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The UK’s financial regulator has been accused of acting in an “irrational” and “unfair” manner when it excluded supposedly “sophisticated” victims of an interest-rate hedging mis-selling scandal from a redress scheme of more than £2.2bn.
A crowd-funded legal challenge brought by MPs and peers against the Financial Conduct Authority began on Tuesday over claims the watchdog “shut out” some small businesses from compensation and “shut its ears” to the findings of an independent review.
Nine banks agreed with the Financial Services Authority, the FCA’s predecessor agency, in 2013 to compensate thousands of customers who had been mis-sold interest rate hedges between 2001 and 2011.
The products were designed to protect small companies from interest rate changes, but left them with large bills when the cost of borrowing plummeted.
The banks — Royal Bank of Scotland, Bank of Ireland, Barclays, HSBC, Lloyds, Allied Irish Bank UK, Clydesdale & Yorkshire Banks, Co-operative Bank and Santander UK — paid out more than £2.2bn in compensation.
However, John Swift KC was critical of the FSA in a report published three years ago into the regulator’s handling of the mis-selling scandal and the ensuing redress scheme.
Swift, whose “lessons learned review” was commissioned by the FCA’s board, found that the FSA “fell below the appropriate standard of transparency” in how it set up the redress scheme.
His report also criticised the FCA and its predecessor, which was abolished in 2013, for excluding as many as 10,000 of the 30,000 cases during a review of the compensation scheme based on “subjective” criteria about whether those customers had the knowledge and experience to buy the swaps.
Opening the claimants’ case at the High Court in London, Thomas Roe KC on Tuesday said that if customers “fell on the wrong side of the line” then “you were on your own”.
“Any bank customer who was deemed to be ‘sophisticated’” under the scheme was “shut out altogether regardless of how unsophisticated or sophisticated” they in fact were, he told the court.
Roe said the FCA’s decision to “decide to do nothing to help affected customers was irrational — that is to say, it fell below the acceptable standard of common law reasonableness”.
The regulator had “shut its ears to the findings” of the review, while presenting its decision as a “fait accompli”, Roe added. Victims had “no opportunity” to argue the FCA ought to have responded differently and this approach was “unfair”, he said.
Richard Coleman KC, representing the FCA, said in written arguments that the claimants had failed to acknowledge several “important findings” of the Swift review.
The FCA had opted for a voluntary redress scheme instead of enforcement action in part because it was likely to lead to “fair and faster redress than customers might otherwise receive”, he said.
Coleman added that the FCA had decided in 2021 that it should not “up to two decades on from the mis-selling now seek to exercise its limited remaining statutory powers to investigate the possibility of compelling the banks to provide redress to the excluded customers”. This followed “careful consideration” over several months, he said.
The case is being brought by the All-Party Parliamentary Group on Fair Banking, a group of MPs and peers, which launched crowdfunding to help finance the judicial review.
The hearing is due to conclude on Wednesday.