McHale & Co. Solicitors Blog

We agree with Bully Banks

Below is an extract of what the organization “Bully Banks” have sent to their members some of whom are clients of ours. Our brief interpretation of the conclusions is “Don’t wait, Litigate!”

The bad news first: 

  • The number of cases in the pilot studies in which the IRSA had been found to have been mis-sold was not disclosed. Clearly we need to know that number expressed as a percentage of the number of cases reviewed by each bank in order to form a view as to the effectiveness of the review process. Indeed there are several numbers we need to know if we are to be able to properly evaluate how each bank is responding to this issue (e.g. the number of cases that each bank determined was a mis-sale prior to the Independent Reviewer’s review, the number of cases in which the Independent Reviewer determined was a mis-sale contrary to the bank’s initial review, the number of cases in which the FSA determined was a mis-sale contrary to the bank’s and Independent Reviewer’s finding.) In other words transparency of the review process is required. 

  • Extraordinarily, there is still no clarification of the meaning of “fair and reasonable redress”, and  

  • There was no definitive timetable given.

Each of these is a serious omission. The meeting was made aware of these omissions and our concerns about them. 

The Positives:
Notwithstanding the above omissions we did feel that the meeting had a number of positives and each of the directors of Bully-Banks who attended the meeting did feel encouraged by the progress being made by the FSA to implement an effective Review Process. 
The following facts were included in a statement by a senior official of the FSA: 

  • Each of HSBC, Lloyds, RBS & Barclays have basically completed their pilot studies and each has reviewed between 30 to 50 sales of IRSAs. 

  • The FSA is scrutinising each of these cases to ensure a fair and reasonable outcome for the SMEs.  This involves a detailed file by file review by the FSA of each case to ensure the bank’s and the Independent Reviewer’s outcomes are consistent with the FSA’s view. 

  • The Independent Reviewer was present at all interviews with SME customers and good feedback from the SME customers has been received about the Independent Reviewer’s participation at these interviews.(That is consistent with the feedback being received by Bully-Banks after a rocky start. We brought certain matters to the attention of the FSA and the FSA and the banks have responded to the concerns we raised. It is clearly in the interest of each SME customer that the Independent Reviewer be present during their interview.) 

The four bank’s pilot studies and their review by the FSA are not yet finished however and there are three key issues still outstanding:

  1. The “sophistication test” needs amendment to avoid some SMEs just missing criteria tests so that they are deemed to be “sophisticated” rather than “un-sophisticated”, (for example because they employ large numbers of individuals as casual labour) and, conversely, to avoid the subsidiaries of very large businesses (ie. businesses with turnovers expressed in billions) managing to fall within the “unsophisticated” category because the IRSAs are held by Single Purpose Vehicles.
  2. The calculation of the redress to be offered to an SME when a mis-sale has been found has not yet been agreed between the banks, the Independent Reviewer and the FSA. (This is a major concern.)
  3. There is still a debate between the banks, the Independent Reviewers and the FSA about what constitutes sufficient information to ensure that a customer is able to “truly understand” the breakage cost implicit in the IRSA. (This is also a major concern.) 
  • The key conclusion is that the Preliminary Results of the pilot studies by the four banks support the FSA’s findings announced on 29th June 2012 (i.e. that there were serious failings in the sale of IRSAs to SMEs and that serious damage had resulted to those SMEs). In fact the percentage of sales found to have serious failings was higher than that found by the FSA prior to the 29th June Agreement. (This was the most significant statement by the FSA during the meeting.) 

  • The FSA emphasised that “Customer Testimony” (ie. the oral evidence of the owners of the SMEs sold the IRSAs) is essential to a fair review and that Customer Testimony had led to a number of decisions being made in the customer’s favour contrary to the decisions initially indicated by the documentation. (In the light of the various statements made by the FSA and the Independent Reviewers during the meeting we would strongly recommend that all members do fully participate in their review. We should make it clear that we also recommend that each member participate with the benefit of legal representation and that they be accompanied by their lawyer at any meeting. It is vital that your case be best presented. Each of the four banks has confirmed that their review process allows for you to be accompanied by your legal representative.)  

  • The FSA has committed to have all the Pilot Studies by the eleven banks completed (including the calculation of redress to those whose review has been conducted as part of the Pilot Studies) by 31st January 2013. 

  • By 31st January 2013 the FSA will have decided whether each bank can proceed to implement the review process that it has agreed with the FSA. It is confidently anticipated that this will be the case for all eleven banks.

