Mis-Selling Derivatives: Lawyers Converge on Strategy in UK Legal Action

A number of UK law firms are looking to co-ordinate a collective litigation strategy as they prepare for legal action against banks accused of mis-selling derivatives to small-to-medium enterprises (SME).

In emails seen by IBTimes UK, 11 law firms with mixed experience in cases where a business is claiming that their bank has mis-sold them interest rate swap agreement (IRSA) are looking to meet and discuss the best ways to approach such cases.

"These cases are difficult to win and there are two reasons for that," says one person close to a number of the law firms cited on the email. "Firstly, banks have got a significant number of contractual defences and secondly, case law, specifically in or around this area, the contracts with banks are not weighted in the favour of these small businesses, so therefore solicitors will have a number of different technical and legal arguments."

"The main issue is that some of the cases have been strong but not well argued, which could in fact hurt future cases. Some law firms have already worked on cases like these for years and two or three firms have co-ordinated already," the person added.

Currently, Barclays, RBS, Lloyds and HSBC are in charge of investigating around 40,000 products that they sold to SMEs to determine which IRSAs were 'mis-sold', under the agreement they forged with the Financial Services Authority (FSA).

Under the same agreement, which has no deadline for the investigations, the banks are also in charge of determining redress for the claimants. During the review process, an 'Independent Reviewer' will be also assessing each case, but this entity is appointed by the bank itself.

Experts have told IBTimes UK that claimants seeking redress for the alleged mis-selling are unlikely to form US-style "class action" lawsuits because of the lack of similarity between interest rate swap contracts.

While it is possible to file an action that would encompass several or hundreds of claimants, lawyers who employ derivatives experts to examine the contracts have warned-off such an action because "there would be little logic" and "little advantage for any of the clients in doing so."

Unlike the uniformity of the settlement process in the Payment Protection Insurance (PPI) scandal that afflicted millions of British savers, small business interest rate derivatives vary in length, value and purpose, making them unsuitable for collective action or settlement.

For instance, one business which spoke to IBTimes UK said it took out a loan with a bank for 5 years against which the bank attached two IRSAs that will not expire until another 5 years after the loan matures.

And while PPI purchases were largely useless, each individual small firm sold a derivative contract may have had a business need for it at the time of purchase. The question to be settled legally is whether the bank sold the firm a product that appropriate for the firm's risk.

In fact, some experts anticipate certain mis-sold contracts will likely be renegotiated or annulled as opposed to being subject to monetary compensation, thus allowing the firm to keep a working relationship with the bank in question and maintain access to funding on overdraft facilities.