Last July 2012, Cortina-averse developer David Agar was reported to have won €30m in a settlement with Ulster Bank over the mis-selling of a financial product known as an “interest rate swap”. This settlement was understood to be the first and almost certainly the biggest in Ireland. Interest rate swaps are financial products designed to give certainty to borrowers about their interest bills – read more detail here. In the UK, over €2bn has so far been refunded to consumers through the Financial Services Authority and a slew of Irish banks are being investigated for mis-selling in the UK. In Ireland however, the Central Bank and the Financial Regulator seem reluctant to open a new Pandora’s Box in a sector which is still generally teetering even after the 2011 recapitalisations.
So, for the time being, it is left to individual borrowers to pursue their own cases for mis-selling of swaps.
Today, we learn via the Irish Times, that two related groups are suing Ulster Bank and its operating unit, First Active, both members of the Royal Bank of Scotland group, for the mis-selling of swaps in 2007. The basis for the applicants’ case appears to be that Ulster Bank had allegedly not complied with Central Bank rules on the conduct of investment business, and it is apparently alleged that one of the investors claims to have had only a basic knowledge of the products when purchased. The remedies sought by the applicants are reported to be the rescinding of the swaps’ agreements and compensation for any losses suffered or sufferable from alleged misrepresentations. It’s not clear how much they’re seeking but it is reported that there are “notional liabilities” of €65m involved in the swaps which might provide a sense of the scale.
There are 10 individual applicants in the case representing two partnerships which had developed property in Sandyford, south Dublin. The first partnership is the so-called “Colgan-Ryan partnership” which comprises David Colgan, Mark Colgan, Davis Colgan, Patrick Ryan, Ronan Ryan, Desmond Ryan, Deirdre Ryan and Padraic Ryan. They are reported to be suing over a swap instrument of June 2007, which expires next November, and another which has expired.
The second partnership is the so-called “Oval partnership” which comprises Patrick Ryan, David Colgan, Mark Colgan and Davis Colgan, and property developers Philip Monaghan and Finian McDonnell. They are reported to be suing over a May 2007 swap, which has expired.
The case was initiated on 22nd November 2012, and just like in the David Agar case, the applicants are represented by Downes solicitors in Dublin – tel 01 6762546, Dublin 2, there doesn’t appear to be a website . The case reference at the High Court is 2012/11840 P. Yesterday the case was transferred to the Commercial Court division of the High Court.
It is surprising that there have not been more swaps’ cases publicized, and given the Irish Statute of Limitations and the fact that our construction and property boom petered out in 2007, developers may have to be quick to make their case.
UPDATE: 16th January 2012. A UK firm of solicitors, Bond Pearce, has analysed what might be the first swap mis-selling case that went all the way through the UK courts. John Green and Paul Rowley v The Royal Bank of Scotland [2012] EWHC 3661 (QB)
NAMA Wine Lake 
NWL
It was said, back in 2010 or 2009 that Irish banks had sold credit protection on property loan exposure to Spanish banks. Anything more known about this?
Peter Curistan was also in the Belfast papers today making noises about swaps.
You pose interesting questions, NWL.
We are ‘way behind the curve on this one. And our SME’s don’t even realise that they have been royally screwed by the banks over these SWAPs yet. In particular the quislings working for the Ulster Bank, which is 82% owned by the British Government, have a lot to answer for judging by the reports on what their masters have been up to in the UK. If the dopey Paddies don’t get their act together, they will legally be out of time.
BTW, Our own government don’t want to know about all these shenanigans, they have enough problems without paying out for mis-sold SWAPs, so to give a “WAKE UP!” call to anyone who has been mis-sold a SWAP…….
Here is an up to date and enlightening report from bully-banks to their members:
The Case Against The Banks:
The Mis-selling of IRSAs
Seeking justice for the UK’s small businesses
An Initial Fact Finding Study produced by Bully-Banks – a campaign group of the owners of small businesses in the UK.
bully-banks.co.uk
Contents:
Introduction 1
IRSAs: The Context 2
The Heart of the Matter 3
The Process of Sale 4
The Consequences 5
What Bully-Banks is Seeking: A 14 Point Plan 6
About Bully-Banks 7
The Survey: The Process and the Results 8
Contact Details 9
1. Introduction:
A major injustice has been suffered by thousands of owners of small businesses across the UK who have been mis-sold Interest Rate Swap Agreements (IRSAs) by their banks.
The owners of these small businesses – which range from fish & chip shops to bed and breakfast providers, from hotels to care homes, from landlords to small manufacturers – have come together to create their own politically and commercially independent campaign, Bully-Banks, to seek justice.
Already many small firms have been forced out of business. Many more are on the point of financial collapse. All because of the crippling costs arising under IRSAs sold to them by their bank.
Many hard-working, decent, dedicated individuals have faced financial ruin, stress and ill-health as a result of the consequences of the mis-selling of IRSAs.
But more than anything else the story that Bully-Banks reports is the story of the pervasive effects of greed upon the processes and conduct of our high street banks.
