To date, around 10,000 customers have accepted a redress offer and £1.5bn is being paid out, including more than £300m to cover consequential losses. So far 71% of offers have been accepted.
In addition to the £1.5bn 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).
Additional 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 also have to be accounted for.
The regulator has been looking into IRHPs since 2012 when it identified failings in the way that some banks sold the products. The banks involved agreed to review their sales of IRHPs made to unsophisticated customers since 2001. The full review started in May 2013.
IRHPs were sold to small and medium-sized businesses who wanted to protect themselves against the risk of a loan becoming more expensive because of rising interest rates. IRHPs were normally sold at the same time that the business took out a loan.
Although IRHPs can be helpful for small businesses, some hedging products come with significant risks. The type and scale of the risk varies from product-to-product and depends on the type of hedging, the length of the product and the amount hedged.
But in general, many products that last for more than just a few years are likely to have very high break costs if the customer wants to leave the contract early.
Andrew Montlake, director of broker Coreco, said: “It is easy to understand why people would be attracted to the idea of purchasing a product which could mitigate the risk of interest rate rises. In theory this puts in an element of security, at a cost, which some borrowers would feel worthwhile in order to protect themselves especially in a rising rate environment.
“It was seen as an insurance policy separate to the loan,” he added.
“The problem is that far from being a simple insurance product, these are actually complex financial instruments, derivatives, which need to be explained clearly and carefully to more sophisticated borrowers.
“However, it seems that in many cases the full costs and risks were not adequately explained and were marketed to “non-sophisticated” borrowers who were taken in by the potential benefits but without understanding the risks.”
One type of IRHP is a “cap”. A cap is a separate contract to the underlying loan agreement that can have the effect of limiting increases in a customer’s loan repayments if interest rates rise. The lower the agreed interest rate, the higher the fee.
The FCA is reminding customers who purchased caps that these sales will be included in the review only if they proactively complain – those customers yet to do so are urged to act quickly.
The FCA reported that all 9 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 FCA rules or that the customer suffered no loss.
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).
