DaySparkes retained to investigate civil claims against HBOS in relation to £1bn fraud

DaySparkes has been instructed by one of the leading witnesses in the criminal trial of Lynden Scourfield, the former Head of the Impaired Assets division of HBOS in Reading, and other individuals connected with the now infamous turnaround consultancy, Quayside Corporate Services, to investigate civil claims arising out of what is now reported to be a staggering £1bn fraud.

On 30 January 2017, Mr Scourfield, and David Mills and Michael Bancroft of Quayside, were convicted of bribery and fraud at Southwark Crown Court, along with 3 other defendants. The conviction follows a long and complex criminal investigation by Thames Valley Police.

Between 2002 and 2007, Mr Scourfield imposed Quayside (headed up by David Mills) on numerous SMEs who had been transferred to the “high risk” division of HBOS. SMEs were forced to appoint Quayside as a condition of HBOS’ lending. Once appointed, Quayside parasitically charged enormous consultancy fees, bloated the companies with debt (supported by Mr Scourfield’s lending) and siphoned off tens of millions of pounds for its own benefit. In certain cases, Quayside took aggressive steps to put into default and gain control of the very businesses it was seeking to turnaround.

As part of the corrupt relationship with Mr Mills and Mr Bancroft, Mr Scourfield received thousands of pounds in cash, gifts and free trips. He was not the only HBOS employee to be implicated in the fraud. Mark Dobson, another director in the Impaired Assets Division, was also convicted on Monday afternoon.

This case is one of the largest and most disturbing British banking scandals in living memory. The level and nature of the fraudulent activity to emerge from the criminal trial and the length of time for which the fraud continued is quite breath-taking and the lives of countless individuals and their businesses have been destroyed.

If you have been affected and wish to discuss your case and how we can help you, then please contact Michael Sparkes and John Day on 020 7242 8018 or at michaelsparkes@daysparkes.com / johnday@daysparkes.com

LIBOR update – Property Alliance Group v RBS comes to trial

The trial in the eagerly anticipated case of the Property Alliance Group Ltd v. The Royal Bank of Scotland commenced in the High Court (Financial List) earlier this week.

RBS is defending a multi-million-pound claim from Property Alliance Group (PAG) which alleges that it was mis-sold interest rate hedging products (IRHPs) linked to three-month LIBOR between 2004 and April 2008.

The case has received widespread media and market attention given that it is the first civil claim involving allegations of LIBOR manipulation to proceed to a hearing and the Court is likely to hear compelling and vigorously contested evidence/submissions in this regard, especially in light of Mr Justice Birss’ judgment on an interlocutory matter in November 2015, in which he stated that there are documents which:

“show that, arguably, members of the RBS board were aware that LIBOR was “broken” during a period in which RBS was selling swaps to PAG referable to LIBOR….there is evidence from which a properly arguable inference can be drawn that knowledge of serious problems with LIBOR existed at a senior level inside the bank. The issues raised in this action do not only concern the RBS trading floor, they concern top management with overall responsibility for LIBOR and for swaps. Based on the material relied on by PAG, the bank needs to account for the activities of its senior staff as well as the actions on the trading floor.”

The case also raises distinct issues surrounding the activities of the bank’s now infamous Global Restructuring Group (GRG) (click here for further information), to which PAG was moved in May 2010. PAG contends that it did not require financial restructuring and that the Tomlinson Report (into the activities of the GRG) shows that the bank unnecessarily engineered defaults to this end.

Other claimants will be watching with great interest as the case, which is scheduled to last until late July, continues.

For more information on LIBOR manipulation, please contact Michael Sparkes on 020 7242 8018 or michaelsparkes@daysparkes.com.

 

FCA puts GRG into the firing line

Promontory and Mazards, the “skilled persons” appointed by the FCA to investigate the activities of RBS’s Global Restructuring Group (“GRG”), have completed their draft report into whether RBS mistreated small and medium-sized companies (“SMEs”).

The FCA said initially that it would publish the results in late 2014, but it has moved the deadline several times, citing the complex and serious nature of the allegations.  Its latest update confirms that it has now received the draft final report from the skilled persons and is currently “considering the contents of the report” and “reviewing underlying evidence”.  It will also give RBS the opportunity to review the report before publication.

What is the GRG?

The GRG was a notorious unit within RBS where businesses were sent if they were in financial distress.

The stated aim of the GRG was to put companies into intensive care to turn them around, and to restructure their debts if necessary.

However, it has instead been accused of driving RBS’ SME customers into insolvency so that, amongst other things, it could make a profit on buying their assets, through its West Register subsidiary.