The Case against the Banks – the mis-selling of IRSA’s is an initial report that has been produced by Bully-Banks to seek justice for those affected by the mis-sale of IRSAs.
Please read on.
2. IRSAs: The Context
In the period prior to the current global economic crisis the leading high street banks faced increased global competition and the global stock market’s insistent demands for continually improving profit margins.
The extraordinary financial gains available to a small group of individuals if they could meet those demands led to a climate in which the prospect of very large personal gains pervaded the management levels of every bank and affected thousands of everyday decisions.
One response to the challenging business environment was to create sophisticated new products and services and then to aggressively sell those new products and services to existing customers.
A particular example of that response was the selling of Interest Rate Swap Agreements (IRSAs) – a term which we use to cover Base Rate Swaps, Caps, Collars, Structured Collars and Structured Swaps – to the owners of small and medium sized businesses (“SME Owners”).
These products were marketed aggressively to SME Owners by many of the high street banks. They were often sold as an incidental when the bank was granting new loan facilities or extending existing loan facilities. Almost invariably they were not requested by the SME owners, the substantial majority of whom were wholly unfamiliar with this type of product.
Often SME Owners were required to enter into the IRSA as part of the conditions upon which loan facilities were granted. Invariably the banks promoted IRSAs on the basis that they would provide a safeguard against interest rate movements in the future and would protect SME Owners from the consequences of those interest rate movements.
The scale of the costs incurred by SME Owners under the IRSAs that they entered into following their bank’s assertive marketing is of itself evidence of the unsuitability of the product for the customers to whom they were sold and for the purpose they were sold.
Frequently the banks would couple advice that interest rates will increase substantially in the medium term with a requirement or recommendation that SME Owners enter into an arrangement to protect themselves against the anticipated interest rate increase.
Within that context, IRSAs were then sold by the banks as a low cost form of interest rate protection without a mention of the devastating consequences that were inherent in them should interest rates fall substantially.
IRSAs were marketed to SME Owners by the banks on the basis that they were to protect the SME owner. In reality the motivation of the banks and their staff was to secure the high profits that these financial instruments secured for the banks and their staff through the exploitation of the lack of financial sophistication and experience of the SME Owners.
IRSAs are not simple financial agreements to protect financially unsophisticated SME Owners. They are complicated financial products. They are a form of what is called a “derivative” – a financial product derived from some other underlying asset. They are so complicated that the ordinary Relationship Manager in a bank was not authorised to deal with the customer directly when IRSAs were involved but had to involve derivatives experts from another division of the bank to effect the transaction.
Although the banks repeatedly advised their customers that interest rates would rise, rates in fact fell substantially. As a consequence customers who had entered into IRSAs did not benefit from the low interest rates that the Bank of England introduced to assist businesses in the UK in the face of the worldwide economic crisis.
Customers with an IRSA did not receive any benefit of the low interest rates. Instead, they were left to face the worldwide economic crisis crippled by paying substantially higher interest rates than their competitors because of the IRSAs they had entered into as the result of their bank’s assertive marketing.
Because of the high cost of terminating these IRSAs the SME Owner is effectively locked into their bank which is then able to increase its charges and be less responsive to it’s clients needs.
In practice, unbeknown to the SME Owners, they had entered into an arrangement that was little more than a bet on interest rate movements.
Fair enough some might say. If you place a bet, you either win or lose. You cannot complain if you lose. Yet every person who enters a betting shop or a casino knows that he or she is about to place a bet and they know the cost of the bet they are about to place.
The vast majority of SME Owners were not aware that they were placing a bet in a casino or a betting shop and were certainly unaware of the cost of the bet. As far as they were concerned they were simply following the advice, and often the instruction, of their bank. The banks disguised the fact that a bet was being made and never mentioned the cost of the “bet” should it go against the SME Owner.
The context of the banks’ requirement or recommendation that SME Owners enter into an IRSA is also relevant. The relationship between an SME Owner and its bank is not the normal relationship between a business and a vendor of financial products. It is a more complicated relationship arising out of:
● the dependence of the SME Owner upon their bank for working capital through overdraft facilities,
● the dependence of the SME Owner upon their bank for development capital through loans, and
● the close working relationship that arises when the bank requires (as it always does) the most private financial information and the most onerous levels of security.
The SME Owner has a closer relationship with his or her bank than with any other product or service provider because of the nature of the banking products and services provided. It is in truth a relationship of dependence, dependence upon the funds provided by the bank but also dependence for advice provided by the bank. It is a relationship which requires the bank to act scrupulously when providing advice.
When carrying out the research upon which the Bully-Banks’ Fact Finding Initial Study is based, what emerges most powerfully is the consistency of the narrative provided by the members of Bully-Banks. A consistent narrative that in every case predates the formation of Bully-Banks. A consistent narrative that was repeated to many independent professional advisers prior to the formation of Bully- Banks.
