Martin Berkeley, a senior consultant at Vedanta Hedging is interviewed by Lianna Brinded of the International Business Times about the problems SMEs still face under the FCA scheme.
Mr Berkeley explains that not all SMEs will receive all of their interest payments & breakage costs back from the Bank and that some will be disappointed He also explains the fact that the Review scheme is ‘product-centric’ and compensation will vary accordingly.
Mr Abhishek Sachdev, Managing Director of Vedanta Hedging, also explains in this article how SMEs will have to fight hard to demonstrate consequential losses, and must credibly quantify these claims.
The full article is below, and also here: https://www.ibtimes.co.uk/articles/461878/20130426/mis-selling-derivatives-irsa-interest-rate-swaps.htm
April 26, 2013 6:43PM
Businesses rejoiced when one of Britain’s biggest banks delivered its first round of compensation offers to firms that claimed they were mis-sold interest rate hedging products.
The offers were close to what small-to-medium enterprises (SMEs) had hoped for.
However, while undoubtedly a step in the right direction, there are hurdles ahead, experts have warned.
First and foremost – the good news.
This week, IBTimes UK exclusively reported on one of the first SMEs to receive a letter from its bank, which offered a generous level of redress.
The bank offered to cancel the interest rate swap agreement (IRSA), return all payments and interest resulting from the financial product and not charge the SME a breakage cost for exiting the contract.
The banks whose cases were included in the pilot scheme only started reviewing them in September and it has taken eight months for the first set of results to come out.
The FCA revealed that 40,000 questionable products had been sold to SMEsand thousands of businesses will have to wait for the wider review process to begin.
But as IBTimes UK has noted repeatedly, time is of the essence. The Statute of Limitations Act means that businesses have only six years from the date the financial product was purchased to file a legal claim.
“A major caveat is the timescale of when businesses will receive redress offers,” said Abhishek Sachdev, managing director (FCA-authorised) at Vedanta Hedging.
“Some banks are zipping through the process and are under immense pressure to resolve as many cases as possible. However, some banks haven’t even started the process, even though the review was released in June last year.”
Firms are still paying thousands of pounds a month on swap payments as well as forking out more cash for loan repayments and other bills.
The longer the process takes, the more vulnerable businesses are and some will have to fight hard to survive.
Structured collar swaps
The businesses that have received redress offers are SMEs that own the most complex types of swaps on the market – a structured collared swap, designed to allow a customer to hedge exposure to interest rate fluctuations within a specified range.
But even the definition of such a device varies, creating potential problems for compensation claimants.
“At face value, the first set of redress sounds like good news but there are going to be a lot of disappointed people. For example, the definition of what type of swap a business has been sold is crucial to the category and type of redress you’ll receive,” said Berkeley.
“What I would call a structured collar may not be what the bank terms it as and therefore [it] would be classified under a different determination.”
Adding to the complexity of some SME compensation claims over mis-sold derivatives are demands for consequential losses, which would be expected to restore a business back to the financial position it was in before it entered a swap agreement.
Consequential losses include lost business opportunities, loss of the value of assets a business was forced to sell at fire sale prices, and fees from solicitors, accountants and surveyors.
“These have to be tangible, quantifiable and you have to undeniably prove the amounts you request,” said Sachdev. “The SME has to fight hard and demonstrate, with credible and quantifiable evidence, where the losses were made.
“This process is even more complicated than the claim for a swap mis-sale because every single business is different and a claim requires experts to comb through your accounts and calculate losses.”
“Consequential losses are a huge issue,” Berkeley added. “People are starting to focus on it a bit more but businesses still need professional advice and forensic accounting to be able to give supportable evidence to the banks. Most consequential loss cases may come down to litigation.”
Another major concern for businesses is what happens when the review process is over.
They still have to get back to running their businesses and this, of course, will mean they have to maintain a relationship with their banks.
IBTimes UK will be broadcasting a special Q&A video on Tuesday on the relationship between SMEs and banks