A report into the practices of the GRG, by Lawrence Tomlinson, the Entrepreneur in residence at the Department for Business, Innovation and Skills at the time, was released on 25 November 2013. This found numerous examples of the GRG artificially distressing otherwise viable businesses and driving them into insolvency and concluded that these practices were systematic and institutional.

In response, RBS retained Clifford Chance to investigate the Tomlinson Report’s findings.  Clifford Chance found no evidence that the Tomlinson claims were true.

Since then, RBS executives have appeared before the Treasury Select Committee to answer claims about the GRG.  The TSC found that some of the evidence given by two particular RBS’ employees was “materially incorrect” and “unacceptable”.

The FCA Review

According to the FCA’s website, its report will: “examine RBS’ treatment of business customers in financial difficulty and consider the allegations of poor practice on the part of the GRG, set out in the report by Dr Lawrence Tomlinson and referenced in Sir Andrew Large’s report [both released in November 2013]”.

“The first stage of the review will consider RBS’ treatment of a sample of customers referred to its Global Restructuring Group. This will include some cases where customers have already raised concerns with Dr Tomlinson, the Department of Business, Innovation and Skills or the FCA.

The review will also consider whether any poor practices identified are widespread and systematic. If this is the case, the second stage of the review will identify the root cause of these issues and make recommendations to address any shortcomings identified.…. if the findings reveal issues which come within the FCA’s remit, the FCA will consider further regulatory measures.”

The FCA’s findings are eagerly anticipated, as RBS could now face a voluntary or enforced redress scheme if the FCA decides that RBS has breached FCA principles.

This prospect seems ever more likely as The Times reported on 2 May 2016 that RBS has now put the manager responsible for its interest rate hedging products redress scheme in charge of a programme to look at victims of its global restructuring division.

The Times reported that Mark Spurin is now leading an RBS internal team in preparation for the findings of the FCA Report, which strongly suggests that some form of redress scheme will be forthcoming.

DaySparkes has advised a number of clients in connection with claims arising out of their treatment at the hands of the GRG. We also have expertise in acting for clients in FCA compensation schemes, based on our experience in acting for clients in the FCA’s review into interest rate hedging misselling.

If you wish to discuss a potential claim or complaint, then please contact Michael Sparkes on 020 7242 8018 or at michaelsparkes@daysparkes.com

It’s not as easy as ABC – Class X under the spotlight

Mr Justice Snowden recently handed down his judgment in Hayfin Opal Luxco S.a.r.l & another v Windermere VIII CMBS p.l.c & others[1], which was one of the first cases to be heard in the newly established Financial List. 

The core issues to be determined in the Part 8 proceedings brought by the Class X noteholder were:

1. Whether there had been underpayments of interest payable to the Class X noteholder (known as “Class X interest”);

2. If so, whether the underpayment of interest itself attracted interest at the Class X interest rate; and   

3. Whether the alleged underpayments had caused an event of default under the CMBS.

The judgment has subsequent implications for CMBS structures in general and for the wider financial markets. It also contains a useful analysis of the law on construction and implication of terms and penalty clauses.

Background  

The Windermere VII CMBS was arranged by the now defunct Lehman Brothers International (Europe) in 2006, under which 8 classes of notes were issued, each entitling the respective noteholder (with the exception of the Class X note) to interest at a floating rate of 3-month EURIBOR plus a specified margin.   

Class X interest, and the applicable interest rate, was calculated on each payment date by reference to a formula. The purpose of this formula was to determine and pay out to the holder of the Class X note the excess spread built-up in the CMBS structure (if any), less associated fees and costs.

Under the Windermere VII structure, this was the difference between expected available interest collections (i.e. the amount of interest that would have been available assuming full and timely payment by the underlying borrowers) and the actual interest collections payable to the noteholders (other than Class X), net of costs and expenses. 

1.     Alleged underpayment of Class X interest

One of the key issues for the Court’s determination was whether the expected available interest collections were incorrectly calculated for the January 2015 payment date, thus resulting in an underpayment of Class X interest. A positive finding in this regard would have had wide-ranging implications for the calculation of interest dating back several years.  

The Court’s focus was on the “Nordostpark loan”, one of 12 loans acquired by the Issuer at origination. The Nordostpark loan was a tranched loan formed of a securitised “A-piece” and a non-securitised “B-piece”, with only interest from the A-piece falling to be paid into the CMBS structure.

Interest payable by the Nordostpark borrower was allocated between the A-piece (the Senior Loan) and the B-piece (the Junior Loan) in accordance with an intercreditor agreement (“the ICA”).

The key point of dispute between the parties was the definition of “Senior Rate” interest payable to the A-piece and “Junior Rate” interest payable to the B-piece.