Nearly every member of Bully-Banks who completed the Bully-Banks’ Fact Finding Questionnaire (representing over 200 small and medium sized businesses each of which entered into an IRSA) tells the same story – of their trust being abused by their bank in both the process of sale of the IRSA to them and in the way in which their bank then responded to the financial difficulties which the SME Owner incurred because of the IRSA sold to them by their bank.
One of the problems with a complaint about the sale of complex financial instruments and the breach of the detailed regulations applying to them is that the complaint quickly becomes focused on the details of the documentation and the regulations.
It is to the banks’ advantage to focus on the details whenever they can because one’s eyes have a tendency to glaze over whenever the “Conduct of Business Rules” or the small print in dozens of closely typed documents full of arcane terms are mentioned. Lawyers will also focus on the details – that is their profession and their domain.
With those two factors at work the issue is assumed to be a highly technical one. It is therefore important to begin by challenging this assumption.
Although there are issues about the small print of highly complex documents and about the application of detailed regulations, Bully-Banks members also have a more fundamental complaint. The issues of the small print and the detailed regulations are part of our complaint but arise within the context of a more wide ranging complaint about the banks’ conduct.
In the first instance our complaint is about the creation by the banks of a process of sale that targeted SME Owners and then abused the banks’ relationships with those SME Owners and exploited their lack of financial sophistication and experience.
The mis-selling sequence is demonstrated with extraordinary consistency by the replies to the Bully-Banks’ Fact Finding Questionnaire..
3. The Heart of the Matter:
At the heart of the mis-selling scandal is the following sequence of events which is the generic experience of the members of Bully-Banks:
The Identification of the SME Owner:
We are informed by individuals who previously worked for the banks selling IRSAs, that many of the banks established sales teams of individuals whose principal activity was the sale of IRSAs to customers of the commercial lending divisions of the banks.
Although these teams were in truth nothing more than a group of individuals trained to sell complex financial agreements that were highly profitable to the banks, they were cloaked in the respectability of being part of a division of a high street bank and described as advisors or specialists. Nowhere were they described as “salesmen” or “saleswomen”. We refer to them in this Report as “Derivatives Experts”.
We are informed that these Derivatives Experts were allocated a number of commercial lending branches and allocated targets in terms of profit levels to achieve through the sale of IRSAs to customers of those commercial lending branches.
We are informed that often the sales targets of the Derivatives Experts were then cascaded into the earnings targets of individual branches and individual Relationship Managers.
We are informed that individual clients of the Relationship Managers were then identified as potential sales opportunities.
The Bully-Banks’ Research shows the following:
● The average age of SME Owners sold an IRSA is over 50 years of age at the time they entered into the IRSA.
● The average turnover of the business was over £1.7 million when sold an IRSA.
● 72% of the businesses sold an IRSA had a turnover below £1 million.
● The average value of the IRSA entered into was £1.9 million.
● The average value of the associated loan was over £1.9 million.
● The average value of the security provided to the bank in connection with the loan was over £3.8 million.
4. The Process of the Sale:
What is clear is that the banks targeted successful SME Owners with substantial assets available as security.
The Moment of Sale:
We understand that the marketing opportunity most frequently identified by the Relationship Manager was the moment at which an SME Owner requested new loan facilities from the bank or requested the extension of existing loan facilities.
(The reason is obvious. The SME Owner is at his or her most vulnerable to an approach by the bank when they are involved in a process in which they are seeking the agreement of the bank to the grant of loan facilities upon which their livelihood depends. If a bank wishes to make a proposal it is at that moment that the SME Owner is most likely to agree to the proposal. It is when the bank has greatest leverage.)
85% of Bully-Banks’ members were sold an IRSA in connection with the grant of new loan facilities or the extension of existing loan facilities
The Generation of Perceived Need:
At that moment, often when the new facilities have been agreed in principal with the Relationship Manager, the following process takes place:
The Relationship Manager advises that he or she believes interest rates will increase substantially in the medium term.
87.5% of Bully-Banks’ members were advised by their Relationship Manager that he or she was of the opinion that interest rates were going to increase.
The Relationship Manager advises that the bank believes that interest rates will increase substantially in the medium term.
87% of Bully-Banks’ members were advised by their Relationship Manager that the bank was of the opinion that interest rates were going to increase.
Remember that the average age of the SME Owner at the time they enter into the IRSA is over 50 and shows that they have lived through periods of very high interest rates. As a result they are receptive to the suggestion that interest rates could move from levels of five per cent to levels of fifteen percent because they have experienced interest rates at those high levels in the past. And at those high levels it becomes self evident that they will be unable to afford the loans that they are then seeking.
The Relationship Manager advises that the bank has concerns about the SME Owner’s ability to meet their loan repayments in the event of a substantial increase in interest rates.
82.5% of Bully-Banks’ members were advised by their Relationship Manager that the bank was concerned whether they would be able to afford the loan in the event interest rates increased.
The Relationship Manager advises that there are financial instruments available to protect the SME Owner against such an increase in interest rates.
96% of Bully-Banks members state that their Relationship Manager introduced the concept of an IRSA to them.
