Business Law: Dermott Thomas examines recent rulings on the alleged mis-selling of hedging products

Dermott Thomas of Barker Gotelee

Dermott Thomas of Barker Gotelee - Credit: Archant

THE high street banks’ battle to avoid or lessen the prospect of paying millions of pounds of damages and compensation to their customers over the sale of complex hedging products has met with varying degrees of success in previous months.

In October, the Financial Services Ombudsman, no doubt buoyed by declarations from the Financial Services Authority and an apparent agreement by the banks to set up compensation schemes in relation to hedging products, overturned initial decisions by the adjudicator to recommend compensation in two cases involving classic examples of bank mis-selling in or around 2007/2008.

In both cases, the Ombudsman recommended an outline of compensation based on a comparison between these complex derivative hedging products and a simple short term fixed rate loan from the bank. Significantly, in both cases, the customers involved were very clearly private customers, one being a small business landlord and the other a small family hotelier. These cases were followed shortly afterwards by a decision in the High Court in Manchester where the claimant developers failed against Royal Bank of Scotland plc in a claim relating to a swap agreement in 2005.

It is yet be seen whether this case results in an appeal but its facts are rather different, in that it relates back to 2004/2005 when the aggressive promotion of these financial products was in its infancy and it would appear that banks were more concerned with explaining the products carefully. It also appears that the complainants in the case were much more sophisticated than the standard SME owner later targeted.

It is said that this latest decision from the High Court has encouraged the high street banks to attack the head of the new Financial Condust Authority (which is being created out of the FSA to administer this sort of product) as a “persecutor” of the UK high street banks. Whilst such a plea is unlikely to garner much public sympathy it remains to be seen what influence the Government may bring to bear.

The FSA announced in February the results of the pilot scheme with a resounding indictment of the banks, finding 90% of cases involved mis-selling.

Affected customers are now being encouraged to open up to the banks in a “customer centric” investigation where the customer provides all its evidence to the bank but the bank refuses to be open about its mis-selling procedures.

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The decision about compensation is to be made by a bank official. How can anyone trust these banks to do the right thing?

: : Dermott Thomas is a partner at law firm Barker Gotelee.

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