Sinels

A Message from Lord Pickles and Lord Blunkett, followed by Sinels's best practice article

The ability to listen and learn from one another has always been vital in parliament, in business and in most aspects of daily life. But at this particular moment in time, as national and global events continue to reiterate, it is uncommonly crucial that we forge new channels of communication and reinforce existing ones. The following article from Sinels is an attempt to do just that. We would welcome your thoughts on this or any other Parliamentary Review article.

Blunkett signature Rt Hon The Lord David Blunkett
Pickles signature Rt Hon The Lord Eric Pickles

www.sinels.com

THE PARLIAMENTARY REVIEW
Highlighting best practice
16 | SINELS
Philip Sinel, Majority Partner
Founded in 1988, Sinels Advocates is a litigation law firm
based in Jersey, with an international reputation and a
global capability. It specialises in litigation and dispute
resolution for both individuals and corporations, residents both
in Jersey and abroad. It has a global reach, and a large part
of the practice has involved actions against financial service
providers, including banks. Senior Partner Philip Sinel discusses
how it responded to the mis-selling of Libor in 2008.
Mis-selling of Libor
The mis-selling of Libor linked products to businesses by their own bankers,
unfairly impacted a large number of SMEs. Although the government set up an
ombudsman scheme following industry pressure, the qualifications for inclusion
in that scheme were altered to suit the banks. This meant that a large number of
family-owned SMEs, the sort of businesses that take generations to build up but a
small amount of time for a banker to destroy, were excluded.
The effect of interest rate swaps was that, as rates fell, because it was a swap the
borrower got the obverse. As the rate fell to 0.5 per cent, borrowing then became
available at 2.5 per cent, but the effect of the swap was to lock borrowers in at five
to six per cent. Because that then became unsustainable, penalty charges brought
it up to nine per cent for anything up to 30 years. When the clients then said they
wanted out, the banks told them there would be a cost and that the break charges
could not be financed, so businesses could not service their borrowing and could
not afford to refinance and they went bankrupt.
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. We had a client stuck in at nine per cent over a 28-
year period with no possibility outside of litigation of getting out of it because of
the incredibly high and unadvertised cost of breaking the instrument.
Our response
We pulled back cash and benefits in the tens of millions for clients and saved a
large part of Jersey’s hospitality industry. In the case of one of our smaller clients
who spent just over £3,000 with us, they received £140,000 in cash and reductions
going forward worth another £140,000 to them. When they first looked at their
product they thought they had bought life insurance, showing just how poor the
information being supplied to clientswas.
Our basic methodology:
»Speaking to our colleagues abroad in the field – cross-fertilisation of knowledge
and expertise
AT A GLANCE
SINELS
»Majority Partner: Philip Sinel
»Founded in 1988
»Based in Jersey
»Services: Litigation often for
those in a disadvantaged
position against banks and
trustees.
»No. of employees: 7
Sinels
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
thetopic
»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
thatarea
»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

www.sinels.com

This article was sponsored by Sinels. The Parliamentary Review is wholly funded by the representatives who write for it. The publication in which this article originally appeared contained the following foreword from Rt Hon Kwasi Kwarteng.

Rt Hon Kwasi Kwarteng's Foreword For The Parliamentary Review

By Rt Hon Kwasi Kwarteng

This year’s Parliamentary Review reflects on a tumultuous and extraordinary year, globally and nationally. As well as being an MP, I am a keen student of history, and I am conscious that 2020 would mark the end of an era. It will be remembered as the year in which we concluded Brexit negotiations and finally left the European Union. Above all, it will be remembered as the year of Covid-19.

In our fight against the pandemic, I am delighted that our vaccination programme is beginning to turn the tide – and I pay tribute to the British businesses, scientists and all those who have helped us to achieve this. But the virus has dealt enormous damage, and we now have a duty to rebuild our economy.

We must ensure that businesses are protected. We have made more than £350 billion available to that end, with grants, business rates relief and our furlough scheme supporting more than 11 million people and jobs in every corner of the country, maintaining livelihoods while easing the pressure on employers. The next step is to work with business to build back better and greener, putting the net zero carbon challenge at the heart of our recovery. This is a complex undertaking, but one which I hope will be recognised as a once in a lifetime opportunity.

Through the prime minister’s ten point plan for a green industrial revolution, we can level up every region of the UK, supporting 250,000 green jobs while we accelerate our progress towards net zero carbon emissions.

With our commitment to raise R&D spending to 2.4% of GDP and the creation of the Advanced Research & Invention Agency, we are empowering our fantastic researchers to take on groundbreaking research, delivering funding with flexibility and speed. With this approach, innovators will be able to work with our traditional industrial heartlands to explore new technologies, and design and manufacture the products on which the future will be built – ready for export around the globe.

And I believe trade will flourish. We are a leading nation in the fight against climate change. As the host of COP26 this year, we have an incredible opportunity to market our low-carbon products and expertise. Our departure from the EU gives us the chance to be a champion of truly global free trade; we have already signed trade deals with more than 60 countries around the world.

As we turn the page and leave 2020 behind, I am excited about the new chapter which Britain is now writing for itself, and for the opportunities which lie ahead of us.
Rt Hon Kwasi Kwarteng
Secretary of State for Business, Energy and Industrial Strategy