In a summary at the conclusion of a lengthy opening statement the FSA confirmed: 

  • The results of each of the pilot studies support the earlier findings by the FSA that a significant proportion of sales of IRSAs were unsatisfactory.  

  • The most important factors in the mis-sale of an IRSA were;

  • Poor disclosure of breakage costs

  • Failure to understand and address the customer’s perception of the risks of the agreement they were proposing to enter into.

  • Over hedging (both by way of term or amount)

  • The bank “straying” into giving advice.

  • The drivers of the transaction being the reward and incentives given to the bank’s staff rather than the customer’s needs. 

  • Large numbers of SMEs were entitled to redress.

The next step in the process is the feedback by the FSA of the results of their review of each bank’s pilot study to the relevant bank and independent reviewer. This will take place in January. The FSA’s “high level observations” (i.e. without referring to individual decisions) about each bank’s pilot study will be published to the next meeting held under the Treasury’s guidance and a decision made whether each bank can go ahead with their Review Process.
Both Deloittes and KPMG (two Independent Reviewers) confirmed that the FSA had rigorously scrutinised their teams of personnel both for independence and skill sets. They emphasised that their independence obligation, which is owed to the FSA, continues throughout their participation in the review process. They stated that the average time spent by the Independent Reviewer on a review of an individual case was three days and this would double in the case of review when the Independent Reviewer’s decision differed from the bank’s.
Each of the four banks confirmed that they were ready to begin their review process and were awaiting confirmation from the FSA.  The scale of the activity was emphasised with Barclays, for example, noting that they had already processed over one million documents in preparing for and carrying out their pilot study and preparing for the review process. Each bank noted the number of people recruited and employed in their review department.
Bully-Banks raised yet again the need for the Urgent Relief that it had raised with each of the four banks in bi-lateral meetings. Reference was made to the announcement by the BBA about the roll over of payments under IRSAs and Bully-Banks expressed disappointment with the use of the words “financial distress” in contrast to the words “financial difficulties” used by a Greg Clark MP on behalf of the Government in Parliament on 11th December. We were reassured by the BBA that the banks would respond to requests by SMEs to roll over the payments under their IRSAs. We were also reassured after the meeting that the banks would not change the terms of lending if an SME asked for a roll-over and would not impose additional management charges. (On a practical basis we are suggesting that every member who wishes to roll over their payments under their IRSA immediately approach their bank referring to the announcement by the BBA. Please let Bully-Banks know if your request to roll over is turned down. Let us know the reasons given by your bank for any such decision. Members have been told by their Relationship Managers that the banks will not offer roll over but will respond to a request for it.)
Our Conclusions
Clearly we have concerns over certain issues and we identified the principal concerns in the “bad news” paragraph at the start of this Newsletter.
The only explanation we can offer for the absence of detailed numbers about the findings of the pilot studies is that the figures suggest a level of mis-sale which is so high that it has implications for the provisions made by the banks.  In a bizarre way the refusal to disclose these figures may be indicative of good news for our members.
The absence of a clear description of what constitutes “fair and reasonable redress” continues to be a major stumbling block to Bully-Banks’ support of the FSA Scheme. Until we know the nature of the redress under the scheme, we have no understanding of what the FSA Scheme is likely to deliver.  Our advice is therefore that litigation should be actively processed as an option by every member i.e. solicitors instructed.
The characterisation of five factors as the most important leading to a mis-sale continues to us to be too narrow. The presentation of a salesperson as an advisor seems an obvious deceit that leads to the conclusion that a mis-sale occurred. In addition the fact the salesperson may not have been authorised by the FSA to give advice in connection with the sale of these products immediately renders the sale a mis-sale.. (It has recently come to our attention that a number of sales of IRSAs were made by salespersons who were not authorised at the time of sale – every member is therefore urged to check upon the status of the derivatives expert who sold them their IRSA at the time of the sale. This can be done by searching the FSA’s website. Please let us know if the salesperson who sold you your IRSA was not authorised to do so at the time of sale.)
However to balance the above concerns, it is clear that there are a number of well motivated professionals who are trying to produce a solution to the problems rising from the sale of IRSAs to SMEs. There appears to be is a strong belief amongst the majority of the civil servants we meet that SMEs were mis-sold these products. They and many of the individual professionals employed by the banks appear to be working hard to deliver an effective review process. We would be foolish not to acknowledge this although a number of our very serious concerns remain unanswered at this time. We are encouraged by what we see but we are also cautious.

Bully Banks

Tags: For Business

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