RBS 2012 Annual Report Download - page 460

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Notes on the consolidated accounts continued
32 Memorandum items continued
Interest rate hedging products
In June 2012, following an industry wide review, the FSA announced that
the Group and other UK banks had agreed to a redress exercise and past
business review in relation to the sale of interest rate hedging products to
some small and medium sized businesses who were classified as retail
clients under FSA rules. On 31 January 2013, the FSA issued a report
outlining the principles to which it wishes the Group and other UK banks
to adhere in conducting the review and redress exercise.
The Group will provide fair and reasonable redress to non-sophisticated
customers classified as retail clients, who were mis-sold interest rate
hedging products. In relation to non-sophisticated customers classified as
retail clients who were sold interest rate products other than interest rate
caps on or after 1 December 2001 up to 29 June 2012, the Group is
required to (i) make redress to customers sold structured collars; and (ii)
write to customers sold other interest rate hedging products offering a
review of their sale and, if it is appropriate in the individual circumstances,
the Group will propose fair and reasonable redress on a case by case
basis. Furthermore, non-sophisticated customers classified as retail
clients who have purchased interest rate caps during the period on or
after 1 December 2001 to 29 June 2012 will be entitled to approach the
Group and request a review.
The redress exercise and the past business review is being scrutinised
by an independent reviewer, who will review and agree any redress, and
will be overseen by the FSA. The Group made a total provision of £700
million in 2012 in respect of this matter, including £125 million for
administration expenses. As the actual amount that the Group will be
required to pay, will depend on the facts and circumstances of each case,
there is no certainty as to the eventual costs of redress.
Retail banking
Since initiating an inquiry into retail banking in the European Union (EU)
in 2005, the European Commission (EC) continues to keep retail banking
under review. In late 2010 the EC launched an initiative pressing for
greater transparency of bank fees and is currently proposing to legislate
for increased harmonisation of terminology across Member States, with
proposals expected in the first quarter of 2013. The Group cannot predict
the outcome of these actions at this stage.
FSA mystery shopping review
On 13 February 2013 the FSA announced the results of a mystery
shopping review it undertook into the investment advice offered by banks
and building societies to retail clients. As a result of that review the FSA
announced that firms involved were cooperative and agreed to take
immediate action. The Group was one of the firms involved. The action
required includes a review of the training provided to advisers,
considering whether changes are necessary to advice processes and
controls for new business, and undertaking a past business review to
identify historic poor advice (and where breaches of regulatory
requirements are identified, to put this right for customers). The Group
will be required to appoint an independent third party to either carry out or
oversee this work. The scope and terms of the past business review and
the appointment of the independent third party have not yet been
determined. The Group cannot predict the outcome of this review at this
stage.
Multilateral interchange fees
In 2007, the EC issued a decision that, while interchange is not illegal per
se, MasterCard’s multilateral interchange fee (MIF) arrangements for
cross border payment card transactions with MasterCard and Maestro
branded consumer credit and debit cards in the EEA were in breach of
competition law. MasterCard was required to withdraw the relevant cross-
border MIF (i.e. set these fees to zero) by 21 June 2008. MasterCard
appealed against the decision to the General Court in March 2008, with
the Group intervening in the appeal proceedings. The General Court
heard MasterCard’s appeal in July 2011 and issued its judgment in May
2012, upholding the EC’s original decision. MasterCard has appealed
further to the Court of Justice and the Group has intervened in these
appeal proceedings.
In March 2008, the EC also opened a formal inquiry into Visa’s MIF
arrangements for cross border payment card transactions with Visa
branded debit and consumer credit cards in the EEA. In April 2009 the
EC announced that it had issued Visa with a formal Statement of
Objections. However, in April 2010 Visa announced it had reached an
agreement with the EC as regards immediate cross border debit card MIF
rates only and in December 2010 the commitments were finalised for a
four year period commencing December 2010 under Article 9 of
Regulation 1/2003. In July 2012 Visa made a request to re-open the
settlement in order to modify the fee. The EC rejected the request and in
October 2012 Visa filed an appeal to the General Court seeking to have
that decision annulled. The EC is continuing its investigations into Visa’s
cross border MIF arrangements for deferred debit and credit transactions.
On 31 July 2012 the EC announced that it had issued Visa with a
supplementary Statement of Objections regarding consumer credit cards
in the EEA.
In the UK, the Office of Fair Trading (OFT) has carried out investigations
into Visa and MasterCard domestic credit card interchange rates. The
OFT has not made any finding of an infringement of competition law and
has not issued a Statement of Objections to any of the parties under
investigation. In February 2013 the OFT confirmed that while reserving its
right to do so, it does not currently expect to issue Statements of
Objections (if at all) prior to the handing down of the Court of Justice
judgment in the matter of MasterCard's appeal against the EC’s 2007
infringement decision.
The outcome of these investigations is not known, but they may have a
material adverse effect on the consumer credit industry in general and,
therefore, on the Group’s business in this sector.