87% of Bully-Banks members state that prior to that introduction by their Relationship Manager they had no thoughts of using an IRSA to protect themselves against interest rises in the future.
The Relationship Manager advises that the bank wishes or requires the SME Owner to obtain this protection.
82.5% of Bully-Banks’ members state that their Relationship Managers advised them that their bank wished them to enter into an IRSA because of the risk of increased interest rates.
Although often expressed as a requirement (73% of Bully-Banks’ members state that their bank required them to enter into an IRSA) and very often expressed in writing (some 76% of those who were required to enter into an IRSA state that the requirement was expressed in writing), even the oral expression of the bank’s “wish” that the SME Owner obtain interest rate protection when expressed within the context of discussions to grant or renew loan facilities is tantamount to a requirement by the bank that the SME Owner obtain interest rate protection.
That is why an approach to the small business customer to sell them these types of complex arrangements should never have been made within the context of negotiations to grant or renew loan facilities. The small business customer does not have a real option. He or she feels they must enter into the arrangement if they are to secure the loan facilities which they seek, particularly when the IRSA is marketed to them as a minimal cost option.
The Relationship Manager then advises the SME Owner that they will introduce the SME Owner to an advisor from the relevant division of the bank to help the SME Owner obtain such protection.
97.5% of Bully-Banks’ members state that their Relationship Manager introduced them to a Derivatives Specialist to help them obtain interest rate protection.
85% of Bully-Banks’ members state that their Relationship Manager introduced the Derivatives Expert as an advisor to assist and guide them when entering into an IRSA.
Prior to the Relationship Manager promoting the concept of an IRSA:
Some 67.5% of Bully-Banks’ members did not believe that interest rates were going to rise substantially,
67% of Bully-Banks’ members were not actively considering fixing the interest rate on their loan, and
67% of Bully-Banks’ members had never previously entered into a fixed rate arrangement in connection with their business.
The Advisor:
The Relationship Manager introduces the SME Owner to a Derivatives Expert who works in a different division of the bank. The Relationship manager introduces this Derivatives Expert as some one who is going to “help”, “assist”, “advise” the SME Owner.
97.5% of Bully-Banks’ members state that their Relationship Manager introduced them to a Derivatives Expert from the relevant division of their bank.
85% of Bully-Banks’ members state that the Derivatives Expert was introduced as an advisor to assist and guide them when entering into an IRSA.
92.5% of Bully-Banks’ members state that they trusted the Derivatives Expert to advise them in their best interests.
88.5% of Bully-Banks’ members state that they did not know that the Derivatives Expert was a salesman and not an advisor.
92.5% of Bully-Banks’ members state that they would have behaved differently if they had been aware that the Derivatives Specials was a salesman and not an advisor.
There is no mention that the advisor ( i.e. the Derivatives Expert) is in fact a salesman who is paid differing levels of commission depending on:
● the profitability to the bank of the type of interest rate protection taken up by the SME Owner, and
● the duration of the period of interest rate protection committed to.
We are informed that the reason for these differing levels of commission is that the differing types of interest rate protection and the differing durations provide different levels of profit to the bank. A variable rate loan agreement with an accompanying IRSA is significantly more profitable to the bank than a simple fixed interest loan. A twenty year IRSA is significantly more profitable to the bank than a three year IRSA.
92.5% of Bully-Banks’ members state that neither the Relationship Manager nor the Derivatives Expert explained that the longer the period of the IRSA the greater the financial benefit to the Relationship Manager and the Derivatives Expert personally.
93% of Bully-Banks’ members state that they were not advised that the Derivatives Expert would be earning a commission on the sale of an IRSA to them.
93% of Bully-Banks’ members state that they were not aware that any financial benefit would accrue to their Relationship Manager as a result of the sale of the IRSA to them.
The Advice Given:
The advice given by the Derivatives Expert was structured to encourage SME Owners to enter into various forms of IRSA. The IRSA was presented as a low cost means of interest rate protection and the nature of the commitment being made under it was not explained.
The Derivatives Expert advised that interest rates were going to increase.
81% of Bully-Banks’ members stated that the Derivatives Expert advised that he was of the opinion that interest rates were going to increase.
79% of Bully-Banks’ members stated that the Derivatives Expert advised that the bank was of the opinion that interest rates were going to increase.
The Derivatives Expert never discussed with the SME owner the implications of a substantial fall in interest rates:
88% of Bully-Banks’ members state that neither the Derivatives Expert nor their Relationship Manager ever discussed with them the implications of a substantial fall in interest rates.
89.5% of Bully-Banks’ members state that the bank never provided possible break costs for or indicated the possible orders of magnitude of the break costs of their IRSA in the event of substantial fall in interest rates.
88% of Bully-Banks’ members state that neither the Relationship Manager nor the Derivatives Expert ever discussed the possible termination costs of their IRSA in the event of a substantial fall in interest rates.
Even when break costs were discussed the Derivatives Expert would often advise that the break costs would not be substantial.
