20 November 2013 by

Two Degrees Of Separation Consequential Loss in the context of Mis Sold Interest Rate

The Financial Conduct Authority announced yesterday that that the progress being made in the Review Scheme set up to deal with the many thousands of claims arising out of mis-sold interest rate derivatives to small and medium sized companies is “slower than expected” and is leading to continued “customer frustration”. This will come as no shock to those affected by the scandal.

The FCA’s comments follow HSBC’s announcement 2 weeks ago that, the bank would release redress payments due to its customers under the scheme in two stages. The announcement was made in the lead up to a Parliamentary debate on the scandal that took place on 24 October, and it is widely suggested that in making this announcement, HSBC (along with the other banks who have since made their own announcements) were preempting widespread condemnation and criticism from MPs about the sluggish progress of the Review Scheme and resulting prejudice to thousands of small business owners.

HSBC has said that in cases where it is decided that mis-selling has occurred they will immediately pay out what is commonly described as “redress” upon making that decision. This will be comprised of a refund of the payments made by the customer under the derivative product, as well as a refund or waiver of the substantial break costs that would otherwise be incurred upon exiting the product (in a legal context this is more commonly referred to as “direct loss”). HSBC will then review the customer’s claims for consequential loss, which is a less straightforward calculation that reflects the negative financial knock -on effect suffered by the customer as a result of entering the product, and upon agreement will make a payment in respect of this loss at a later date. Many commentators have reacted positively to the announcement, which appears on the face of it to demonstrate a more customer friendly and cooperative approach.

The reaction of the other banks implicated in the scandal followed shortly. Until this time, the 81% state owned Royal Bank of Scotland had been conspicuous in their lack of engagement with the Review Scheme, as highlighted by the FCA’s progress statistics, released on 28 August of this year (which showed that RBS have made only 20 redress offers on over 10,000 claims). It was surprising, therefore, that RBS decided to follow HSBC’s example.

Unfortunately, Barclays and Lloyds have both taken a slightly different approach to the issue, announcing that the two stage payment system will only be applied in circumstances where the customer is deemed to be in “financial distress”.

What does it mean for claimants?

On the face of it, the approach taken by HSBC and RBS is a welcome development for victims of the scandal, who could well do with an injection of capital to help their businesses and to assist with funding the proper formulation of their consequential loss claims. However, the sluggishness with which the Review Scheme has progressed means that it is prudent for claimants to exercise caution at every step. With this in mind, claimants should be wary of the costs implications that could arise during litigation if direct loss is settled as a separate issue.

In circumstances where the bank’s assessment of consequential loss under the Scheme is unsatisfactory and it becomes necessary to progress the issue through the courts, claimants will be more exposed to the risk of becoming liable for the other side’s costs if the only issue to be determined is consequential loss. This is because in many cases the merits of the claimant’s arguments on liability for the mis-selling of derivative products will, in most cases be relatively strong which means that a positive judgment on the case would be more likely to be obtained. This provides the claimant with a degree of protection from an adverse costs order being made against them for the bank’s costs in defending the claim. If a claim is made purely in relation to consequential loss, the risk profile for the claimant’s will be higher (particularly in relation to costs liability) as the safety net of a strong direct loss claim will be removed by virtue of the early payment under the Review Scheme. The claimant will then be left with the harder task of proving their consequential loss in the knowledge that, if they are not able to ‘win’ that dispute, they may face liability for a large costs bill from the banks.

The announcements made by Barclays and Lloyds are much less customer-friendly and are in fact quite difficult to reconcile. The decision to separate and pay out on direct loss at an earlier stage will clearly be helpful for customers in financial distress. However, that assistance is, on the face of it, irrelevant to the question of whether or not redress is due. If it is determined that redress is due, it logically follows that it ought to be paid upon that determination, regardless of the financial health of the claimant.

It is difficult to conclude anything other than that Barclays’ and Lloyds decisions primarily serve their own needs in that they will:

1. Further delay the process, raising concerns over the statutory limitation period within which claims must be issued at court;

2. Provide for a continued reduction in the bank’s liability to the other party to the derivative transaction at the expense of the claimant; and

3. Spread the total liability of the banks over a longer period of time, thereby affording them tax and accounting benefits, whilst safeguarding their share price.

This highlights a growing concern that the banks’ engagement with the Review Scheme is not as cooperative as they lead the public and the FCA to believe, and that in fact they may be taking advantage of their supervisory role in the Review Scheme in circumstances where key decisions are being made purely to protect their own position and without regards to the substantive issues in the cases.


Whilst it seems that the banks are responding to pressure from the FCA and Parliament to progress the Review Scheme and achieve positive outcomes for the victims of this scandal, the banks still appear to be reluctant to act wholly in the interests of their customers and in the pursuit of redressing their wrongdoing. In any event, these announcements make no attempt to deal with the substance of how consequential loss claims are going to be dealt with, which is an issue of much wider concern. In circumstances where the Independent Reviewer is a chartered accountant (and therefore has no, or at best limited, legal background) it is difficult to see how they will adequately make determinations of loss based on what are likely to be complex legal arguments.

In this regard, it is prudent to take legal advice when formulating these claims to ensure that each claimant receives the best possible outcome in relation to consequential loss. It is also essential that claimants know about all of the options that are available to them outside the process of the Review Scheme in order to keep the bank under pressure and conclude the matter as quickly as possible.

Simon Bishop

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