The Class X noteholder contended that the intention of the parties at the time of the contract was to apportion all interest payable by the Nordostpark borrower between the A and B pieces and that the definitions of the rates in the ICA, as drafted, were materially deficient in achieving this intention. In support of its case, the Class X noteholder pointed to the mismatch between amounts being paid by the Nordostpark borrower and the interest ultimately paid to the A and B pieces (calculated on the basis of the Senior and Junior rate definitions) and contended that the potential for substantial amounts of interest to remain unallocated produced a commercial absurdity which required the correction of the ICA by construction and/or an implication.

Construction of the ICA  

The Court reaffirmed that the approach to the interpretation of financial instruments is an iterative process that is not confined to textual analysis but also extends to “placing rival interpretations within their commercial setting and investigating…their commercial consequences (Napier Park[2]).  

The Court then went on to consider Chartbrook[3], the leading decision on the correction of mistakes by construction, where Lord Hoffman stated that whilst the Court would not readily accept that parties have made mistakes in formal documents, if a clear mistake can be identified, having regard to the relevant background and context, there is:

 “no limit to the amount of red ink or verbal rearrangement or correction which the Court is allowed. All that is required is the it should be clear that something has gone wrong with the language and that it should be clear what a reasonable person would have understood the parties to have meant”.

The Court also considered the recent Supreme Court decision in M&S v BNP[4], in which the Court restated the strict requirements for the implication of terms and sought to create a distinction between the process of correction of mistakes by construction and the test for implication.

Mr Justice Snowden ultimately found that it was open to debate whether the additional words proposed by the Class X noteholder were to be characterised as a process of construction or implication. Notwithstanding that, he considered that there were features common to both processes, namely:

1. On either view, the test to be satisfied is a strict one.

2. The Court will not supply additional words or terms simply because it is reasonable to do so in the circumstances that have arisen.

3. The Court will only add words to an agreement if it is necessary to do so because the agreement is incomplete, or commercially incoherent without them. 

4. The Court must be certain that (i) the absence of the words was inadvertent; and (ii) if the omission had been drawn to the attention of the parties at the time of contracting they would have agreed to the additional wording.

Having considered the parties’ respective positions, the Court held that it was “very difficult for the Court to be confident that the absence of additional wording altering the definitions of Senior Rate and Junior Rate…  was the result of an oversight or a mistake”.

In reaching this conclusion, the Court expressed its view that (i) the Senior Rate and Junior Rate definitions were not mere boiler plate clauses; (ii) the parties would have given careful consideration to those provisions at the time of concluding the ICA; and (iii) it was manifestly foreseeable by the parties that the underlying borrower might fail to repay its loan at maturity and that the swap agreement would lapse.

Accordingly, the Court could not conclude that the parties had simply failed to foresee the type of situation in which there was a mismatch between the rate payable by the underlying borrower and that which was apportioned between the A and B pieces.

The Court also expressed the view that any surplus interest built-up by the mismatch of rates could be dealt with by clause 3.5 of the ICA, which provided the agent a general discretion to act in the best interest of the lenders or at the instruction of the senior lenders (A-piece).    

2.     Interest on interest at the Class X rate  

The controversy surrounding this issue is premised on the fact that Class X interest is not, as the Court described, interest “in the conventional sense of that word”. The Class X interest rate is derived from a formula that is based on the relationship between the Class X interest amount and the principal value of the Class X note. Given that the principal value of Class X notes was typically very low, the Class X interest rate could in theory result in an extremely high rate. 

Despite having found against the Class X noteholder on the primary issue, the Court went on to provide its obiter comments on whether any underpayments of Class X interest would themselves accrue interest at the Class X interest rate.

Condition 5(i) of the notes provided that any shortfall caused by a deferral of interest would itself accrue interest at “the same rate as that payable in respect of the relevant Class of Notes”. However, and whilst “not immediately attracted” to the Issuer’s arguments, the Court accepted the Issuer’s contention that the condition did not apply in the circumstances that had arisen (i.e. a miscalculation) and that, in any event, the condition was not engaged until the underpayment had been determined to be payable by the Cash Manager.  

The Issuer also advanced a number of other, alternative, arguments if condition 5(i) was found to apply. This included an argument that applying the Class X interest rate to underpayments would produce a commercially absurd result that the parties could not have intended. The Court saw difficulty in this line of argument as it was not immediately obvious what rate would apply instead; especially in the context of a CMBS where “certainty and clarity [would have been] at a premium” to the parties.

Class X rate and the penalty doctrine

Of particular interest is the Court’s (obiter) views on whether interest on interest at the Class X interest rate would, as alleged by the Issuer, fall foul of the penalty doctrine. The Court considered the recent Supreme Court decision in Cavendish[5],in which the Court stated that the question to be determined is not whether a provision is a pre-estimate of loss but whether it is penal, i.e. “out of all proportion to the legitimate interest of the innocent party in the enforcement of the primary obligation”[6].

