As a quick refresher on what an interest rate swap is; a bank interest rate swap agreement (‘Swap’) is a complex financial instrument, a bet, otherwise referred to as a ‘derivative contract’, through which a business could effectively cap the amount of interest that it would pay if, after having borrowed a capital sum of say, £1,000,000, interest rates rose above a specified level. The products are sometimes referred to as a ‘hedge’ against interest rates rising.
The flipside of such a deal was that if interest rates fell below a certain level, the customer would pay a larger amount to the lender. Undeniably, interest rates are at an historically low level, with Bank of England’s Base Rate still at just 0.5% – as it has been for years.
The bet was one which – from a customer’s point of view – was against interest rates rising. Few realised that if interest rates fell, the customer would pick up a large bill.
For a customer to get out of the arrangement or contract, banks charged, or sought to charge, large penalties, which most customers could not afford. Some businesses of modest means with relatively modest loans discovered that they were liable for millions of pounds to buy themselves out of the Swap.
The Swaps were sold to customers with a substantial asset base, typically real estate. Many sectors were targeted, not just care homes, but hotels, restaurants, public houses – anyone with a chargeable capital asset.
There have been a number of High Court cases in which the Swap deal has been a central feature; some of those claims failed.
The banks have been reviewing many of the Swap agreements and have made some payments to customers – where the bank concerned has decided that the customer had been mis-sold the Swap product. In many cases, the banks have taken the view that large companies can ‘look after themselves’ and, so far as I know, payments have so far been made only to small- and medium-sized enterprises. Much of the work has been undertaken by, or with significant input and oversight from, the big accountancy firms.
A very recent court decision will cause mixed emotions among those businesses which were mis-sold Interest Rate Swap products by their bank.
Holmcroft Properties, a care home operator, was one such customer; it alleged that it had been mis-sold Swaps products. It submitted to the redress scheme, which the Financial Conduct Authority (FCA) had required the banks to devise and operate, and the FCA had required the bank to nominate a reviewer, in this case the reviewer was KPMG.
Holmcroft Properties, which had initially been awarded about £500,000 under the Barclays scheme, was dissatisfied with the process and the sum awarded to it. This was because the claim made by the company included claims in respect of its consequential losses, which totalled about £4.8m, and were not compensated.
In April 2015, Holmcroft Properties obtained permission from Mr Justice Parker to bring judicial review proceedings concerning the redress scheme as operated by Barclays Bank, and reviewed by KPMG. The judge had decided that, for the purposes of the redress scheme, KPMG could potentially be considered to be a ‘public body’ and, therefore, susceptible to a judicial review application.
The decision in the judicial review hearing had been reserved and was announced on 24th February 2016.
In short, while the court found that KPMG was contracted to oversee Barclays Bank’s redress scheme, as required by the FCA (the relevant regulator at the time of promulgation of the scheme), it was not carrying out a public function such that it was amenable to judicial review. The claim was dismissed.
The solicitor representing Holmcroft Properties said, ‘While naturally we are disappointed with today’s decision, there are two aspects of the judgment that are surprisingly encouraging.’ He went on to say that the judges’ ruling on the question of KPMG’s public function ‘is not clear cut. We believe it offers very credible grounds for appeal and will be making an application to do so.’
The solicitor also said of the judgment, ‘The second encouraging part of the judgment is that it quite explicitly indicates that there is value in pursuing an alternative legal route to securing compensation for affected businesses, focusing on the issue of breach of duty,’ and added that this point ‘bodes very well’ for a proposed class action.
KPMG welcomed the ruling. A statement made on behalf of KPMG said, ‘We’re particularly pleased that the court acknowledged that the redress process had been “conducted in a conspicuously scrupulous way” and we welcome the decision of the court that KPMG is not subject to judicial review in our role as independent reviewer.’
Barclays also said it was satisfied with the judgment, ‘Barclays remains committed to achieving an appropriate, fair and reasonable outcome for all customers through its review of past [Interest Rate Swap products] sales.’
In addition to a possible appeal by Holmcroft Properties, other customers of various banks, including Barclays, have a number of cases progressing through the courts as they believe that they have not been properly served by the compensation process as it has been applied to them.
It seems therefore, that there is more litigation to follow before the issue of Swaps is finally put to bed. Meanwhile, the litigation continues to operate as a ‘drag’ both on the businesses challenging the banks and the banks themselves.
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