Compensation for interest rate swaps ‘sophisticated’ clients

Published: 04/07/2014

Banks have been hit with several mis selling scandals in recent years, the largest of which involved payment protection insurance and is estimated to have cost lenders in the region of £22bn. However it now appears this figure could be matched by the interest rate swaps mis selling scandal as claims from ‘sophisticated’ could soon land at lender’s doors.

The Financial Conduct Authority’s (FCA) review scheme excluded clients deemed ‘sophisticated’. However this term appears to have little to do with a business owner’s actual understanding of these complex hedging products. Instead it was applied to businesses which had at least two of the following:

• a turnover of more than £6.5 million;
• a balance sheet total of more than £3.26 million; or
• more than 50 employees.

However there are now calls for lenders to be made to compensate those left outside the scope of the FCA Review Scheme. Simon Cottrell couldn’t agree more:

“There are a lot of flaws to the FCA Review Scheme - from its inability to provide any transparent information in relation to time scales, level of redress and limitation to allowing lenders to appoint their own ‘independent’ review. However the omission of businesses based on turnover or even number of employees is the biggest calamity of all.

“A business is ultimately being punished for its successful. The fact remains that these products are so complex that they were originally devised for trading between financial institutions and much bigger corporations typically with their own trading team. How does having 51 employees give a business owner more knowledge on this topic than one with 49?

“The classification of clients as either sophisticated or unsophisticated has caused problems from the get go with those deemed ‘unsophisticated’ irked by the label and those classed as ‘sophisticated’ all but forgotten about.

“The bottom line is clients have been let down by their lender and should receive compensation and we are here to make sure that happens regardless of the label you have been given.”

Content correct at time of publication