Interestingly, the Court expressed doubt on whether interest payable at the Class X interest rate following an underpayment of Class X interest could be considered a secondary obligation (as opposed to a primary obligation which would not trigger the penalty doctrine). However, the Court made no further comments in this regard.

The Court however expressed the view that the fact that the Issuer had the benefit of limited recourse provisions did not prevent the application of the penalty doctrine:

“I also do not think that the fact that the obligations of the Issuer are imposed on a limited recourse basis provides any exception or defence to the application of the penalty doctrine….[T]he penalty doctrine focuses on the lack of proportionality between the amount of the secondary liability imposed and the innocent party’s legitimate interest in performance of the primary obligation. Whether a clause is a penalty cannot therefore depend upon the ability of the particular contract-breaker to pay the specified amount, or the source from which he is to pay. An innocent party cannot save a clause from being a penalty by claiming that even though it provides for payment of a wholly disproportionate amount to the interest which he (the innocent party) has in performance, the contract-breaker is so rich that he will not notice the difference. Nor can he do so by promising to limit his claim to specified funds in the hands of the contract-breaker, if the available amount of those funds would still be capable of paying a wholly disproportionate amount, and payment might deprive the contract-breaker of the ability to pay debts due to other creditors with lower priority.”

3.     Historical underpayment of Class X interest – Event of Default?

The Court held that underpayments of Class X interest would not constitute an event of default under the CMBS. An underpayment would only become due and payable so as to constitute an event of default under condition 10(a)(i) of the notes once it had been determined to be payable by the Cash Manager. If otherwise, the Court was of view that this would create a concealed “hair trigger” within the structure of the CMBS.

Appeal

The Class X noteholder has obtained permission to appeal.

For further information, please contact Michael Sparkes (michaelsparkes@daysparkes.com) or Gopi Binning (gopibinning@daysparkes.com) on 020 7242 8018.


[1] [2016] EWHC 782 (Ch)

[2] Napier Park European Credit Opportunities Fund Limited v Harbourmaster Pro-Rata CLO 2 BV [2014] EWCA Civ 984

[3] Chartbrook Ltd v Persimmon Homes Ltd [2009] 1 AC 1101

[4] Marks and Spencer PLC v BNP Paribas Securities Services Trust Co (Jersey) Ltd [2015] 3 WLR 1843

[5] Cavendish Square Holdings v Makdessi [2015] 3 WLR 1373

[6] Paragraph 32 of Cavendish.

Class X under the spotlight – High Court grants expedited trial in March for Class X dispute

DaySparkes acts for the Class X noteholder in Part 8 proceedings against the Issuer, Note Trustee and Cash Manager of the Windermere VII CMBS seeking declarations in respect of its entitlement to what it believes to be significant historic underpayments of Class X interest over many years. The Class X noteholder also contends that these underpayments themselves attract interest at the Class X interest rate.

On 14 January 2016, Mrs Justice Rose, granted an application for (amongst other matters) an expedited trial of the key declarations sought. At the start of the hearing, the Issuer confirmed that it would not be pursuing its objections to the Class X noteholder’s standing to bring its claims, on the basis that the Note Trustee had confirmed that it was prepared in principle to take over these claims, should this prove necessary.

The trial will take place in the week commencing 7 March and will be something of a test case for Class X disputes, of which a number are currently before the Court.

The proceedings are also amongst the first to be brought in the new Financial List (for substantial claims requiring particular expertise in the financial markets and/or raising issues of general importance to the financial markets) and is expected to be one of the first financial list cases to come to trial.

What are Class X notes?

CMBS transactions are structured so that the total interest due on the underlying portfolio of loans exceeds the total interest that accrues on the notes which are issued in the CMBS.

The excess amount is known as “excess spread”.  This excess spread is a means of extracting revenue from the CMBS transaction, and Class X Notes are an instrument through which this revenue can be extracted.

Class X Notes are typically held by the originating bank (the bank which arranges the CMBS loan) as a means of extracting profit and reducing tax (as listed bonds are exempt from withholding taxes). However, many are subsequently sold on to investors, such as hedge funds.

Class X Notes from CMBS deals pre-dating the financial crisis (also known as legacy CMBS or CMBS 1.0 deals) were designed to pay out, even if the underlying loan defaulted. This is partly because Class X Notes ranked equally to senior notes, thereby entitling their holder to receive excess spread before the payment of principal on junior classes of Notes.

According to Bloomberg, Class X Notes were included in 78 of the 290 European CMBS 1.0 deals sold between 1995 and 2010 by banks including Bank of America, Barclays, Citigroup, Deutsche Bank, Morgan Stanley and Royal Bank of Scotland.

