BE sure to read the small print.
That is the moral of a judgment handed down yesterday in the Court of Session in Edinburgh. Lord Hodge dismissed a claim from two brothers against the Royal Bank of Scotland for the mis-selling of a complicated insurance product which, they claim, pushed their property business into administration.
Thousands of other businessmen who were persuaded to purchase similar products now seem unlikely to find redress through the courts. They deserve better.
This matter came to light in June when The Herald revealed that thousands of small businesses faced exorbitant repayment charges after taking out Interest Rate Swap Agreements (IRSAs) from high street banks between 2005 and 2008, when the Bank of England base rate was around 5%. They were intended to protect customers against rises in interest rates. But when the rate plunged to 0.5% and stayed there, customers found themselves not only unable to take advantage of the low rate but also faced with steep rises in their repayment charges because of the way the scheme operated. And if they tried to extricate themselves, there were huge break fees.
Many businesses claim to have been pushed to the brink of bankruptcy or beyond by IRSAs, which were sometimes a quid pro quo for receiving a loan.
Clearly, many customers did not understand what was being sold to them or realise that IRSAs were complex financial instruments, invented by the merchant banking arms of the banks and sold by agents earning a fat commission. If the downside had been properly spelled out, who would have agreed to such contracts?
The banks quote the small print in their agreements, indicating that customers are advised to seek independent advice. But the fact remains that over the years banks have tried to portray themselves as being on the side of their customers and trusted to act in their best interests. Perhaps customers have been slow to appreciate the way bank staff have been transformed from supportive partners into highly incentivised sales teams.
Ruari and Jamie Stephen have the option of taking their case to the Financial Services Authority (FSA) but yesterday's judgment, which places the onus emphatically on company directors to understand the legal documents they sign, makes it unlikely that they will find redress there either. Indeed, banks now have every reason to reject claims and invite customers to see them in court.
The FSA acknowledges that banks have a duty of care to unsophisticated customers but this judgment allows banks to define that group very narrowly. For anyone who is a company director, the watchword has to be caveat emptor. After the role of the banks in the 2008 crash, mis-selling of endowments and payment protection insurance, the Libor scandal and now IRSAs, trust between banks and customers is at an all-time low. If the industry is serious about rebuilding that trust, it should do the decent thing and agree terms with those who have been grossly disadvantaged. Pressure from the Treasury select committee might help.
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