A very substantial break cost is payable if a swap is broken before the end of its term and interest rates have fallen. This could be more than 20% of the notional amount. For example, a swap with a notional amount of £1 million may well have entailed a break cost in excess of £200,000. This is commonly the “mark to market” figure – that is the market value (reflecting in part the value the swap might have had to the bank if it had not been broken.)
The average estimated break cost of those completing the Bully-Banks’ Questionnaire is £360,000 against an average IRSA value of £1.9 million.
Most importantly, the Derivatives Expert never discussed the cost of termination of the IRSA with the SME owner:
81.5% of Bully-Banks’ members state the Derivatives Expert never discussed the cost of termination of the IRSA with them.
89.5% of Bully-Banks’ members state the Relationship Manager never discussed the cost of termination of the IRSA with them.
The banks have provided transcripts of telephone conversations between the Derivatives Expert and the SME Owner to many Bully-Banks’ members. Although it is self evident in many cases that the Derivatives Experts are quite clearly acting as an advisor to the SME Owner, the Derivatives Expert does not tell the SME owner to obtain advice from an independent expert in derivatives:
89.5% of Bully-Banks’ members state that the Derivatives Expert never advised them to seek independent advice from a specialist in derivatives.
92.5% of Bully-Banks’ members did not seek independent advice from a specialist in derivatives prior to entering into their IRSA.
It is a matter of record that such independent experts were not even available to the SME owner at the time the majority of IRSAs were sold.
The Suitability of the IRSA:
The Derivatives Expert sells an IRSA that in many cases is not suitable for its purpose.
● Sometimes the IRSA is for a longer term than the Loan it is associated with (and this is purely because the longer the term of the IRSA the more profitable it is to the bank, the greater value it is to the Advisor in terms of commission and the greater value to the Relationship Manager in terms of bonus or in terms of targets met.)
10% of IRSAs sold to Bully-Banks’ members have durations that are longer than the period of the associated loan.
● The IRSA typically allows the bank to circumvent any protection against interest rate rises because it does not fix the “margin” charged by the Bank on the associated Loan (and in this case is valueless as a means of protecting the Customer in the event of increased interest rates):
30% of Bully-Bank members have had their margin increased even though interest rates had fallen despite entering into IRSA to fix their borrowing costs.
(One can ask what would have been the percentage of SME Owners suffering increased margins if interest rates had increased? Clearly the IRSA is wholly unsuitable as a means of protecting SME Owners against movements in interest rates. In practice what occurred was that the costs of the IRSA led to businesses being in difficulties and that allowed the banks the opportunity to increase the margin on the loans, an opportunity which they seized.)
● Sometimes the IRSA is unsuitable as a means of protection against interest rises because it gives the Bank the right of termination in certain cases and therefore does not in practice protect the SME Owner, it is a one way option in favour of the bank.
Proper Disclosure By the Bank:
Given the lack of knowledge about IRSAs by the SME Owners, the context of the discussions (i.e. the negotiation of new loan facilities or the renewal of existing loan facilities) and the relationship of dependence between he SME Owner and their bank, the bank is obliged to disclose all material facts to the SME Owner to enable the SME Owner to properly understand the arrangement being proposed by the bank.
The Customer has no idea that when he hears that the Derivative Expert has placed the IRSA on the market it is in fact a “sale” by the Bank which delivers a very substantial immediate profit to the Bank.
92% of Bully-Banks members state that they were not advised that the bank would record a substantial profit on its books immediately they entered into the IRSA.
92% of Bully-Banks’ members state they were not advised how their bank secured a profit on the sale of the IRSA to them. 70.5% of Bully-Banks’ members did not even understand that their bank was “selling” the IRSA to them.
The bank did not disclose the fact it is possible to purchase an IRSA from a third party for substantially less cost than the costs being charged to them by the bank.
92.5% of Bully-Banks’ members state that they were not aware that the rates charged by their bank were greater than those available to them via a third party dealer in derivatives.
91% of Bully-Banks’ members state that the Derivatives Expert never advised then that IRSAs could be purchased at a different price from a third party and did not advise them that they should look at the alternative pricing for this type of arrangement available in the market place.
The bank, at the time the SME Owner enters into the IRSA, calculated the possible Contingent Liability should the SME Owner terminate the IRSA by default.
The bank deliberately did not disclose this calculation to the SME Owner because that would inform the Customer that the IRSA has substantial risk and discourage the Customer from entering into the IRSA.
90.5% of Bully-Banks’ members were unaware that the bank had calculated the Contingent Liability arising under the IRSA.
The Customer is discouraged from looking at alternative ways of fixing borrowing costs. Most importantly the Derivative Expert emphasises the significant upfront transaction costs associated with those alternative ways (because they offer little profit to the bank and little commission to the Derivative Expert ).
The IRSA is sold as a “without cost” protection for the Customer although the bank has calculated the Contingent Liability arising out of the IRSA for its own purposes and does not disclose this to the Customer.
95% of Bully-Banks members were not aware that their bank had calculated the Contingent Liability arising out of the sale of the IRSA to them.