CMBS 2.0

As a result of the senior ranking of Class X Notes, they became the subject of extensive and heated discussions, when the European CMBS market stalled following the collapse in real estate prices during the financial crisis.  This ranking meant that, notwithstanding default on the underlying loans in the CMBS and the resulting risk of losses for other noteholders, Class X notes sat on top of the pile and were entitled to be paid irrespective of the performance of the underlying loans.

In 2012, a “CMBS 2.0” Committee was established by the Commercial Real Estate Finance Council Europe, to explore the best practice for CMBS transactions going forward.

In summary, the main recommendation was that Class X Notes should in future be structured so that they can only receive excess spread after all of the other CMBS notes have been paid in full.

In addition, the following specific recommendations were made:

  • Full details of any revenue extraction through the use of excess spread monetisation should be given in a separate section of the Offering Circular. This should include how it is to be calculated and whether it is to be retained by the originating bank, servicer/special servicer or the borrower or their affiliates.
  • There should be precise disclosure of the priority of payments on revenue extraction and liquidity facility drawings.
  • The noteholder reporting for any CMBS transaction should provide a full breakdown of the component of the calculation for the revenue extraction and provide precise amounts for its various components.

These Committee recommendations do not affect CMBS 1.0 deals and 2016 is expected to be a crunch year in this regard, given that this will be the final maturity date for a large number of these legacy deals.

For further information, please contact Michael Sparkes on 020 7242 8018, or michaelsparkes@daysparkes.com.

LIBOR Update

More than two years on from the start of the LIBOR scandal the English Court awaits the trial of its first test case into LIBOR manipulation.

All eyes were on Graiseley [1] and Unitech [2] in November 2013 when they were granted permission by the Court of Appeal to amend their pleadings against Barclays and Deutsche Bank respectively to plead misrepresentations in relation to the setting of LIBOR. In the course of its judgement, the Court of Appeal found that it was at least arguable that these banks had impliedly represented that LIBOR was not being manipulated, at the time of selling the derivatives in issue, and that this representation (if proved at trial) would entitle the claimants to rescind the derivatives.

However, Graiseley settled in April 2014 and Unitech is still progressing to trial [3].  It is now Property Alliance Group Limited v The Royal Bank of Scotland which is grabbing the headlines this year.

The case involves a property developer, Property Alliance Group (PAG), which alleges that it was mis-sold interest rate hedging products (IRHPs) linked to the 3-month LIBOR rate between 2004 and April 2008. As with Graiseley and Unitech, one of the key issues in the case is whether RBS made misrepresentations in relation to the setting of LIBOR, which PAG allege induced them into the IRHPs.

Royal Bank of Scotland ordered to disclose documents relating to LIBOR manipulation

In the latest pre-trial skirmish, RBS made an application to withhold the inspection of, inter alia: (i)  confidential reports submitted to the Japanese Financial Services Agency in relation to the manipulation of LIBOR; and (ii) a confidential document, known as Attachment C, appended to a Deferred Prosecution Agreement (agreed between RBS and the US Department of Justice) containing a list of benchmark rates that are alleged to have been manipulated and that are the subject of an ongoing investigation by the US authorities.

In two separate judgments handed down on 11 and 19 February 2015, Mr Justice Birss ordered that copies of the documents be provided to PAG, subject to the usual requirement under the CPR that the documents are used only in the legal proceedings and an additional restriction that the permission of the court is required before reference can be made to them in open court. The additional safeguard was to allay concerns raised by RBS in their application that allowing inspection of Attachment C and the reports submitted to the Japanese Regulator would put RBS at risk of contravening US and Japanese law respectively.

Balancing the concerns expressed, Birss J held that the risk of RBS being sanctioned was low, that confidentiality alone was not a reason to withhold inspection and that there was an “obvious and compelling public interest in establishing the full extent to which financial institutions have been engaging in manipulation of LIBOR”.  

This is a helpful decision for parties litigating against the banks which are often, at the start of proceedings, at a factual disadvantage when attempting to outline allegations of misconduct in relation to the setting of LIBOR. Disclosure will undoubtedly become an important part of the proceedings and it seems from the above decision that the Court will be reluctant to allow a bank to withhold inspection of relevant documents on the basis of confidentiality, in light of the inherent safeguards built into the CPR. To download the judgments, please click here.

For more information on LIBOR manipulation, please contact Michael Sparkes on 020 7242 8018 or michaelsparkes@daysparkes.com.


