews will be carried out:

  • The sophistication test has been amended. The threshold at which a customer is deemed to be sophisticated has been raised. To be classified as being sophisticated the bank needs to demonstrate that the customer met at least 2 of the following criteria at the point the customer entered to the interest rate hedging product: a turnover of more than £6.5 million; a balance sheet total of more than £3.26 million; Employed more than 50 employees.

This revised criteria reflects the small companies definition as set out in the Companies Act 2006.

A customer could meet 2 or more of the above criteria and still be classified as sophisticated if the bank can demonstrate that at the time of purchasing the product the customer had the necessary experience and knowledge to understand the product including its complexity and the risks involved.

Further guidance has been provided by the FSA to prevent certain entities which were likely to fall within the definition of non-sophisticated falling within the review e.g. subsidiaries of large multi-national corporations and special purpose vehicles. The way in which the above criteria should be applied is amended as follows:

  • Customers who only meet the balance sheet criteria and employee number criteria are included in the review only where the total value of their "live" interest rate hedging product is equal to or less than £10m;
  • Subsidiaries of large groups and special purpose vehicles forming part of a large group are likely to be excluded from the review;
  • Company groups that are not able to take advantage of the lighter reporting requirements under the Companies Act 2006 for small groups are likely to be excluded from the review; and
  • Special purpose vehicle customers that are constituted in a way that falls out the Companies Act 2006 definition of a group are nevertheless connected entities are likely to be excluded from the review where the total value of their "live" interest rate hedging product is more than £10 million.

2) On the 14 February 2013 the FSA announced that Allied Irish, Bank of Ireland, Clydesdale and Yorkshire Banks, Co-operative Bank and Santander UK also agreed to review the sales of interest rate hedging products in line with the approach set out in the FSA's Report.

The above banks are currently subject to a pilot scheme, the results of which are likely to be published in the coming weeks.

About the Author

Photograph of Kath Shimmin

Kath leads the Banking and Finance team at Blake Morgan. She has over 25 years experience in the finance sector, covering a huge range of client and transaction types.

Kath Shimmin
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023 8085 7081

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