Disputes over interest rate hedging (derivatives) products sold by banks are in the news again this week – this time US state and local governments are looking at whether the products were ‘mis-sold’ and whether they have a case.
Closer to home, as predicted by UK lawyers I spoke to at the time of its launch, the FSA scheme to compensate ‘unsophisticated’ customers who were sold derivatives products is rather clearly being run for the benefit of the banks.
The scheme promised to resolve one class of disputes quickly and cheaply – and its authors were rather keen to keep lawyers away from the process.
Instead, the existence of the scheme is being referenced by at least three banks in correspondence with business owners in a clear attempt to delay litigation – ‘as a weapon’, in the words of one lawyer who is acting for claimants on these cases.
‘We are considering if your client should go through this scheme,’ reads one letter to a solicitor whose client’s case is well advanced. The solicitor describes the letter as ‘cheeky’. In some cases, a delay has been suggested by banks referencing the scheme that would take the case over the limitation period for making a claim should the scheme fail to resolve the matter.
As I have noted before, not all who have lost financially through the purchase of a derivative product have cases with merit. But a great many do – witness the £450m Barclays has set aside to settle cases of mis-sold products.
The attitude of the courts, parliament, regulators and the ombudsman to these cases has shifted away from simple acceptance of the banks’ version of this area over the past year.
What they either will not do, or will struggle to do, is to look at the wider context of these product sales. The economic context would seem to prove widescale mis-selling.
The UK is a mature market, which by 2005 was quite simply pretty close to saturation point for financial products, just as it was for certain kinds of high-end commercial legal advice.
In the latter case, this is where commercial law firms’ interest in other jurisdictions comes from. Some of our leading firms believe they will become smaller in the UK, but be in more countries in the future. Growth should come from, say, east and south-east Asia – even though revenue from these markets is dwarfed by UK income.
One can tell that the banks were less accepting of the home market’s saturation point than were law firms, because profits year-on-year in the UK were many times the rate of economic growth, and that in a highly competitive economic environment.
That can be achieved if competition in financial services is poor (it was not), or by upping the amount banks sell to people whose own profits are moving up at a more pedestrian pace. In 2005-2008, it looks like a lot of what went on was the latter - more products being sold more expensively to customers for every pound those customers are making from running their businesses.
That in case after case bank employees bowed to the pressure to earn (or ‘skim’) more from a relatively fixed level of economic activity is shown by the banks’ results from that time.
Not every new derivatives sale was inappropriate, and there are plenty of business owners who did, and still do, actively seek these products as a way of managing their risks. But it is quite clear to me that, in broad terms, the mis-selling issue will not go away, and has the scale it does, because banks so often treated a saturated market as if it had plenty of room to grow.