The Financial Conduct Authority's legal agreement with the banks over the review of mis-sold complex loans raises questions about its fairness, a legal expert has said.
The terms of the agreement were kept confidential until the FCA agreed to release it to the Treasury Committee, whose chairman Andrew Tyrie published it this week.
According to specialist advisers QA Legal, banks have disregarded it when making many offers of redress to small businesses.
So far £1.8billion has been paid out in 11,000 accepted offers following the 18-month review, but 3,000 firms have yet to settle and another 3,000 been denied any redress.
In an analysis of the agreement, Simon Jaquiss of QA Legal says it will be "of particular interest to those companies and individuals for whom the review mechanism has resulted in either no redress compensation at all, or substantially reduced compensation due to the imposition of an 'alternative product'".
Mr Jaquiss points to the overriding need for the original sale of an interest rate hedging product (IHRP) to comply with the FCA's rulebook, and says: "This runs contrary to what several of the banks have been telling us."
If rules were breached - as the FCA found in over 90 per cent of cases - banks had to return the customer to his original position, and the agreement shows they could only offer an alternative product on certain conditions, Mr Jaquiss says. One of them was that the original IHRP, or the replacement, did not have a break cost of more than 7.5 per cent of the loan in a "pessimistic but plausible scenario" of future interest rates.
Further, an IHRP could only be imposed on a customer as a loan condition if the IHRP had been "chosen without regard to its inherent profitability for the firm" and sold within the rules.
Mr Jaquiss said: "The banks ask for 'new evidence' when asked to either re-open a case, or consider a challenge to a redress offer. The documents released by Mr Tyrie provide it."
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