Freedom of Information Request Financial Conduct Authority Fixed Rate Loans Embedded Interest Rate Swaps

Republished with kind permission of Bully-Banks

Hidden Swaps – Freedom on Information: Right to Know Request

On 6th May Bully-Banks sent a Right to Know Request (“the Request”) to the FCA.  It is seeking disclosure of the advice given to the FCA that led to their decision not to treat Hidden Swaps as “regulated products”.

We have been asked by a number of members of the Hidden Swaps’ Team to make the Request public because it directs their legal advisors to the issues which we consider are key to the issue of whether a Hidden Swap is a “regulated product”.

Here is the text of the letter:

Martin Wheatley
Chief Executive
The Financial Conduct Authority
25 The North Colonnade,
Canary Wharf,
London E14 5HS.

6th May 2014
Dear Martin,

Freedom of Information: Right to Know Request

We should be grateful if the FCA would provide the information requested in paragraphs 1 to 5 below.

Ordinary People in Business is requesting this information under the Freedom of Information Act 2000 on behalf of one hundred of its members who each allege that they have been mis-sold a “Hidden Swap” by their bank.

Hidden Swap

For ease of reference may we first define the term “Hidden Swap”.

“Hidden Swap” is a term that we use to describe a fixed interest business loan the break cost of which is linked to the value of an underlying swap entered into between the lender and a third party (which may be another division or subsidiary of the lender).  Hidden Swaps are sometimes called “Embedded Swaps” or “Tailored Business Loans” and may have other names.

A Hidden Swap contains a term providing for “breakage costs” to be payable in the event the customer terminates the Hidden Swap prior to expiry. The unusual feature of a Hidden Swap is that the quantum of these “breakage costs” is unknown at the date the Hidden Swap is entered into. These “breakage costs” are determined when the Hidden Swap is terminated (or proposed to be terminated) by reference to either the then current Bank of England Base Rate or the then prevailing LIBOR rate AND the then outstanding term of the Hidden Swap.

You will be aware that the FCA has recently confirmed that a number of banks sold some 70,000 of these products in the period since 2001.

You will also be aware that some hundreds of SMEs have alleged that they were mis-sold a Hidden Swap by their bank and maintain that this mis-sale is substantial misconduct by the bank.

Advice

For the purposes of this letter, “advice” means advice from an external solicitor or barrister AND / OR advice from the legal department of the FCA AND / OR advice from the legal department of any government ministry or department AND / OR guidance or direction from any government ministry or department.

The Information Requested

We are requesting a copy of each of the following documents:

A copy of the written advice given to the FCA (or to any official of the FCA) that the alleged mis-conduct of a number of banks and building societies in mis-selling Hidden Swaps is not an issue of “conduct” sufficient to bring the mis-sale of Hidden Swaps within the FCA’s jurisdiction to investigate (i.e. the FCA does not have the jurisdiction to investigate the allegations of mis-conduct made by some hundreds of SMEs that have been sold Hidden Swaps).

In the event that such written advice exists, a copy of any letter of instruction from the FCA (or any official of the FCA) requesting such advice together with any appendices or enclosures submitted with such letter of instruction.

In the event that such written advice does not exist, a copy of the minutes of any meetings when the FCA (or any official of the FCA) took the decision that the alleged mis-conduct of a number of banks and building societies in mis-selling Hidden Swaps is not an issue of “conduct” sufficient to bring the mis-sale of Hidden Swaps within the FCA’s jurisdiction to investigate.

A copy of the written advice given to the FCA (or to any official of the FCA) that the breakage clause contained within a Hidden Swap is not a derivative.

In the event that such written advice exists, a copy of any letter of instruction from the FCA (or any official of the FCA) requesting such advice together with any appendices or enclosures submitted with such letter of instruction.

In the event that such written advice does not exist, a copy of the minutes of any meetings when the FCA (or any official of the FCA) took the decision that the breakage clause contained within a Hidden Swap is not a derivative.