The Banks Involved:
The following banks sold IRSAs to Bully-Banks’ members in the following percentages:
Royal Bank of Scotland (inc Nat West) 39.5%
Barclays 31%
HSBC 15.5%
Lloyds TSB 5.0%
AIB 3.5%
Yorkshire Bank 1.5%
Clydesdale Bank 1.5%
Lloyds Banking Group 1.0%
HBOS 1.0%
Bank of Ireland 0.5%
Co-operative Bank 0.5%
The sale process that is outlined above is the heart of the scandal that Bully- Banks was formed to address. It is not the minutiae of small print and regulations. It is the abuse of process and relationship by the Banks.
● The fact is that the Banks’ did not comply with the Conduct of Business Rules.
● The fact is that the small print designed to protect the banks is often defective.
● The fact is that the banks breached their statutory obligations.
But all of that is secondary to the abuse of process and relationship by the Banks that is the heart of this scandal.
97% of Bully-Banks’ members trusted their Relationship Managers to advise them in the member’s best interests.
92.5% of Bully-Banks’ members trusted the Derivatives Experts to advise them in the member’s best interests.
98.5% of the Bully-Banks’ members trusted their bank to advise them in the member’s best interests.
5. The Consequences:
The consequences of a mis-sold IRSA can bring ruin to the SME Owner:
The businesses of over 10% of the Bully-Banks’ members completing the Questionnaire have already been placed in liquidation or administration.
64% of the Bully-Banks’ members stated that the management of their account had been moved to a specialist department of the bank dealing with businesses in difficulties.
Many SME Owners are dependent upon finance provided by their bank. Without that finance the small business will not survive.
The Health of the SME Owners:
Many SME Owners have suffered ill health as a result of the pressures they are under from their bank as a result of the IRSA:
67% of the Bully-Banks’ members stated that they had suffered ill health since entering into the IRSA.
Many of the spouses/partners of SME Owners have suffered ill health as a result of the pressures they are under from their bank as a result of the IRSA:
52% of the Bully-Banks’ members stated their spouses or partners had suffered ill health since entering into the IRSA
The Wider Economic Harm:
When the IRSA was signed the average number of jobs provided by each of businesses which completed the Bully-Banks’ Questionnaire was 24.
The average number of jobs lost by each of the businesses which completed the Bully-Banks Questionnaire is over 5.
Of the businesses completing the Bully-Banks’ Questionnaire, 24 are no longer trading. The businesses still trading currently employ 4,346 people and estimate that they would have created a further 807 jobs if they had not entered into the IRSA.
The Banking Process:
Once the owner of the SME Owner has entered into the IRSA they are locked into very a high level of cost under that IRSA when interest rates fall substantially. In practice the SME Owner cannot re-finance with another party because of the continuing cost of the IRSA sold to them by their bank.
Because the SME Owner cannot re-finance with a third party, the bank is able to substantially increase bank charges and/or the margin on the associated loan (often “justified” by the worsening financial position of the SME Owner caused by the SME Owner’s obligations under the IRSA sold to it by the bank).
Because the SME Owner cannot re-finance, the bank is able to impose new categories of charges during the current very difficult economic circumstances.
In practice these charges are often imposed by the bank by way of an ultimatum i.e. facilities that may have existed for years will be withdrawn if these increased charges are not agreed to.
One of the particularly objectionable practices is for the bank to move the management of the account from the local branch to a department specialising in dealing with customers in difficulty. The bank then imposes charges upon the customers for this “service” when in practice the SME Owner now receives less service from the bank and his financial difficulties are increased by the additional cost:
64% of the Bully-Banks’ members stated that the management of their account had been moved to a specialist department of the bank dealing with businesses in difficulties.
82% of the Bully-Banks’ members stated that they now had a different Relationship Manager from when they entered into the IRSA. 25% stated they had had two different Relationship Managers since then. 30% stated that they had three different Relationship Managers since then, 12% stated that they had had four different Relationship Managers since then.
Although not every customer incurs all of the above layers of cost, in practice many do. The impact of these layers of cost is very substantial. The costs for the management by a specialist department can be over one per cent of total borrowings.
Take that cost with annual arrangement fees of one to two percent and a margin of anything upwards of three percent and you will see that the business in difficulty may be charged eight or nine per cent or more above base rate or Libor (which at the present time is 0.5%). This level of cost compares with a margin of one to two percent above base rate or Libor prior to entering into the IRSA.
The banks appear to have deliberately adopted a policy of delay and unresponsiveness to justifiable complaints.
One simple example of the approach a bank may take is to seek to maintain that the commercial lending arm of the bank is an entirely different legal entity from the division of the bank that entered into the IRSA.
This position is maintained despite the fact that the division entering into the IRSA was introduced to the SME Owner by the commercial lending arm of the bank and recommended by the Relationship Manager dealing with the SME on a regular basis. The commercial lending arm then seeks to wash its hands of any responsibility for the other division’s actions.
