Interest Rate Hedging Products Compensation

BBM Solicitors are instructed by a number of insolvency practitioners dealing with cases where compensation is payable under the scheme set up by the financial conduct authority (FCA) to provide redress to companies who were mis-sold interest rate hedging products (“IRHP”).

The issues are legally complex. For example, if a bank offers compensation, can it set off compensation payable against debts to it by an insolvent company? Can it rank ahead of unsecured creditors in relation to sharing the compensation, by virtue of a floating charge? How should an insolvency practitioner deal with this situation where directors of the company maintain there is a claim for consequential loss, but the insolvency practitioner wishes to capture initial redress, in order that claims of unsecured creditors can be met?

We conducted a survey of our insolvency practitioner clients. It is not scientific, because it is not a large enough sample to draw accurate statistics from, and some practitioners responded to the survey answering on behalf of a number of cases, where as others only have one or two such cases.

However, anecdotally the results were interesting.

All respondents (of course there would be some insolvency practitioners who did not respond to the survey because they had no relevant case experience) had at least one case involveding compensation under the IRHP review.   The majority of cases our clients seem to be dealing with related to Royal Bank of Scotland, although our clients did have experience of dealing with Bank of Scotland and Clydesdale, as well as a minority with other banks.

A minority of respondents had experience of a bank trying to set off compensation for IRHP against the bank debt.   This is by no means straight forward for the bank. In our view, an insolvency practitioner may want to take direction from the court before agreeing to such a set off. The balancing of accounts in bankruptcy usually requires both liabilities to exist pre insolvency.   It may well be, that compensation should be analysed as a post insolvency claim, although that is still to be judicially decided.

Two thirds of respondents had experience of the banks using their floating charge in an attempt to argue that they should rank ahead of unsecured creditors in relation to compensation. We are instructed in one, possibly two cases, where we expect to be shortly seeking directions from the court in relation to this matter.

More problematically for IP’ s, we know of one example where the bank refused to confirm primary redress could be “captured” by the insolvency practitioner if a consequential losses claim is to be pursued.

Finally, it was interesting that the IPs were fairly evenly split as to whether banks ought to be allowed to share in compensation payable, ahead of unsecured creditors, with the unsecured creditors, or behind unsecured creditors, with a similar proportion saying it depended on all the circumstances.

More details about the FCA review can be found at the following link:

http://www.fca.org.uk/consumers/financial-services-products/banking/interest-rate-hedging-products/review

Contact: Eric Baijal: emb [AT] bbmsolicitors [DOT] co [DOT] uk