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UK businesses are concerned that the Financial Services Authority (FSA)'s review, which found that banks mis-sold complex derivatives to small-to-medium enterprises (SME), gives too much power to the banks and are flooding lawyers and dispute consultancies in order to bypass the agreement they had with the FSA by launching legal proceedings.

"Since the FSA published its agreement with the banks at the end of June, we have seen a steady stream of inquiries and it doesn't seem to be slowing down," said Marc Yaffe, Partner at JMW Solicitors. "The FSA scheme is a product of two competing forces; public and political pressure on the one hand and the banks' reluctance to be transparent on the other. The difficult balancing act placed upon the FSA has resulted in a very weak scheme."

Other lawyers have also said they were being inundated with enquiries. After several cases, including that of Sara Pearson, were settled out of court, businesses have been looking for a swifter resolution than could be achieved by waiting for the banks' and independent reviewer's investigation results, which do not have a deadline.

"Since the FSA announced the basic details of that review, we have seen a notable increase of enquiries coming in," said Ali Akram, principal practising solicitor (England & Wales) and barrister at LexLaw.

"We've have multiple litigation cases against the banks and are  in excess of 100 consultations to see if it is possible to bring about legal proceedings. After years of them trying to resolve their disputes with the banks or even simply getting a response, they [SMEs] don't trust the banks, even with an independent reviewer, will give them a fair verdict.

"The FSA's agreement with the banks is nothing more than a press release."

Companies such as Vedanta Hedging and Commercial Financial Solutions (CFS), which is led by ex-bankers, also said they were being inundated with cases.

At the end of June, the FSA released its findings from a review that found that 28,000 interest rate swap products have been sold to customers and all these cases will have to be investigated for potential mis-selling. In an agreement with the banks, the FSA has now banned HSBC, Barclays, Lloyds and RBS from selling interest rate swaps to SMEs again.

Interest rate swap agreements (IRSAs) are contracts between a bank and its customer where typically one side pays a floating, or variable, rate of interest and receives a fixed rate of interest payments in exchange. They are used to hedge against extreme movements in market interest rates over a given period.

Companies that have seen the value of these products move against them as rates fell during the recession now owe banks crippling sums in interest payments each year.

Under an agreement with the FSA, the banks are now in charge of leading investigations into all the potentially affected customers with the aid of independent reviewers, who are overseen by the FSA.

The FSA said that although not all businesses will be owed redress. The exact amount for that that are will vary from customer to customer and could include a mixture of cancelling or replacing existing products, together with partial or full refunds. The banks will be in charge of deciding the level of compensation for each customer individually.

However, there is no deadline for these investigations and forms of redress to be completed.

"The FSA Scheme is limited in scope, vague, and gives far too much autonomy to the banks, rather than protecting the customer," said  Yaffe. "The banks can decide whether its customer is entitled to a review, whether the customer is entitled to redress and thirdly the banks are free to determine what they consider to be fair and reasonable redress."

FSA representative Joseph Eyre told IBTimes UK: "There is a lot of work going into making sure that the right process is being put in place.

"The independent reviewers will be a key part of the process to make sure that this is resolved properly. There is a lot of information on our website about this. Discussions with the banks have been wholly focused on getting the right outcome for those people who bought these products and insuring that there is a thorough review of their sales."

Regulatory scheme not legal form of redress

IBTimes UK has spoken to a large number of UK businesses that are claiming to have been mis-sold IRSAs by the four main UK banks. The news comes just after IBTimes UK exclusively revealed that campaign group Bully-Banks have set up a limited-by-guarantee company to help steer 700 business owners towards litigation.

One small Yorkshire-based retailer, which has a case study indicative of a number of stories heard by IBTimes UK, was told that he could have a mortgage to expand the business only on condition that he took out a swap.

The business owner told us that the relationship manager gave "what if" scenarios concerning rising interest rates but did not explain that the company would have to pay thousands of pounds to the bank if interest rates tanked.

According to the company, the bank also failed to tell it about the break costs if it wanted to exit the contract until after it bought the product along with the mortgage.

