Consequential Hedging Losses

Consequential Hedging Losses denial in  cases for mis-sold products, have become center stage, particularly with their ‘Ugly Sister’ – the Banks’ Conflicts of Interest.
In 2012, the UK Financial Conduct Authority (FCA) identified failings in the way that some banks sold structured collars, swaps, simple collars and cap products, which are collectively referred to as Interest rate Hedging Products [IRHPs]. The nine Banks involved agreed to review their sales of IRHP made to what are described as ‘Unsophisticated Customers”  since 2001. There is no equivalent Irish scheme in place, although there have been instances of Consequential losses denial in Hedging cases, and related Banks’ Conflicts of Interest.

 

The full review started in May 2013. The UK banks have nearly completed their reviews, having sent a redress determination letter to 18,100 businesses and paid over £2.1 billion in redress, including £464 million to deal with consequential hedging losses.
The nine banks that are reviewing their sales of IRHPs  are:

Allied Irish Bank (UK), Bank of Ireland, Barclays,
Clydesdale & Yorkshire Banks, Co-operative Bank, HSBC,
Lloyds Banking Group, Royal Bank of Scotland, Santander UK

Out of these, four have had major commercial financing operations here in Ireland, but there is no equivalent Scheme in place for negatively affected Ireland-based  commercial Borrowers.
To give a perception that outcomes are fair and reasonable, the banks’ review of every case is overseen by an Independent Reviewer;  AIB GB uses its own Auditors –  Deloitte, as an allegedly Independent Reviewer. However on 20th June 2013 Allied Irish Banks, plc. (AIB) announces the appointment of the same Deloitte as Independent Group Auditor. This is a clear Conflict of Interest.
Included in the role of the Independent Reviewer ( or Skilled Person) is (i) reporting on whether the banks have identified and contacted all eligible customers, and (ii) reporting on the banks’ engagement with customers, which includes attending meetings as silent observers.

Hedging Mis-selling
A major flaw in the FCA’s Review Scheme was that it relied on the Banks themselves to decide who was eligible for compensation, which led to the exclusion of many businesses who they deemed to be ‘Sophisticated’. This flaw  led to the exclusion of many businesses who they (unilaterally) deemed to be ‘Sophisticated’. Banks worked closely with assessors, (or designated Skilled Persons) frequently large accountancy firms – Deloitte, KPMG and PriceWaterhouseCoopers, – who, inappropriately  are Bank-appointees. Legal Proceedings are being taken to challenge this widespread Consequential Hedging Losses denial and the  Banks’ Conflicts of Interest,
Customers who did not join the IRHP review, in the UK before 31 March 2015 still have the following options (subject to time limits for making a complaint or bringing a claim):
1. To complain about the sale of their IRHPs through the banks’ usual complaints handling processes;
2. To refer their complaint to the Financial Ombudsman Service;
3. To pursue their case through the courts. Consequential Hedging Losses denial may be applicable to other members of the Group on 9 Banks, and their Conflicts of Interest.
Over recent years, a number of instances of mis-sold substantial Interest Rate Derivative Products have been referred to in litigation in Ireland, but there is no Redress Scheme in place for affected Borrowers, they are compelled to go-it-alone & play Russian Roulette at the Irish Courts.
The FCA – UK (Financial Conduct Authority) review so far – [as at the end of December 2015]:

To date, around 13,500 UK-customers have accepted a redress offer and £2 billion is being paid out, including more than £460 million to cover consequential losses. This means that, so far, around 92% of offers have been accepted. This is a surprising interim outcome, when considered alongside the Banks harnessing of ‘a standardised methodology’ in dealing with Affected Borrowers’ Claims. This is particularly worrying when the Slide Rule is taken out by the Borrowers’ Forensic Accountant (or equivalent Investigator) to scrutinise the Borrowers’ files for undisclosed aspects of very substantial and attributable Consequential Hedging Losses.

Last month (January 2016) , in what is  a significant legal hearing in the UK., a Judicial Review commenced with respect to the Interest Rate Hedging Product (IRHP) compensation scheme. The outcome of this Review could affect up to 10,000 business that have been affected by the mis-selling scandal. The UK precedent may have a bearing on Irish Borrowers who have been similarly mis-sold Hedging products.
In April 2015, a UK Judge granted an application put forward by the nursing home operator, Holmcroft Properties.
Holmcroft Properties, who in April came up in Court against giants Barclays, KPMG and the Financial Conduct Authority (FCA), was mis-sold Interest Rate Hedging Products by Barclays on two separate occasions, resulting in the loss of five secured-properties when interest rates fell. Barclays compensated the claimant with £500,000, however Holmcroft’s fully attributable consequential hedging losses could be shown to be for far higher sums. Basic tenets of these proceedings (and other related cases) are denial of  fully attributable Consequential Hedging Losses  & Banks’ Conflicts of Interest.