FCA Review

In May 2013 nine banks[1] (“the Banks”) agreed to review their sales to unsophisticated customers[2] in accordance with terms of references agreed with the FCA.  At the end of June 2014 the FCA reported that all participating banks had completed their sales reviews in relation to customers who joined the Review before March 2014[3].  By the end of June 2014 the Banks had sent out 16,000 redress letters, 13,500 of which included a cash redress offer and with the balance of 2,500 confirming that the sale had been compliant with the (then) FSA rules or that the customer had suffered no loss. By the end of June 2014 8,000 customers had accepted their redress offers, and the Banks had paid out £1.2 billion.

The Banks’ independent reviewers are now considering consequential loss claims.  The FCA expects that process to be concluded by the end of 2014.  By end of June 2014 2,400 customers had submitted a consequential loss claim, 600 of those claims had been assessed and the Banks had paid out £1m in relation to consequential losses (over and above 8% simple interest per annum).  That equates to an average award for consequential losses of only £1,700[4].

Consequential Loss Claims

The Banks are strongly resistant to paying substantial consequential losses (that is sums exceeding the standard offer of 8% flat interest on refunded IRHP payments).  Only well prepared and presented consequential loss claims stand any chance of compensation within the Review.  No5 barristers are currently acting for clients in preparing the claims for consequential losses in the Review.  We are also acting in the High Court for clients seeking damages for consequential losses suffered as a result of the Banks’ regulatory breaches and negligence.  The following matters are of note in both contexts:-

(1)       the client must be able to make a persuasive case on the facts that he would have used the monies payable to the Bank pursuant to the IRHP in a way which would have resulted in a quantifiable benefit to him.  For example:-

(i)        if the client was unable to repay or service indebtedness as a consequence of his obligation to make the IRHP payments to the Bank and if as a result he has lost assets and/or his business due to insolvency, he may have a valuable claim for losses corresponding to capital loss or rental losses relating to such assets or for the value of his business as a going concern.

(ii)       if the client was prevented by the burden of the payments to the Bank from investing in a business opportunity which would have earned him a profit, he may have a claim for such damages to compensate him for the lost opportunity to earn such profits (subject to remoteness arguments).

(2)       the client must prove causation of loss, i.e. a direct link between the consequences of the missold IRHP on his financial position, specifically, his inability to enter into a transaction which would have generated profit. He needs to be able to make a strong case on the facts of what he would have done if he had not been compelled to make the IRHP payments to the Bank. Many claims for consequential loss fall at this hurdle. It goes without saying that documented opportunities, such as purchase offers open for acceptance, significantly improve the client’s case on causation.

(3)       proving the amount of consequential losses usually requires forensic accountancy and/or valuation evidence.  In addition, if it is the client’s case that the detrimental effect of the IRHP payments on his business’ cashflow caused insolvency or led to the seizing of assets by creditors, an expert accountancy report is usually required to tease out what happened to the financial position of the client and/or his business as a result of the IRHP payment obligations.  A comprehensive report from a competent expert is never cheap, but will be valuable evidence in demonstrating to the Bank how and where the losses have been incurred, and the report can be used when putting together the legal claim.

(4)       any loss caused to the client must have been reasonably forseeable at the time the contract for the IRHP was made.  We have found that in cases we have seen the losses are mostly of a type which would have been in the contemplation of the parties when making the IRHP contract.  Severe cash flow problems bringing about and the loss of the client’s business, a loss of assets or a loss of business opportunities are likely to be held forseeable by the Bank when selling an IRHP which exposed the client to significant monthly or quarterly payments. This is particularly so in cases where the client’s business was already highly geared.     

(5)       if the Bank refuses the consequential loss claim in the Review or does not pay satisfactory redress, the client has to decide whether he wishes to launch a redress claim by way of court proceedings. Hopefully his legal advisers will have agreed a standstill agreement with the Bank or (if necessary) have issued a claim to protect the client’s position on limitation.  The vast majority of IRHPs were sold in 2007 and 2008 and the regulatory causes of action, unless protected, are likely to be met with limitation defences.

Next Steps

These are a number of points relevant to all consequential loss claims resulting from missold IRHPs.  Issues of causation and remoteness (foreseeability) of loss are highly fact sensitive and require careful examination. If the claim has prospects of success, it must be presented in a compelling and fully evidenced manner if it is to persuade the Bank to settle and to avoid the risks, costs and delays involved in litigating the client’s entire case on liability and loss.  

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[1] Barclays, HSBC, Lloyds, RBS, Santander UK, Clydesdale and Yorkshire Banks, Co-operative Bank, Allied Irish Bank (UK) and Bank of Ireland

[2] customers either classified as “private customers” (sales before 31 October 2007) or “retail clients” (sales on or after 1 November 2007) and eligible under the new sophistication test

[3] Another 1,200 customers joined the Review since March 2014 and their cases will be determined over the next few months.

[4] Source: FCA website June 2014