FCA criticised for approach in “swaps scandal”: implications for future intervention
UPDATE: 27 January 2025: On 25 January 2025, the Treasury has applied to intervene in the Supreme Court hearing relating to commission and listed for the start of April, signalling a move to attempt to maintain the UK’s financial competitiveness and protect the UK motor finance and other funding markets reliant on brokers, as Motonovo and Close Brothers prepare to appeal the recent Court of Appeal ruling.
The Financial Conduct Authority (FCA) has faced renewed scrutiny over its handling of the interest-rate hedging mis-selling scandal with claims that it acted in an “irrational” and “unfair” manner when it excluded supposedly “sophisticated” victims from a redress scheme of more than £2.2 billion. This controversy, brought back into focus by an ongoing High Court judicial review, has cast doubt on the effectiveness of the FCA’s interventions in striking the correct balance between fairness to stakeholders and regulatory efficiency, and has raised critical questions about how the regulator should approach similar situations in future, such as the motor finance commission disclosure scandal following the landmark Court of Appeal ruling in Johnson v Firstrand Bank, Wrench v Firstrand Bank and Hopcraft v Close Brothers.
“The Swaps Scandal”: criticism and judicial review
Central to the “swaps scandal” was a redress scheme agreed upon in 2013, which provided over £2.2 billion in compensation to businesses affected by mis-sold interest rate hedging products. While the FCA claimed the voluntary redress scheme provided “fair and faster” outcomes compared to enforcement action, critics, including members of the All-Party Parliamentary Group on Fair Banking, argue that the FCA unjustly excluded approximately 10,000 businesses deemed “sophisticated” based on subjective criteria, leaving many small businesses without redress. These exclusions have been labelled as arbitrary and lacking transparency, as highlighted in the independent Swift review, which found that the FCA’s predecessor, the Financial Services Authority (FSA), “fell below the acceptable standard of transparency” in designing and executing the scheme. Further, the FCA’s recent court challenge has highlighted what some view as a lack of transparency and accountability in its decision-making. According to legal representatives, the FCA “shut its ears” to findings of independent reviews, undermining confidence in the redress process.
The ongoing judicial review of the FCA’s actions has brought renewed attention to these alleged regulatory shortcomings. The claimants argue that the regulator’s decisions denied small businesses their right to redress, a claim bolstered by assertions that the FCA opted for expediency over fairness when excluding businesses from redress. This judicial review has broader implications for the scope and approach of FCA regulatory intervention going forward.
Motor Finance Commission: broader implications for regulatory oversight
Simultaneously, the FCA’s handling of the motor finance commission disclosure scandal has faced criticism following Hopcraft where the Court of Appeal found that insufficient or absent disclosure regarding broker commissions which failed to ensure consumers’ informed consent breached fiduciary duties and created unfair financial relationships under the Consumer Credit Act 1974 (CCA). This ruling emphasised a fiduciary duty that surpassed the regulatory requirements in place at the time thereby leaving the FCA open to claims it failed to act decisively to prevent misconduct. This is expected to be revisited by the Supreme Court in the first half of 2025 following leave to appeal being granted.
Lessons for the FCA and the industry
For lenders, these developments underline the importance of robust client engagement and proactive compliance with disclosure and transparency standards, with clear, fair and inclusive criteria being crucial to maintaining trust and avoiding reputational damage both for consumers and businesses.
As legal challenges and consumer claims rise, the industry faces mounting pressure to review historical practices and current processes to avoid liability. The swaps scandal should serve as a cautionary tale for the FCA urging it to engage more effectively with stakeholders to ensure fair and comprehensive outcomes by adopting more robust and equitable frameworks when addressing misconduct. Moving forward, the FCA’s handling of the commission disclosure scandal will likely test its ability to restore confidence in its regulatory function while ensuring fair treatment for all stakeholders.
For further insights, please visit our related articles on the legal implications of the motor finance commission ruling:
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