Regulation  

FCA pledges greater transparency in response to IRHP review

FCA pledges greater transparency in response to IRHP review

The Financial Conduct Authority has pledged greater transparency and better governance in its handling of consumer redress, in response to the independent review of the interest rate hedging products (IRHPs) scheme offered to consumers.

An independent review by John Swift QC found clear shortfalls in the processes, governance and record keeping when decisions about the redress scheme were made, as well as a lack of transparency.  

The FCA said today (December 14) it recognised these findings and the related recommendations and also welcomed the findings that most customers eligible for the scheme obtained better outcomes than could have been achieved outside of it. 

The regulator said 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 will ensure that any significant decisions on redress made in the future will be transparent, with appropriate governance, and supporting evidence will be properly recorded,” it said. 

In 2013, the FCA's predecessor, the Financial Services Authority, had entered into agreements with nine banks and delivered redress of £2.2bn to thousands of small businesses. 

It paid out to thousands of customers who had been mis-sold IRHPs over the period 2001 to 2011. 

An IRHP is a financial instrument which enables customers to manage, or 'hedge', their exposure to fluctuating interest rates. The purpose of it is to secure a profit or avoid a loss by reference to changes in interest rate.

This voluntary customer redress scheme, which was overseen by skilled persons approved by the regulator, was implemented from 2013 and was largely completed by 2016. It led to just over 20,000 IRHP sales to customers being examined and around 14,000 offers of basic redress and interest being accepted.

However, the FSA's intervention, creation of the scheme and its role throughout the period of its implementation, was subject to intense scrutiny and criticism. 

This included legal actions and a report from the Treasury Select Committee, as well as a parliamentary debate in the House of Commons on December 4, 2014, both of which ultimately led to the appointment of the independent review in 2019.

Last year, the FCA’s chief executive Nikhil Rathi also launched a transformation programme to ensure the FCA is a more “innovative, adaptive and assertive regulator” that would investigate and act earlier. 

The FCA said in the report today that it already has a more proactive approach and better systems, oversight and controls than it had when the IRHP sales took place. 

The City watchdog also said it does not consider the FSA was wrong to limit the scope of the redress scheme to less sophisticated customers and concluded that it would not be appropriate or proportionate to take further action. 

“Accordingly, the FCA will not seek to use its powers to require any further redress to be paid to IRHP customers.”

The recommendations

The report on the back of the review outlined several recommendations for the FCA, including that it should regulate more proactively to prevent harm to consumers as well as taking remedial action after harm has occurred.