[1] Graiseley Properties Ltd (Guardian Care Homes) v Barclays Bank PLC

[2] Deutsche Bank and Others v Unitech Global and Another

[3] On 23 April 2015, it emerged that US and UK regulatory authorities had fined Deutsche Bank $2.12bn and $340m respectively for its role in the alleged manipulation of benchmark interest rates from around 2003 to 2010. This is the largest such fine in relation to LIBOR rigging to date. 

 

 

 

 

Misgivings on Mis-selling Claims: The Treasury Committee Reports on the FCA’s Interest Rate Hedging Product Review

Two years on from the start of the FCA’s review into the sale of interest rate hedging products (IRHPs)[1], more than 28,000 sales have been reviewed and the banks have sent redress determination letters to the 19,000 businesses found eligible. To date, 14,119 redress offers have been made and the banks have paid out £1.8bn under the scheme, including £365m in consequential losses.

Whilst the amounts may be substantial, the Review has come under heavy fire for both its arbitrary eligibility criteria and the way in which claims qualifying for redress have been handled.

In its latest report on Conduct and Competition in SME lending, the Treasury Committee delivered its findings on the Review, having heard evidence from the FCA, affected SMEs and various companies within the financial services industry.

1.     The  Cap 

The redress scheme was only available to non-sophisticated customers who met certain eligibility criteria[2]. One of the most controversial aspects of the sophistication test was that a customer was deemed sophisticated (and thus would fall out of the Review) if the aggregate notional value of all live IRHPs held by the customer immediately after the IRHP sale exceeded £10m. This was notwithstanding a customer’s categorisation, for regulation purposes, as a “private” or (post MIFID) “retail” customer which in itself recognises a significant lack of sophistication on its part. Many SMEs who would otherwise fall within the Review have questioned the use of what they consider to be an arbitrary cap, which the FCA has now acknowledged “excluded approximately one third of the largest IRHP review participants”. The Treasury Committee confirmed that the £10m cap did not originally appear in the FCA’s draft proposal to the banks and accordingly has asked the FCA to explain “its decision-making on the cap” and to “state whether, in its view, it represented a concession to bank lobbying, and if not, why not”.

It is difficult to tell to what extent the Committee’s request will put pressure on the FCA (and the banks) to widen the scope of the Review by removing the £10m cap. The position still remains that customers excluded from the Review by virtue of the cap have little option other than to pursue their IRHP mis-selling claims in the Courts.

2. Alternative Product Redress

As of December 2013, just over 40% of cases involved what is termed alternative product redress. If the customer would have purchased an alternative product instead of the hedging product that they actually entered into, then the cash redress payable by the bank is reduced to give credit for the notional cost of the alternative product.

The Treasury Committee heard evidence that banks are offering alternative product redress even where there is no evidence that the customer would have purchased an alternative product (such as an interest rate cap), either because such products were not discussed or the  premium would have been unaffordable. One of the consultancy firms giving evidence noted that “the replacements are quite expensively priced and are often not particularly suitable or perhaps what a client would have chosen”.

3.     Other concerns discussed in the Committee’s report include:

  • The lack of consistency in the application of the scheme between the banks;
  • A lack of transparency about how the scheme is being run;
  • The possibility of conflicts of interest in view of the fact that staff connected to the mis-selling of IRHPs have been retained as part of the banks’ internal review teams (the FCA denied, to the best of its knowledge, that no former bank employees involved in the sale of IRHPs are employed within the independent review teams);
  • The change in the focus of the test applied to determine whether a sale is compliant from whether the customer “understood the features and risks of the product”, to whether the customer “was provided with sufficient information to enable the Customer to understand the features and risks of the product”;
  • The failure of the independent reviewers to contact customers for their views and evidence that in some cases customers had been barred from contacting the independent reviewer altogether;
  • The failure of the banks to provide the information used to make the determination or explain how they reached the determination (to allow customers to make an informed choice as to whether to accept the redress offer); and
  • A lack of appeals process.

The Committee has asked the FCA to collate “the necessary information to establish whether there are systemic failures in the review”, publish its findings and take any appropriate action to ensure that customers receive the reasonable and fair redress they are entitled to. It will be interesting to see how the FCA responds to the Committee’s findings; particularly with regard to the £10m cap. It appears that the FCA Review may still have some way to run.

Separately, the FCA also faces an application for judicial review of the Review process brought by an Isle of Man property developer (Holmcroft Properties). The judicial review focusses on the role of the FCA scheme’s “independent reviewers”, large accountancy or law firms responsible for approving the banks’ decisions. This application is due to be heard on 24 April 2015.

Success on either front could open the floodgates for further legal challenges from the businesses excluded from or otherwise unsuccessful in the current process.

To download a copy of the report, please click here. DaySparkes is currently advising a number of clients on claims relating to the mis-selling of IHRPs. For further information on the FSA Review and on hedging claims generally, please contact Michael Sparkes on 020 7242 8018.



