Interest rate hedging products - Financial Conduct Authority

Interest rate hedging products

In 2012, we identified failings in the way that some banks sold IRHPs.  The banks involved agreed to review their sales of IRHPs1 made to unsophisticated customers2 since 2001. The full review started in May 2013.   

In 2012, we identified failings in the way that some banks sold IRHPs. The banks involved agreed to review their sales of IRHPs1 made to unsophisticated customers2 since 2001. The full review started in May 2013.

The voluntary agreements establishing the IRHP scheme are supported by independent reviewers appointed under s.166 of the Financial Services and Markets Act 2000. Every case is overseen and verified by an independent reviewer.

Customer engagement in the review has been high with 89% of eligible customers choosing to have their cases reviewed. 

Customers who purchased caps

We remind customers who purchased caps that these sales will be included in the review only if they proactively complain. So far, 1,400 out of 7,400 customers have complained about caps. If you have purchased a cap product and wish to complain, we urge you to do it as soon as possible.

Tax treatment of redress

Customers may find it helpful to know that HMRC has issued guidance about the tax treatment of IRHP redress

The review so far

All nine banks have now completed their sales reviews of customers who joined the review before March 2014 and have delivered redress letters to all but a handful of these customers.

The banks have now sent 17,000 redress determinations to customers, 14,000 of which include a cash redress offer and 3,000 confirm that the IRHP sale complied with our rules or that the customer suffered no loss.

To date, around 10,000 customers have accepted a redress offer and £1.5 billion is being paid out, including more than £300 million to cover consequential losses.  This means that so far 71% of offers have been accepted.  For those banks who got their letters out earlier, the acceptance rates are nearing 90%.

In addition to the £1.5 billion of redress payable to customers, the banks have set aside money to cover the costs of having to get out of these products (the payments customers would have made in the future), the costs of employing more than 3,000 people to carry out the review exercise, and the costs of engaging independent reviewers to look at every case.

The charts and tables below summarise the banks’ progress and the position at the end of June:

Next steps

Since March 2014, around 1,500 customers have chosen to join the review. Around 1,200 of these cases have already been determined and the remainder will be dealt with over the next few months.

For those customers who have received an offer, the banks will also continue to hold meetings, during which they can obtain a more detailed explanation of the decision, ask questions and, if appropriate, provide additional information. The banks and independent reviewers will carefully consider any points that are raised by customers.

Finally, the banks and independent reviewers will continue to assess customers’ claims for consequential losses. Every redress offer has 8% simple interest per year added which is intended to compensate customers for the lost opportunity cost of being deprived of their money (e.g. lost interest or profits). For many customers who were sold an IRHP more than 5 years ago, the cumulative interest payments will amount to up to 40% of their basic redress payment. Customers who can demonstrate that the losses caused by their IRHP exceeded 8% per year can submit a consequential loss claim.

We expect the work of the banks and independent reviewers to continue until the end of the year. We will continue to provide close oversight of the IRHP review and will provide quarterly updates, including information about the progress of consequential loss claims.

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1For these purposes, we mean IRHPs that are derivatives which are separate to a lending arrangement and are for the purpose of managing interest rate fluctuations.

2That is, customers classified under our rules as either ‘private customers’ (in relation to sales made on or before 31 October 2007) or ‘retail clients’ (for sales made on or after 1 November 2007), and assessed as being eligible for the review under the ‘sophistication test’.