Determining the level of redress - Financial Conduct Authority

Determining the level of redress

Find out more about what you can expect to receive as fair and reasonable redress, including compensation for consequential losses.

Fair and reasonable redress means putting the customer back in the position they would have been in had the regulatory failings not occurred, including any consequential loss. 

What is fair and reasonable redress will vary from case to case and will be determined by a review of evidence and customer testimony. All redress offers will be scrutinised and approved by an independent reviewer. 

The following table sets out how the banks agreed to calculate redress under the review. 

Basic redress The difference between actual payments made on the IRHP and those that the customer would have made if the breaches of relevant regulatory requirements had not occurred.

Interest

 

The opportunity cost (loss of profits or interest) of being deprived of the money awarded as basic redress.

The banks will either pay 8% a year of simple interest, or an interest level in line with:

  1. an identifiable cost that the customer incurred as a result of having to borrow money; or
  2. an identifiable interest rate that a customer has not earned as a result of having less money in the bank.

Taking into account the economic environment over the last five years, interest will avoid many customers from having to put together consequential loss claims.

Consequential loss

There are different types of consequential loss.  A few examples are set out below:

  1. Loss of profits over and above the interest paid on basic redress–: Customers should be aware that claims for loss of profits will require customers to show that they would have used the funds in question to generate a profit (for example, through a specific investment in the business). Any money invested in this way could not also have been earning interest in the bank at the same time and customers will not be able to ‘double recover’. Claims for loss of profits could result in the customer receiving an amount that is less than 8% simple interest on their basic redress if this is their actual loss.
  2. Bank charges
  3. Certain legal expenses
  4. Tax (if a customer has to pay tax on their redress and this differs to what they would have paid had there not been a mis-sale)

For each consequential loss claim, the onus is on the customer to demonstrate that the ‘legal tests’ are met (see below). Customers should note that claims for consequential loss will take longer to review. Customers can track the banks’ reviews of consequential loss claims.

 

The objective of the review is to put customers back in the position that they would have been in, had it not been for the mis-sale. Our principles of fair and reasonable redress give rise to three possible basic redress outcomes for customers:

  1. Some customers would never have purchased a hedging product and will receive a ‘full tear up’ of their interest rate hedging product (IRHP).  These customers will receive a full refund of all payments on their IRHP.
  2. Some customers would have chosen the same product they originally purchased whilst some customers may not have suffered any loss.  These customers will receive no redress.
  3. Some customers would still have sought or been required to enter into a product that provided protection against interest rate movements, but would have chosen an alternative product.  These customers will receive redress based on the difference between the payments they would have made on the alternative product, compared with the payments they did make.

Examples of fair and reasonable redress offers

We expect the banks to clearly explain to customers how they have reached their redress determination, including what facts they relied on.  Redress offer letters will generally set out at a relatively high level the basis of banks’ decisions.  In addition, customers will also be offered a face to face meeting, during which they can obtain a more detailed explanation, ask questions and, if appropriate challenge, the outcome.  The banks and independent reviewers will carefully consider any points that are raised by customers.  We do not ask the banks to show customers how they have technically calculated the redress offers, as the independent reviewers will verify all the calculations used.

The exact tax treatment of any redress is likely to depend both on the circumstances of the case and on the customer’s own wider financial and tax position.  This is not something we can advise on. Ultimately, the customer will need to contact HM Revenue and Customs and confirm the position.

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

Banks agreed to automatically add 8% annual interest on top of basic redress payments to reflect opportunity costs (loss of profits or interest). Given the economic context over the past years, this has represented a straightforward and fair alternative to putting together consequential loss claims for most customers.

If customers believe their lost opportunity amounts to more than the 8% simple interest they can put together a claim for consequential loss. All customers are invited to do this following the basic redress offer and there is no need to go to a claims management company.

Consequential losses are assessed by reference to established legal principles relating to claims in tort and breach of statutory duty.  Customers should be aware of some of the legal tests, which in broad terms are:

  • The mis-sale must have caused the loss (i.e. the loss would not have happened had it not been for the bank’s regulatory breaches).
  • The loss must not be too “remote”.  That is, the loss must have been areasonably foreseeable outcome of the bank’s regulatory breaches (i.e. the bank could have reasonably foreseen that its regulatory breaches could result in those losses).
  • Only claims that are supported by evidence will be considered.  For example, documents that were created at the time the loss was suffered are likely to be very relevant.

There is no exhaustive list of types of loss that can be claimed as consequential loss (assuming they meet the legal tests). However, we have set out below some of the more frequent claims that we have seen so far and clarify some of the more common misunderstandings about what can be claimed.

Bank charges

These are charges and penalties that could have been avoided but for payments in relation to a mis-sold IRHP and may be recoverable.   

Legal and professional fees

Fees incurred in relation to dealing with the consequences of the mis-sale may be recoverable (for example, the cost of professional advice about restructuring the business to deal with the IRHP payments).  However, costs (such as legal fees) incurred as part of any legal process to recover compensation are unlikely to be claimable.

Customers should consider carefully before using lawyers or claims management companies in the review process, as the review process is being overseen by independent reviewers and such costs are unlikely to be recoverable.  

Loss of profits (i.e. if money had not been used to make IRHP payments, it would have been available to the customer who would have generated more profits)

The banks have agreed to adopt the Financial Ombudsman Service’s approach to compensate opportunity costs which is to add 8% simple interest per year to all basic redress offers (that is, 8% per year unless there is a different identifiable cost that the customer incurred as a result of having to borrow money, or an identifiable loss of interest that a customer did not earn as a result of having less money in the bank).  We hope this means that many customers can avoid making consequential loss claims which are likely to take longer to assess.

Customers who believe their ‘lost opportunity’ costs were more than 8% per year can make a consequential loss claim for loss of profits.  For these claims, customers will need to demonstrate there were concrete opportunities that they were likely to have taken if it had not been for the mis-sale.  Customers must show that the loss of profits was caused by the breach of regulatory requirements, for example by having to make IRHP payments that would not otherwise have been paid (rather than by extraneous factors, such as the economic climate).      

Claims that speculate how the money could have been invested, without supporting evidence, are unlikely to succeed. Generally, customers who make loss of profits claims would have been aware at the time of the lost opportunities and should be able to demonstrate this.  If they were not aware of the loss of opportunity, it is unlikely that the legal tests will be met. 

If customers make a successful claim for loss of profits, this is likely to replace the 8% simple interest per year that the banks’ initial redress offers will include and customers will not be able to claim both a loss of opportunity and interest where this would amount to ‘double recovery’.

Mental distress

It is very unlikely that claims for mental distress will meet the legal tests, as they are generally not recoverable in the context of a commercial contract.

Wasted management time

Losses for wasted management time may be recoverable. Customers would need to show that the IRHP mis-sale resulted in a diversion of management time that caused a quantifiable loss/cost to the business.   

Physical inconvenience and loss of amenity

It is very unlikely that claims for physical inconvenience and loss of amenity will meet the legal tests.  In practice, it is unlikely that a customer could demonstrate that such a loss was caused by the IRHP or that it was a reasonably foreseeable outcome.

Losses incurred by shareholders, directors and guarantors

The review will only consider claims in relation to losses incurred by the customer who took out the IRHP. Therefore, losses suffered by shareholders, directors, guarantors and other third parties are not claimable under the review (because they are not considered to be the ‘customer’ in such cases. These include claims for ‘personal losses’ such as breakdown of a relationship.