[1] The IRHP Review was set up by the financial regulator, the FSA (as it was then known) in conjunction with nine UK banks, in May 2013 and aimed to provide a redress mechanism for  non-sophisticated customers who were mis-sold IRHPs  in the years leading up to and including the financial crisis.

[2] See our article: FSA announces findings of review into the mis-selling of swaps, please click here.

Facing the Consequences – Claims for Consequential Loss under the FCA Review into the Sale of Interest Rate Hedging Products (IRHPs)

Customers are often faced with a stark choice when they receive a bank’s offer of redress under the FCA review: (i) take the simple route and accept the bank’s pre-defined figure for consequential loss and interest; or (ii) take the more arduous but potentially rewarding route of proving the exact loss that has been suffered as a result of the bank’s mis-sale.

As part of the FCA review, banks have agreed to pay 8% simple interest on any redress payments to its customers. The relatively high rate of interest is to reflect the customer’s loss of opportunity and, given the recent economic outlook, is designed to provide a fair, simple and fast way of dealing with consequential losses arising out of a mis-sale.

But what if 8% interest does not adequately reflect the loss suffered?

As of December 2014, 3,620 customers had submitted bespoke claims on the basis that the lost opportunity costs arising from the bank’s mis-selling of IRHPs amounted to more than the 8% interest offered by way of basic redress.

What can be claimed?

There is no exhaustive list of the types of loss that can or cannot be claimed. What matters is that the legal tests (as summarised below) are satisfied and that the claims are supported by evidence.

Typical examples of the types of losses that may be recoverable include:

  • Bank charges or penalties incurred as a result of the mis-sold IRHPs.
  • Loss of profit which would have been made from investment opportunities that have been lost as a result of the bank’s regulatory breaches.
  • Wasted management time in dealing with mis-sold IHRPs where it can be shown to have caused a quantifiable loss.
  • Legal and professional fees in dealing with the consequences of the mis-sold IRHPs.

What must be proved?

The onus is on the customer to put together the claim for consequential loss and prove they would have suffered a loss over and above the default 8% interest offered by the banks. The FCA has stated that any claims for consequential loss are to be assessed by reference to the established legal principles relating to claims in tort and breach of statutory duty. In broad terms, customers must prove:

  • The mis-sale caused the loss, i.e. the loss would not have occurred but for the bank’s breach; and
  • The loss is not too remote. In other words, the loss suffered must be a reasonably foreseeable consequence of the bank’s breach.

The merits of submitting a bespoke claim for consequential losses will naturally depend on the circumstances of each case. DaySparkes is currently advising a number of clients on claims relating to the mis-selling of IHRPs and has experience of preparing bespoke consequential loss claims. For further information, please contact Michael Sparkes on 020 7242 8018 or michaelsparkes@daysparkes.com.

Interest rate swap mis-selling: first case reaches Court of Appeal

Although a large number of claims relating to the mis-selling of interest rate hedging products (IRHPs) are currently underway against the UK’s major banks, only one has so far reached the Court of Appeal, which recently handed down its judgment.

In Green & Rowley vs Royal Bank of Scotland plc (Case No. A3/2013/0138), the claimants had entered into a 10-year interest rate swap with RBS at a nominal value of £1.5 million. The claimants were sold the swap in May 2005 to hedge against fluctuations in the interest payable on an underlying loan with RBS.

The swap initially protected them from subsequent rises in the base rate of interest but, when interest rates fell in the financial crisis of 2008, they were required to make significant additional payments to RBS. In 2009, when the claimants enquired about breaking the swap, they were told it would cost them a further £138,650.

In May 2011, the claimants issued proceedings against RBS, alleging that the swap had been mis-sold. They claimed that RBS had given them negligent advice and made negligent statements in relation to the swap, in breach of its duty of care. They also argued that RBS had breached the FSA’s Conduct of Business (COB) rules and that this was relevant to the scope of its duty to explain the terms of the swap properly.

The claim was dismissed by the Manchester Mercantile Court at first instance. The claimants’ appeal raised two main issues: first, whether the bank’s statutory duties under the COB rules created an additional common law duty of care in respect of its customers; and secondly, if the bank was under such a duty, what information should it provide to customers (specifically in relation to risk warnings and break costs) in order to satisfy it.

The Court of Appeal dismissed the claimants’ appeal. It agreed with the trial judge that the claimants had been given information as to the suitability of the swap, but not a recommendation or advice. Itconsidered that the latter would have been essential to establish a duty of care.

Having made this finding on the first issue, the Court of Appeal declined to consider the second issue, notwithstanding the obvious public interest on this topic (given the number of other swap mis-selling cases waiting in the wings). This was on the basis that the nature and ambit of the risk warning required in each case was highly fact-specific, depending on issues such as customer sophistication and the particular interest rate hedging product in question.

