This case concerns the ability of the FCA to police the review process that it set up with so many banks in relation to the sale of interest rate hedging products (IRHPs). The decision suggests that the FCA (through the Financial Ombudsman) has no jurisdiction to consider what happened during the banks’ reviews. It will therefore worry the banks’ customers who might ask the question: how can we hope for a fair review if the FCA cannot police how that review is conducted?
Background
In October 2008 three associated companies (Mazarona) borrowed £6.4m from AIB. As part of that agreement, AIB was entitled to, and duly required, Mazarona to hedge against the risk of rising interest rates. Under the terms of the IRHP (a 2 year swap), AIB was a floating rate payer (3 month LIBOR on £6.4m) and Mazarona a fixed rate payer (4.66% on £6.4m). As interest rates crashed, so did any commercial benefit from the IRHP for Mazarona.
In July 2012, the FCA and AIB agreed that AIB would review the sale of its IRHPs to certain non-sophisticated customers, like Mazarona. Two basic types of redress were identified. First, the refund of all payments made under the IRHP to a customer who would not have selected any such product; this was known as the “full tear up”. Second, a refund of the difference between the payments made under the IRHP actually sold and an alternative product which the customer would have selected if there had been no regulatory breach, the so-called “alternative product”.
In April 2014, AIB concluded its initial review, found that the IRHP had been mis-sold and offered redress on the alternative product basis for £387,615.22. That offer was rejected by Mazarona on 28 April 2014 who made a counter offer on the full tear up basis of £535,370.
AIB conducted a review of the redress that it had offered under the oversight of the “skilled person”. Apparently because of new information from Marazona on 28 April 2014, AIB withdrew its offer in December 2014 because it was satisfied that Mazarona would have entered into the IRHP actually executed even if there had been no regulatory breaches.
In January 2015, Mazarona complained to the Financial Ombudsman Service (FOS) about both (i) the withdrawal of AIB’s offer and (ii) the sale of the IRHP. FOS ultimately concluded that (i) she had no jurisdiction over AIB’s review of the redress it had offered (since the review was not “a regulated activity”) and (ii) Mazarona would have entered into the IRHP even if there had been no regulatory breach.
Analysis
These two findings are difficult to reconcile. If the FOS had no jurisdiction over the review process, then how can she have also made a finding about how Mazarona would have acted? Perhaps she reached that decision without considering any aspect of the review process.
In any event, Mazarona sought judicial review of both of the FOS decisions, but only obtained permission in relation to the finding on jurisdiction. The sole issue therefore that the judge was dealing with was “whether the Ombudsman was right to conclude that she could not consider what had happened in AIB’s review in her determination.” Having worked his way through the labyrinth of relevant definitions, Mr Justice Mitting concluded the Ombudsman had been right: she did lack jurisdiction to consider what had happened in the review. It is difficult to argue with the judge’s analysis of the relevant statutory provisions, but, if correct, the practical effect is that the FCA is not entitled to oversee the very review process that it set up. Unless and until there is a statutory amendment, the decision making of the banks and the skilled persons in the review process cannot be policed by the FCA.
Mr Justice Mitting refused permission to appeal. It is not yet clear whether Mazarona will apply to the Court of Appeal for permission to take the matter further.
Gibson & Co.
June 2017