Example 1 - Full tear up redress
A small business applied for an interest-only loan repayable in five years. Although it was not a condition of the loan, the bank told the customer about products that were available to protect against interest rates movements and they were persuaded to buy a five-year Structured Collar.
Interest rates fell sharply. However, because of the way that the collar was structured, the monthly payments that the customer was making actually increased.
The bank agreed with the FCA that Structured Collars were too complex to be understood by customers like this and agreed to provide redress.
The independent reviewer agreed with the bank’s assessment that if the customer had understood the risks of the Structured Collar, they would not have chosen to enter into any interest rate hedging product. For redress purposes, the customer was treated as if they had never purchased the Structured Collar. Redress comprised:
- A refund of all payments under the Structured Collar amounting to £100,000.
- Simple interest on the refund on payments (8% per year) of £20,000.
- Bank charges of £800 which would have been avoided ‘but for’ the mis-sale (plus simple interest at 8%).
Example 2 - Alternative product redress
A small business applied for an interest-only loan repayable in ten years. A condition of lending was that the customer was required to take out a product to protect it against interest rate movements. The customer agreed to proceed on this basis and bought a ten-year swap, to fix payments at £5,000 a month.
Interest rates fell sharply. However, because the customer had fixed their payments, they were still paying £5,000 a month to service the loan and swap. The customer wanted to get out of the swap to benefit from lower interest rates and to reduce the monthly payments but was told that to do so they would have to pay an additional £200,000 of break costs.
The bank and independent reviewer concluded that the customer was not given clear and fair information about the potential break costs associated with the product.
The independent reviewer agreed with the bank’s assessment that if the risks of break costs had been sufficiently disclosed, the customer would still have decided to fix their payments by entering into a swap but would have chosen a five-year term, so they were not tied in for an extended period. For redress purposes, the customer was treated as if they had originally entered into a five-year swap.
- Cancellation of the 10 year swap.
- A refund of swap payments amounting to £17,000 - the difference between monthly payments made so far on the ten-year swap and the payments the customer would have made on the five-year swap until 2012 (which is when the replacement five-year swap would have ended).
- Simple interest (8% per year) £3,000.
- Refund of bank charges incurred of £200 which would have been avoided if the customer had been in the five-year swap from the start (plus simple interest at 8%).