The SME Owner’s Relationship With Their Bank:
The following responses indicate the perception held by Bully-Banks’ members of their banks’ response to the problems caused by the IRSA:
92.5% of Bully-Banks’ members do not believe that their bank has worked proactively to solve the problems caused by the IRSA.
94.5% of Bully-Banks’ members do not believe that their bank has acted responsibly in dealing with the consequences of the IRSA which the bank sold to the SME Owner.
89.5% of Bully-Banks’ members state that their bank do not acknowledge the existence of other clients who have complained about IRSAs mis-sold to them.
95.5% of Bully-Banks’ members state that their bank has not provided constructive advice how to mitigate the consequences of the IRSA.
89% of Bully-Banks’ members believe that their bank is indifferent to their financial problems.
70% of Bully-Banks’ members believe that their Relationship manager has on occasion lied to them.
96% of Bully-Banks members believe that the behavior of their bank after the financial consequences of the sale of the IRSA became apparent is disgraceful and should also be investigated by the FSA.
It is believed that banks are dealing with some thousands SME Owners across the country in ways that are unacceptable and causing great harm to a large number of individuals.
We do not know how many SME Owners are affected because of the banks’ approach to this information.
The banks have persistently refused to disclose to individual SME Owners that there are other clients who have complained about the sale of their IRSA (89.5% of Bully-Banks’ members state that their bank has still refused to acknowledge that it may have other customers who have been mis-sold an IRSA.)
The banks persistently refuse to disclose to the Press the numbers of SME Owners who have been sold IRSAs and seek to minimize the scale of the issue.
The Chairman of Royal Bank of Scotland refers to “only” half a percent of RBS’s current clients having been sold an IRSA. RBS on its own data states that it has more than one million SME Owners as customers. Half a percent is therefore five thousand businesses. And they are just the current clients and exclude those who have been forced out of business or who have paid the break cost to exit the IRSA.
The Chief Executive of Barclays refers to “a very small number of transactions” where customers had made complaints and said Barclays would help “fix” any problems they were having. “I can guarantee you in some cases we have made mistakes. It’s going to happen when we do thousands of transactions.” The cavalier attitude of that admission is dismissive of every single SME Owner who has been mis-sold an IRSAs by a high street bank.
It’s just a “mistake” to the Chief Executive a high street bank. To the SME Owner who has been mis-sold an IRSA, it’s their home, their livelihood and often their health.
7. What Bully-Banks is Seeking:
A 14 Point Plan
The following 14 points set out the steps that we would ask the FSA to take to resolve the scandal that has occurred:
1. Formal confirmation that the IRSAs which have been brought to the attention of the FSA and the FOS by the SME Owners claiming that they have been missold are not just a few isolated “mistakes” by the banks. To this end we ask that the FSA make public the total number of IRSAs sold by each bank to SME Owners in each of the last ten years. (The term ”IRSA” to include any Mortgages or Loans which the banks have previously mis-described as “Fixed Rate” but which are in reality disguised Swaps.)
2. An instruction to every bank that there be a moratorium on withdrawing loan and /or overdraft facilities and other financial services from SME Owners who have been sold an IRSA and who register with the FSA a complaint that such IRSA was mis-sold to them.
3. An instruction to every bank that they immediately transfer into a separate account in the name of each SME Owner (with a minimum level of interest charge) all payments paid under their IRSA since 1st January 2012 and any further payments under that IRSA that become payable prior to the resolution of this issue.
4. An instruction to every bank that the limitation period for the mis-sale of IRSAs be extended to ten years.
5. An instruction to every bank to notify every SME Owner sold an IRSA (as defined) by that bank over the last ten years that:
● they may have a claim against the bank for the mis-selling of the IRSA to them, and
● if they believe that they have been mis-sold an IRSA they should register their claim with the FSA.
6. An instruction to every bank to provide:
● Details of the number of IRSAs sold by it to SME Owners over the last ten years.
● Details of the commission / compensation arrangements for Derivative Experts and Relationship Managers in connection with the sale of IRSAs to SME Owners.
● Details of the accounting treatment of IRSAs when sold to SME Owners and a clear description of the processes of sale that occurred when a Derivative Expert advised that they were going into the market to purchase the IRSA.
7. A request to HMRC that they provide for time to pay arrangements for VAT, Income Tax etc. with all SME Owners who have been sold an IRSA and who register with the FSA a complaint that such IRSA was mis-sold to them.
8. The provision of clear, unambiguous directions to the banks that the banks will not contest a claim that an IRSA has been mis-sold if the IRSA falls within the definition of mis-selling provided by the FSA.
Bully-Banks proposes a definition that mis-selling has occurred whenever any one of the following:
● The term of the IRSA is longer than the term of the associated borrowing facilities.
● The IRSA was a condition of an agreement to provide borrowing facilities or a requirement expressed at the time borrowing facilities were being agreed or implemented.
● Prior to entering into the IRSA the bank failed to provide detailed estimates to the SME Owner of the break costs implicit in the IRSA in the event of a substantial fall in interest rates.
