The interest rate swap compensation scheme set up by the Financial Conduct Authority (FCA) has been criticised for failing victims, it has been reported. The scheme has only given out a small portion of the compensation that was allocated, and banks have reduced payouts by offering different financial products in exchange for the ones complained about.
This has been called ‘a swap for a swap’.
What Happened with the Compensation Scheme?
The FCA scheme was set up to provide redress to victims of financial mis-selling, by way of ‘interest rate hedging products’ such as interest rate swaps. Yet while the scheme is coming to an end, it has paid out significantly less than anticipated and, according to a group known as ‘Bully Banks’, was unduly influenced by the banks who sold the products.
Research carried out by Bully Banks suggests that almost a half of the companies who received compensation would remain in debt caused by the mis-selling.
A Swap for a Swap
One of the practices challenged by the group was referred to as ‘a swap for a swap’. This is where the compensation scheme allowed a bank to replace the swap a customer had, with another one. If the bank does this, they can deduct the cost of the replacement swap out of the amount of compensation owed. Some have said that the replacement swaps were priced higher than they were worth, so effectively compensation is reduced further. The banks don’t have to give a reason for offering a replacement, and so they could automatically become part of the settlement package.
Vince Cable, the business secretary has questioned the practice, and wrote to the head of the FCA, asking the regulator to examine the practice. In response the FCA commented that they believe that small businesses were not being exploited, and that the prices of the replacement swaps were fair. They also stated that they regularly checked that the ‘independent reviewers’ were carrying out their role correctly. Independent reviewers are a part of the compensation process for interest rate hedging products, and are often accountancy, compliance, or legal firms. However, it is important to note that the banks subject to review are able to choose who the independent reviewer will be.
Because the FCA redress scheme has now come to an end, a claim for compensation is no longer an option available to those who have not already applied to the scheme. However, you still may have other options. If you feel you’ve been mis-sold an interest rate hedging product, you can contact us for a free initial consultation.