CONSULTING
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DIGITAL FORENSICS
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E-DISCLOSURE
LEGAL NEWS Issue 6
www.cclgroupltd.com
MIS-SELLING OF INTEREST RATE HEDGING PRODUCTS How digital forensics and e-disclosure techniques can support a claim
Last year the FCA reviewed the processes associated with the sale of Interest Rate Hedging Products (IRHPs). In this review the FCA categorised the different types of IRHPs into the following four categories: 1. Interest Rate Swaps fix the interest rate by swapping the customer’s variable rate on the loan for a fixed one. 2. Interest Rate Caps have the effect of capping the variable interest rate on the loan. The customer will pay a premium for a cap, generally a lower cap will incur a higher premium. 3. Interest Rate Simple Collars prevent the interest rate from fluctuating outside of an agreed range. If the base interest rate rises above the agreed ceiling it will be capped, however if it falls below the agreed floor the rate will remain at the floor level. 4. Interest Rate Structured Collars operate in a similar way to simple collars, the only difference being in the way in which the product reacts if the floor level is reached. Customers may be required to pay increased interest rates if the base rate falls below a certain level. The FCA’s review was not into the products themselves, which can serve a perfectly legitimate and useful purpose, but into the way in which they were sold. The then FSA, now FCA, identified that these products had been mis-sold in some cases.
Their concerns centred around: • Inappropriate sales of complex products, such as structured collars; and • Poor sales practices used in the selling of IRHPs, potentially exacerbated by sales incentive and reward schemes So what does this mean for the customers who bought IRHPs? The answer depends largely on whether the banks and FCA consider the customer to be a ‘sophisticated buyer’. In short, the current stance is that a ‘sophisticated buyer’ is big enough to have understood the product and the risks involved, and as such they are not entitled to any redress through the FCA’s review (although this is not necessarily the end of the story for sophisticated buyers).
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claim is through the bank’s own complaint handling procedures and potentially subsequent litigation. In these cases the key will be in proving that the product was mis-sold on the basis of one of the following: • Poor disclosure of exit costs • Failure to ascertain the customer’s understanding of risk • Non advised sales straying into advice • ‘Over-hedging’ (i.e. where the amounts and/or duration did not match the underlying loans); and • Rewards and incentives being a driver of these practices
Non-sophisticated buyers potentially have a fast-track for their claims, depending on what type of product they bought. The banks have committed to providing redress on the sale of structured collars for all nonsophisticated buyers and a case by case review of swaps and simple collars. Caps will be reviewed for non-sophisticated buyers, however unlike the structured collars, simple collars and swaps claims, caps claims will need to be initiated by the buyer instead of automatically by the bank.
In most of these cases it will be necessary to determine and evidence communications between the bank and the buyer. Communications such as emails and hard copy documents potentially dating back over a decade. Locating these documents is no straightforward task; imagine trying to find email communications dating back to 2001! We at CCL have already engaged in discussions with a number of firms pursuing such claims, on how we could use e-disclosure technology and techniques to help demonstrate that the product was mis-sold - processes such as recovering historical email accounts by restoring backup tapes, mailbox archives, voice and chat data such as Bloomberg.
For buyers who are deemed to be sophisticated the only route for making a
CCL is the digital forensics supplier of choice to the FCA.
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