A copy of the written advice given to the FCA (or to any official of the FCA) that the breakage clause contained within a Hidden Swap does not fall within Section 85(1) of the Financial Services & Markets Act 2000 (Regulated Activities) Order 2001 i.e. is not “a right under a contract the purpose of which is to secure a profit or avoid a loss by reference to fluctuations in …. an index or other factor designated for that purpose in the contract”.

In the event that such written advice exists, a copy of any letter of instruction from the FCA (or any official of the FCA) requesting such advice together with any appendices or enclosures submitted with such letter of instruction.

In the event that such written advice does not exist, a copy of the minutes of any meetings when the FCA (or any official of the FCA) took the decision that the breakage clause contained within a Hidden Swap does not fall within Section 85(1) of the Financial Services & Markets Act 2000 (Regulated Activities) Order 2001.

A copy of the written advice given to the FCA (or to any official of the FCA) that the breakage clause contained within a Hidden Swap does not fall within Article (4)(1)(17) of the Markets in Financial Instruments Directive 2004/39/EC.

In the event that such written advice exists, a copy of any letter of instruction from the FCA (or any official of the FCA) requesting such advice together with any appendices or enclosures submitted with such letter of instruction.

In the event that such written advice does not exist, a copy of the minutes of any meetings when the FCA (or any official of the FCA) took the decision that the breakage clause contained within a Hidden Swap does not fall within Article (4)(1)(17) of the Markets in Financial Instruments Directive 2004/39/EC.

A copy of the written advice given to the FCA (or to any official of the FCA) that “the deposit” made by the bank as one party to the Hidden Swap does not fall within Question ID 289 in the Commission’s Question and Answers on MiFID which states, inter alia, “Equally, a deposit with an embedded derivative that has the potential of reducing the initial capital invested is a financial instrument under MiFID.”

In the event that such written advice exists, a copy of any letter of instruction from the FCA (or any official of the FCA) requesting such advice together with any appendices or enclosures submitted with such letter of instruction.

In the event that such written advice does not exist, a copy of the minutes of any meetings when the FCA (or any official of the FCA) took the decision that “the deposit” made by the bank as one party to the Hidden Swap does not fall within ID 289.

Given the high level of sensitivity attaching to this issue we should be grateful if the FCA would make every effort to disclose the requested information. The FCA’s reliance on a claim of legal privilege (which is how the FCA has responded to other requests for disclosure on the issue of Hidden Swaps) is inappropriate in the circumstances.

On behalf of our members we are seeking confirmation that each one of the various questions raised has been properly considered by the FCA and its advisors. We are also seeking an explanation of the reasons behind the decisions taken by the FCA in regard to each of the questions.

With many thanks for your help, yours sincerely,

Jeremy
Chairman
Ordinary People in Business

The FCA confirmed receipt of the Request and noted the following:

“Out of interest, I note your description of how the break costs are calculated:

“These “breakage costs” are determined when the Hidden Swap is terminated (or proposed to be terminated) by reference to either the then current Bank of England Base Rate or the then prevailing LIBOR rate AND the then outstanding term of the Hidden Swap.”

I don’t think this is technically correct – I understood that break costs were determined with reference to prevailing forward interest rate curves (rather than the current base rates or LIBOR rates). This is illustrated quite well today – the base rate has not moved but break costs on many live base rate swaps will have fallen because of expectations about the future path of interest rates.”

Bully-Banks immediately agreed with the correction i.e. the break costs in a Hidden Swap are determined with reference to the prevailing forward interest rate curves (rather than the current base rates or LIBOR rates).

The FCA has helpfully put its finger exactly upon why a Hidden Swap is “a regulated product” i.e. the breakage cost a Hidden Swap contains is clearly a derivative because it is determined with reference to prevailing forward interest rate curves.

We await the FCA’s response to our request for information with great interest.

Jeremy Roe
Chairman
Ordinary People in Business

About Scott Simpson

Landlord/Property Developer sold a Fixed Rate Loan, 'Tailored Business Loan' by Yorkshire Bank. These Type of Business Loans Contained Hidden or Embedded Swaps With Huge Break Costs.