Overall, the case underlines the importance for potential claimants of ensuring that all discussions and communications with their banks regarding the sale of IRHPs are properly documented.

The evidence of RBS’ key witness – an adviser at the bank who had discussed the swap with the claimants on several occasions – was preferred to that of the claimants because (unlike the claimants) she was able to produce credible contemporaneous records of their meetings which supported the bank’s case on the nature of the information it provided. This made it extremely difficult for the claimants to prove the contrary.

DaySparkes is currently advising a number of clients on claims relating to the mis-selling of IHRPs and is recommended as a leading firm for banking litigation by the Legal 500.

For further information, please contact John Day or Michael Sparkes on 020 7242 8018.

Corporate veil remains intact – even in cases of alleged fraud

English law has long recognised the principle that a company is a separate legal entity from its shareholders – the so-called “corporate veil”.  This principle has recently been tested before the Court of Appeal and the Supreme Court, with both courts confirming that the corporate veil can only be pierced in very limited circumstances.

In Antonio Gramsci Shipping Corporation & others v Aivars Lembergs ([2013] EWCA Civ 730), the Court of Appeal was asked to consider the extent to which the corporate veil can be pierced in cases of fraud, in order to allow the acts of a company to be attributed to its owner or controller.

The case involved a challenge by Mr Lembergs, a well-known Latvian businessman, to the jurisdiction of the English Court in proceedings relating to a complex shipping fraud against the Latvian Shipping Company.

The claimants had applied to join Mr Lembergs as a defendant to the proceedings on the basis that he was a beneficial owner and controller of the original defendant companies.  The English Court had already determined, in an earlier judgment, that the defendant companies had entered into fraudulent shipping contracts to divert profits away from the claimants.  The disputed contracts contained English law jurisdiction clauses.

Mr Lembergs had successfully challenged jurisdiction at first instance in the Commercial Court (see the judgment of Mr Justice Teare in Antonio Gramsci Shipping Corporation and others v Recoletos Limited and others including Aivars Lembergs ([2012] EWHC 1887 (Comm)) and the claimants appealed.

In the Court of Appeal, the claimants relied on EU caselaw to argue that, as a result of Mr Lembergs’ fraud, the corporate veil should be pierced and he should be bound by the jurisdiction clauses in the shipping contracts.  They argued that Mr Lembergs himself should be deemed to have consented to the jurisdiction clauses because he was the owner/controller of the contracting defendant companies.

This would have given the English Court jurisdiction to hear claims against Mr Lembergs under Article 23 of the Brussels Regulation (Council Regulation (EC) No 44/2001) which, in broad terms, states that the courts of an EU member state shall accept jurisdiction over a dispute if that is what the parties have previously agreed.

The claimants also argued that, as a matter of public policy, the corporate veil should be pierced where a defendant has set up a puppet company for the purpose of defrauding an innocent party.  In the circumstances of the case, they argued that there were grounds for piercing the corporate veil to prevent Mr Lembergs from sheltering behind the corporate structure of the companies he was alleged to have created.

Having considered the judgments of the Court of Appeal and the Supreme Court in VTB Capital plc v Nutritek International Corp. and others ([2012] EWCA Civ 808 and [2013] UKSC 5) and of the Supreme Court in Prest v Petrodel Resources Ltd and others ([2013] UKSC 34), as well as relevant decisions of the European Court of Justice, the Court of Appeal rejected the claimants’ arguments.

Giving the leading judgment, Lord Justice Beatson noted as follows:

“[I]t is clear from the decision of the Supreme Court [in the Prest case] that, in the present state of English law, the Court can only pierce the corporate veil when ‘a person is under an existing legal obligation or liability or subject to an existing legal restriction which he deliberately evades or whose enforcement he deliberately frustrates by interposing a company under his control’ […] In the light of the decisions in VTB Capital and Prest v Petrodel, the submission that it is possible to pierce the corporate veil in this case to deem Mr Lembergs to have consented to the jurisdiction is untenable.”

The Antonio Gramsci case is an interesting reminder of the strength of the corporate veil and the separate legal personalities of companies and their shareholders under English law.  Whilst accepting that the corporate veil can be pierced in certain circumstances, the Court of Appeal – with reference to very recent caselaw – emphasised that these circumstances are very limited, even in cases where a fraud is alleged to have occurred.

DaySparkes has been instructed by two of the parties in proceedings related to the Antonio Gramsci case which are currently before the Commercial Court (Recoletos Limited and others v Aivars Lembergs and others).

For further information, please contact John Day or Michael Sparkes on 020 7242 8018.