Another small business owner got in contact with IBTimes UK and said it had taken out two four-year loans on condition that a swap for each loan was wrapped into the deal in 2008. However, while the loan repayments are coming to an end, the business owner is having to pay 11 years more of swap payments to the bank.

All businesses that IBTimes UK has spoken to have their cases under review by solicitors to press on with legal proceedings. In all cases, they claimed they had been largely ignored by the banks before the FSA paper was released.

"All clients have tried to get a resolution or response from the banks and are worried that without a deadline on the FSA's agreement to investigate and deliver redress, it could lead to months or years of delay and limit their legal rights," said Akram. "By just waiting for an outcome from these investigations, it could spell an expiration of the time companies can file a legal complaint."

Other lawyers agreed and highlighted the differences between litigation and the FSA agreement with the banks.

"One of the most important points to remember is that the FSA review is a regulatory scheme, not a legal form of redress. In a case currently before the courts, when a claimant started legal proceedings, the bank applied for litigation to be stayed while it carried out a review under the FSA scheme," said Yaffe.

"Thankfully, the court rejected this application and ordered the legal case to continue.

"Customers should be aware of time limits on bringing a claim. It seems clear that the FSA review process will take time and there will be delays. Customers must therefore consider whether their legal claim may become time-barred during that review process. Once the limitation has expired, the banks may show little appetite for a fair and reasonable settlement because the threat of legal proceedings will have fallen away," said Yaffe.

The FSA agreement does not affect the application of the Limitations Act to claims that are brought through court proceedings.

"Customers who are unsure about whether they are still able to bring about court proceedings or are concerned that they may run out of time should they decide to issue court proceedings, should consider seeking legal advice," says the FSA website.

The statute of limitation is six years. The risk of further delays could mean a customer not being left with much choice. 

"These claims are very different to the PPI cases," said Yaffe. "We have a large number of clients that may have claims for cases of mis-selling and we are carefully working through all their documents. Whilst we are seeing common patterns emerging across our caseload, we believe it is important to take the time to review each case on its own merits, because every single case has its own set of facts and therefore requires individual analysis before an approach is made to the banks."

Akram said: "Every case is entirely different and there have been times where the client has missed the deadline on legally being able to file a claim by days. While there are ways around trying to file later than six years, it can be difficult, complex and expensive to try do."

Bank responses to mis-selling derivatives claims

The following banks have delivered statements to IBTimes UK, regarding our reports.

HSBC:

"We are working with the FSA and an independent reviewer and we will be providing customers with further information about this process as soon as possible. We are committed to building long-term relationships with customers and will provide clear communication to all customers throughout the process."

RBS:

"The RBS Group has reached agreement with the FSA on an approach to the issues surrounding interest rate swap products for SMEs. We believe that an independent review process will help to bring the clarity and certainty that customers and other stakeholders need."

"In the case of a small number of less sophisticated customers who entered into more complex swap products we have agreed to move directly to redress. We believe risk management products are an essential part of corporate banking and it is important we restore customer trust in this area. We are committed to the fair and timely treatment of our customers and will work closely with the FSA to achieve that end."

Lloyds: 

"We are fully engaged and participating in the review of interest rate derivative products, which will provide redress to certain customers as set out by the FSA and we are taking this process very seriously."

"We have already written to those SME customers with structured collar products to notify them that they are party to the review and that their case will be reviewed by an independent assessor. In due course, we will also write to those with interest rate products deemed to be simpler in nature to notify them that if they would like their case to be reviewed that we will do so."

"Interest rate derivative products were not products that we sold widely to our SME customers with over 90 percent of our SME customers that wished to protect themselves against interest rate moves doing so through fixed rate loans."

Barclays:

"Barclays welcomes the clarity and certainty that the independent FSA review process will bring for customers.  Barclays is finalising the detail of the review with the FSA after which Barclays shall be writing to all eligible customers to let them know the next steps to be taken for their particular case. Where there is evidence of failures in the way these products were sold, Barclays will work hard to make things right. We continue to believe that risk management products such as interest rate swaps remain an effective tool for some businesses wishing to hedge their exposure to interest rates and can be an appropriate product when sold properly."