17SINELS |
BEST PRACTICE REPRESENTATIVE 2019
»COMMON THEMES UNDERLYING MIS-SELLING
»Clients were not informed of the true risks
»Clients were not informed how much money the bank was making
»Clients were not informed that an interest rate cap could have been
bought with absolute safety for a fraction of the cost involved in
having a swap
»Clients were not informed that for the banks it was a one-way bet –
they could terminate when they wanted but clients could not
»Clients were not informed that swingeing break charges would be
applied.
»Methodically going through every
piece of open source intelligence
and learning what was available on
thetopic
»Finding whistle-blowers, people who
had previously been on the inside
and who could be turned or who
had turned
»Finding technical experts who could
draw up a comparison between
what was sold and what should have
been sold
»Looking at the relevant codes of
practice for lenders operating in
thatarea
»Issuing proceedings.
We first built up the intelligence
picture, we discovered that dedicated
sales teams, mislabelled as advisers, had
been selling these instruments for the
benefit of the banks. The banks who
sold the products were invariably the
counter-party on the other side of the
deal. As the client lost, the banks won,
which gave rise to an inherent conflict
of interest. Banks were harvesting
their own clients’ information to pass
to their own in-house sales teams. If a
client already had a loan and then they
wanted to renew it, they had to buy
one of these products.
In the case of one clearing bank, a
sales advisor told us that by May 2008
he had sold one of these instruments
to every client he had, at which stage
he was told by his supervisors to go
out and re-hedge. In practice, that
meant expanding the period of the
hedge to the benefit of the bank and
at the expense of the client.
Lessons learned
Libor is the interest rate to which
the swaps were fixed; clients got the
observe, so if Libor went down, the
clients interest rate went up, and if
Libor went up, the clients interest rate
went down. The banks knew where it
was going, ie down, but they forgot to
tell their clients. In May 2008 not only
did we see what the banks had thought
was going to happen, but Libor, which
was supposed to be reflective of the
rate at which banks borrowed from
each other, was being described as
“the rate at which no bank could or
did borrow at”. Libor was fictional and
artificially depressed in order to give the
impression of bank strength.
In May 2008, Libor was at 2.5 per cent.
During the course of that year, Barclays
became insolvent, Lloyds and RBS
needed government handouts and HBOS
was bankrupt, following Northern Rock.
We now see traders being prosecuted
belatedly for rate fixing, but it is far
from clear that the regulator and the
government were not aware.
Farces like Libor should be brought
to an end immediately. The regulator
should never have allowed this situation
to happen, and not only in relation
to the Libor rate. Nor should the
regulator allow banks to offer products
when they are the counter-party
without giving out some very explicit
warnings and some clear and honest
explanations. There must be a robust
system in place for making sure that
clients can make informed decisions.
It should be a statutory requirement to
have an independent financial adviser
present when signing a contract with
a bank. It was a dereliction of duty to
allow the banks to rewrite the rules
for the ombudsman reviewing their
mis-selling. We also need legislation
to insert a duty of good faith into all
contracts. Other nations have it and
we cannot rely on the judiciary to do it;
they need statutory encouragement.
Many well-run
businesses
providing jobs,
services and
infrastructure
were holed
below the water
line, some never
recovered and
some dragged
their directors
and shareholders
under with
them
“
“
Rt Hon The Lord David Blunkett
Rt Hon The Lord Eric Pickles
