Confirmation of the FCA’s limited regulatory remit to consider Fixed Rate Loans

This supports the FCA’s view that it cannot establish a redress scheme for these loans and its conduct rules do not apply in relation to the feature which has led to the majority of complaints - break costs.

On 26 June 2014, the FCA explained to the Treasury that fixed rate loans with similar features to IRHPs were not specified investments under the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001. Consequently, unlike standalone IRHPs (which are contracts for differences), these loans are not regulated products.

In stating its position, the FCA said:

“Relevant loans have been referred to by a number of different terms, such as “embedded” or “hidden” swaps. This description is not entirely accurate. […] The clause under which the break cost arises is, in substance, a liquidated damages clause under which the parties have agreed the basis on which damages will be assessed in the event of a default or early termination.”

The FCA further concluded that the conduct rules (or other FCA powers) did not apply and a redress scheme was not available. In support of this conclusion, the FCA stated they had obtained the opinion of Charles Flint QC which was consistent with its view.

Given the importance of this issue and the Treasury Committee’s request for comfort on the FCA’s approach, the FCA agreed to allow the Treasury Committee to appoint another QC for a second opinion on the advice they had already received. The Treasury Committee therefore appointed Jonathan Fisher QC to review the advice given by Mr Flint.

In a short Opinion dated 7 January 2015, Mr Fisher confirms he is in “complete agreement” with Mr Flint and states:

“The key point is that a contract for these loans is for the customer to borrow and the bank to lend. It is not to secure a profit or avoid a loss by reference to fluctuations in interest rates. The break costs arise only when a customer decides to terminate the contract early; as a contingent clause, it does not operate to change the purpose of the contract as a whole.”

Therefore, the features which are contained in these loans which are similar to IRHPs do not bring them within the FCA’s current regulatory remit.

Despite this unequivocal view, it is unlikely to be the end of the matter; as Mr Fisher’s final comments may have highlighted:

“In so far as issues of consumer protection are concerned, there is a lacuna in the law.”

In response to this second opinion, the Treasury Committee has said:

“The Committee will be considering whether more needs to be done to address this gap in regulation as part of its report on SME lending. It is crucial to the UK economy that this market be restored to working order.”