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Sophistication Test

The Financial Conduct Authority (FCA) have determined that interest rate swap products were particularly likely to have been mis-sold to ‘non-sophisticated’ customers. Therefore, only those customers categorised as ‘non-sophisticated’ will be included in the FCA review.

What are the criteria for deciding whether a customer is considered ‘sophisticated’ or ‘non-sophisticated’?

The sophistication test involves a number of objective measures based on turnover, net assets and number of employees, as well as a subjective test whereby the bank judges whether you had the relevant knowledge and experience to make an informed decision on the product. If the notional value of swap products you held immediately after the sale in question was more than £10 million, you are automatically considered ‘sophisticated’.

Most of the banks have now completed the process of categorising customers as ‘sophisticated’ or ‘non-sophisticated’. However, at the time of writing there are several thousand customers, mostly with RBS, who have yet to receive their determination.

If you receive a letter saying you have been included in the review, you should opt in by returning the form included with the letter. If you do not opt in, you will not be included in the review. If you can show that you are in financial difficulty, your case will be prioritised and your payments to the swap may be suspended pending the outcome.

If you have been categorised as ‘sophisticated’, do you still have a mis-selling case?

It is important to note that although the sophistication criteria were defined by the FCA, the assessment is carried out by the bank. It is worth checking the assumptions made by the bank against the FCA criteria and challenging if appropriate. Even if you have been correctly categorised as a sophisticated customer you may still have a valid mis-selling case. For example, it has recently been reported that Lord Sugar may be the highest profile victim of mis-selling. He is complaining to Lloyds Bank after paying £10 million in break fees on a swap product that would be excluded from the review.

If you are categorised as a ‘sophisticated’ customer, it is vital to take advice, to evaluate other options such as pursuing a negotiated settlement with the bank.
Whether your business is ‘sophisticated’, ‘non-sophisticated’ or you don’t know, contact us for advice.

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