Interest Rate Swaps and the costs of advice

You have instructed a solicitor or a Claims Management Company (“CMC”) and are grateful that they have assisted you in obtaining compensation as result of a mis-sold swap.

The solicitor or CMC then contacts you and requests the 10% fee for their work. You have recovered £900,000 thus the fee amounts to £90,000 plus VAT.

However, you are minded by the fact that this seems an awful amount for the work that has been done, which was perhaps less than you anticipated. What do you do?

Background

In 2013, the Financial Services Authority found that thousands of businesses had been sold interest rate-hedging products that they did not need or understand.  This means that businesses have been taking action against banks in order to recover losses for products which were wrongfully sold.

Whilst this is clearly a sensible thing to do, businesses are at risk of encountering further difficulty and unfairness in trying to resolve the issue, as one unnamed Care Home found out.

Case-study

In 2013, an owner of a care home saw an advert from a CMC which dealt with the mis-selling of interest-hedging products.

The owner had paid the Bank over £750,000 over and above the business loan they took out; and the employee of the CMC spoke to the owner over the telephone and told them that it sounded as if the product had been mis-sold and offered to act on their behalf with the Bank in order to recover compensation.

The CMC and the owner entered into what is known as a Damages Based Agreement (a “DBA”) by email (although it was not referred to by that name in the agreement itself and neither party seemed aware that they had entered into a DBA). The Agreement provided that the fee for the case would be 10% plus VAT.

The owner was not aware that their case would be heard by an automatic review process; an alternative to taking the case to court.

Further, the claim was statute-barred so there was no realistic prospect of pursuing a claim at court.

Following initial correspondence, the CMC recovered ‘basic redress’ i.e. the monies expended by the owner in meeting the payments under the swap plus interest of 8%, meaning a total amount of £900,000 before tax.

The CMC which dealt with the case sent the owner an invoice of £90,000 plus VAT. The customer queried that £90,000 plus VAT for the work done seemed too much.

The owner was grateful for the work that had been done on behalf of her business, but knew that this was limited to perhaps tens of hours of work, not hundreds and hundreds of hours. No fee was agreed and the owner was threatened with legal proceedings.

The owner then sought legal advice with Ward Hadaway as to how to remedy the situation.

After examining the agreement which the owner signed, it became clear that the CMC was in breach of the Damages-Based Agreements Regulations 2013, in respect to its fee.

Regulation 3 provides that any such agreement must specify the reason for setting the amount of the payment at the level agreed.

In our view, the agreement that the owner signed did not provide any explanation as to why the CMC’s fee had been set at 10% of any damages awarded.  As such, in our view the agreement was void.

After exchanging a number of letters with the CMC’s solicitor explaining the owner’s position, Ward Hadaway has had no further contact from the CMC’s solicitor, and the owner of the business has heard nothing more from the CMC itself.

The owner did not pay any of the money demanded from the CMC. The business has saved over £90,000 fees, allowing it to keep the redress payment in its entirety.

Martin Woodford, Partner in Litigation, says as follows: “DBA’s are tightly regulated. If a potential claimant agrees to give a percentage of their damages in payment of legal fees, and the adviser, for example, has set that a fee of 30% of recovered damages, then that adviser must provide details as to why the fees has been set at 30% as opposed to 10% or 20% so that the potential claimant can make an informed decision about the adviser’s fees.

“If this is not done, in certain circumstances, these agreements can be avoided in their entirety. In this case, the business saved over £90,000 in fees allowing it to keep the redress payment in full.”