London & The World

High Court

Interest rate swap compensation scheme facing judicial review challenge /

A £1.8 billion scheme set up for high street banks to compensate small firms mis-sold interest rate hedging products is facing a legal challenge.

London's High Court has granted an application brought by Mishcon de Reya on behalf of a nursing home owner and property developer, Holmcroft Properties Limited, to launch a full judicial review of a decision made under the scheme. According to press reports, including in The Daily Telegraph and Reuters, the decision could open the floodgates for other firms to challenge their compensation packages from the banks and lead to an overhaul of the scheme.

The rate swap products were intended to protect smaller companies against rising interest rates, but led to catastrophic losses for some firms when rates fell. Many companies also faced hefty penalties to extricate themselves from the deals. In 2012, the then Financial Services Authority, now the Financial Conduct Authority (FCA) set up the compensation scheme after reaching an agreement with nine banks – including Barclays, HSBC, Lloyds Banking Group and Royal Bank of Scotland – but the scheme relied on banks appointing assessors to decide who was eligible for compensation. Many firms criticised the process on the ground that their compensation was inadequate, they were offered alternative hedging products they did not want or they were excluded from the process altogether on technicalities.

In its application, Mishcon questioned the role of the assessors, which in Holmcroft Properties' case was KPMG, the independent reviewer of Barclays’ redress programme. Barclays, KPMG and the FCA all challenged the application, claiming that the relationship between the bank and KPMG was a matter of contract, with no wider public law duty to act fairly.

In granting Mishcon's application, however, Judge Kenneth Parker held that KPMG could potentially be considered a public body and therefore be the subject of a judicial review. Without ruling on the merits of the claim, he said that the level of public interest in the affair was a factor in his decision. "It is plain from everything that this matter is one of very considerable general public interest. I am not allowing the claim to proceed solely because of that factor, but it does seem to me a factor that the court should take into account" he said.

A date for the full judicial review has yet to be set.

For further information please contact:

James Oldnall
Partner, Finance & Banking Disputes

James Taylor
Solicitor, Finance * Banking Disputes