Banks that mis-sold hedging products have offended 'natural justice' by failing to pay out over £16bn in compensation to small businesses, claimant representatives have claimed.

So far victims have claimed just £2bn, which the lawyers blame on the failings of the official compensation regime. 

The compensation scheme for SMEs began work in 2013 and at its peak involved 3,000 bank employees, according to the Financial Conduct Authority.

‘Non-sophisticated’ business owners were eligible dependent on criteria including that their businesses: employed 50 staff or fewer; were not professionally advised on the product sale;  worked in an area not relevant to the product sold; and who had a claim for under £10m. Nine banks signed up to the scheme. 

To date 13,800 business owners have accepted payouts totalling £2.2bn, the vast bulk of which related to direct loss. Just £500m was paid out for 'consequential loss' - losses incurred through lost investment opportunities, due to the high cost of the mis-sold product, or damage to the business through commitments that could not be met, in some cases resulting in closure. 

The small sum paid out for consequential loss is a serious injustice, professionals advising business owners claim. ‘'The compensation scheme, if conducted done properly, would have paid out £20bn,’ Abhishek Sachdev, managing director, Vedanta Hedging, told the Gazette.

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Sachdev bases that opinion on the very different experience he has had of advising on claims made through the scheme, and those where a settlement has been sought outside it.

He said: ‘When it comes to consequential loss, under the review scheme people are getting back zilch.’ By contrast, all 480 disputes he has advised on outside the scheme were settled by the banks and included significant payouts for consequential losses. ‘The case law is still in favour of the banks. They aren’t prepare to risk that,’ he added.

Stephen Rosen (pictured), a financial disputes expert at Collyer Bristow who has had a leading role in bringing claims: ‘It’s been scandalous how the banks have dealt with consequential loss claims. When the scheme was set up, it was announced that claims would be assessed according to legal principles.’

Instead, Rosen said: ‘We’ve submitted many well-structured claims, but found the client gets little or nothing. It’s a breach of natural justice. As the scheme is set up, the banks are judge, jury, investigator and executioner.

Decisions made by the schemes’ independent reviewers cannot be scrutinised, and evidence presented to reviewers by the banks is not disclosed to claimants and their lawyers.   

Claire Collinson, principal of Claire Collinson Legal, whose clients still have 28 claims in the scheme, added: ‘There are very significant delays in dealing with consequential loss. It’s immensely frustrating for the businesses involved.’ She added: ‘These claims should be assessed on the balance of probabilities but in many cases the level of proof required by the banks exceeds that burden of proof.’

FCA advice that no legal advice was needed for businesses entering the compensation scheme means many are now beyond the limitation period for bringing a claim through the courts, Collinson added: ‘If businesses listened to FCA and bank advice that no lawyer was necessary, then we often find that no standstill agreement was put in place and that the time for litigation has passed.’

The banks’ success in limiting payout is such that Barclays has reduced the amount set aside for compensation payments. In 2012, the Financial Services Authority (now the FCA) conducted a review that indicated 90% of interest rate swaps products sold to SMEs included irregularities in the sale.

As to next steps for dissatisfied claimants, claims can go through the courts is a ‘standstill’ agreement was put in place as clients entered the compensation scheme. Where a claim can be linked to fraud, the limitation does not apply.

Judicial review has proved an ineffective option to date, and was not being considered by lawyers contacted by the Gazette