● Prior to entering into the IRSA the “Derivatives Expert” was not clearly identified as a salesman or saleswoman who would financially benefit from the SME Owner’s decision to enter into an IRSA.
● Prior to entering into the IRSA the level of financial benefit accruing to the Relationship Manager from the SME Owner’s decision to enter into an IRSA was not clearly identified.
● The bank failed to provide details of alternative interest rate protection strategies and identify fully both their advantages and disadvantages compared to an IRSA.
● The SME Owner was not told that the Bank would take a substantial profit when the SME Owner entered into the IRSA.
● The complexity of the IRSA is clearly unsuitable given the SME Owner’s
educational background and career.
● The complexity of the IRSA is clearly unsuitable given the SME Owner’s future plans (e.g. retirement from or sale of their business).
9. The establishment of a fast-track dispute resolution or arbitration service with clear guidelines for the resolution of disputes. This service should be established taking into account the failure of the Financial Services Ombudsman on this issue to date.
10. The achievement of rapid resolution and redress (because the speed of response to the SME Owners is as important as the substance of the response) within the following timescales:
● As soon as possible – provide the option to cancel the SWAP and not in cur break charges.
● Within an agreed timeframe – we would propose 2 months – a restitution of payments made to banks by customers mis-sold an IRSA (as defined in this Report).
● Within a slightly extended timescale – we would propose 4 months – agreement of any compensation that the banks should pay their SME customers as a result of mis-selling.
● Provide guidelines on what constitutes reasonable compensation.
11. Investigate and review the performance of the Financial Ombudsman Service in its handling of complaints by SME Owners about the mis-selling of IRSAs.
12. Investigate and review the performance of the FSA in this matter and identify action points for improvement.
13. Ensure regulations are in place to prevent a repeat of this scandal.
14. Resolution of this issue responsibly and rapidly without the need for individual SME Owners to issue legal proceedings and without the unsavoury aspects of the recent PPI scandal. Each SME Owner is at an obvious disadvantage when dealing with their bank on an individual basis and this disadvantage should be taken into account when providing mechanisms for the resolution of this issue.
Bully-Banks is a campaign group of the owners of small and medium sized businesses each of which has been mis-sold an IRSA by their bank.
The founding principals of Bully-Banks are as follows:
● Bully-Banks represents the interests of those owners of small and medium sized businesses that have been directly affected by the mis-selling of IRSAs.
● Bully-Banks is commercially independent.
● Bully-Banks is politically independent.
● Bully-Banks acts as a means of communication between members.
● Bully-Banks provides a forum for the views of our members.
● Bully-Banks advises, supports and acts as an advocate for our members.
For the avoidance of doubt we stress that none of the various people involved in the preparation of this Report has received any money in connection with the promotion of Bully-Banks’ campaign or the preparation of this Report from either:
● the members of Bully-Banks or
● from any third party.
8. The Bully-Banks Survey: The Process and the Results
Bully-Banks has asked each of its members to answer over two hundred questions in connection with:
● the sale of an IRSA to them,
● the consequences of the sale of the IRSA and
● the conduct of the bank and it’s employees both:
– during the sale process and
– following the advent of the adverse financial consequences arising from the IRSA.
The Survey was internet based and results were entered by members directly into the Survey documentation.
Members were required to provide names, business names, phone numbers so that each individual completing the Survey could be verified against a list of Bully-Banks’ members.
The individuals completing the Survey received the following instructions:
About Bully-Banks
● Please complete the Survey to the best of your ability and carefully. Do not race through the questions. Read every question and answer every question thoughtfully.
● It is important that you complete the Survey honestly and diligently. Answer every question with care. This information will be vital to our prospects of success.
● Do not exaggerate as that will only degrade the reliability of the information gathered. Any exaggeration of a claim or any incorrect information will become visible in due course and will damage both Bully-Banks’ credibility and the credibility of our case. (For example, if you are giving an estimate of the costs that the IRSA has caused you, always be conservative in your estimates. Round down rather than up, only give costs that fall clearly within the terms of the question asked etc.)
By definition Bully-Banks has limited resource. We are a group of individuals who are being financially damaged by the consequences of the IRSAs about which we complain.
Given the resources of Bully-Banks we cannot verify every one of the completed Questionnaires beyond a reasonable doubt and some of the questions require estimations to be made. But we should affirm as clearly as we can that the Survey Forms relied on by us:
● appear to us to be sensible documents that have been carefully prepared by the relevant members,
● more importantly, they consistently accord with the experience of those most involved in the preparation of this Report, and
● accord with hundreds of conversations that those most involved in the preparation of this Report have had with the members completing the Questionnaires.
9. Contact
Bully-Banks can be contacted by
Email: info@bully-banks.co.uk
Telephone: 00 44 1237 441 210.
If you have read this far, it is probable that you,or someone you know has been mis-sold a SWAP. My best advice to you is that, without delay, you employ the most aggressive lawyer you can find – and sue the bastards!
The roadmap above will show you the way.