Justice scales and gavel by books

The U.K. regulators’ efforts to ensure that thousands of customers received billions in redress after they were mis-sold hedging products were successful overall, but also suffered from a lack of transparency, governance, and other failings, a review has found.

The Financial Conduct Authority (FCA) said that it has accepted the recommendations made in an independent review of its efforts.

In 2013, the FCA’s predecessor (the FSA) reached agreements with nine banks, which saw them pay over £2.2 billion in compensation to thousands of customers who had been mis-sold hedging products between 2001 and 2011.

The voluntary redress scheme, launched in 2013 and completed in 2016, was overseen by outside monitors approved by the regulator.

The review found that the scheme resulted in more than 20,000 sales being examined, and around 14,000 offers of basic compensation being paid.

“Most eligible customers therefore obtained redress that met the objective of the scheme and in all likelihood was ‘better’ from their perspective than any outcome they could have achieved outside the scheme,” the review noted.

However, the review also pointed to a number of failings by the FCA, including its decision at the outset to limit the redress scheme to customers deemed “unsophisticated.” That meant excluding thousands of so-called “sophisticated” clients.

“My main conclusion on the scope of the scheme is that the FSA was wrong to confine it to a subset of private customers/retail clients designated as ‘non-sophisticated’,” the review said, noting that the regulator allowed the industry to limit the scope of the redress scheme without adequate justification.

“Instead, when the [FCA] was asked to restrict the scope of the whole scheme to ‘non- sophisticated’ customers, it did so after only the briefest consideration, and without sufficient involvement by the board,” the review added, saying that the sophistication of the client doesn’t relieve the industry from its regulatory obligations.

Essentially, the review found, there’s no “free pass” for banks from addressing the consequences of breaches, in this case based on the status of a customer who is “assessed by some measure of knowledge or experience or both …”

In this case, the banks were absolved of responsibility to 10,000 customers, and the regulator didn’t take any action beyond the redress scheme to hold them accountable, the review found.

It also found that the FCA had limited its oversight of the redress scheme, and under-resourced that oversight work.

“Targeting this scheme so that it could be quickly rolled out to the small businesses that needed it most was a complex undertaking,” the FCA said in a statement, responding to the review’s findings.

“Nevertheless, the FCA has acknowledged clear shortfalls in processes, governance and record keeping when decisions about the redress scheme were made, and a lack of transparency,” the regulator added.

The FCA also pledged that future redress efforts “will be transparent, with appropriate governance, and supporting evidence will be properly recorded.” The regulator also made reference to having “a more proactive approach and better systems, oversight and controls,” citing a “significant transformation programme” that allows for innovation and adaptability.

Nevertheless, the regulator will not revisit this mis-selling episode: “FCA will not seek to use its powers to require any further redress to be paid to IRHP customers,” it said.