WHAT IS INTEREST RATE MIS-SELLING?
We have seen an increased number of instructions from our business clients who have been sold interest rate protection products by banks. Widely known as “Interest rate Swaps” or “Cap” and “Collars”, they are essentially sophisticated financial or hedging products.
Although these types of products have been around for a number of years, problems have arisen when the banks started to aggressively market them to SME’s including landlords, property developers, hoteliers, farmers and so on. Traditionally they were used by sophisticated investors such as commodities dealers who were usually surrounded by accountants or finance directors who could talk them through the product and the financial implications and the risks involved.
It is said that SME’s will get this country out of the current recession; however, it is precisely these customers which have been hit by this current mis-selling scandal. The impact on business can be catastrophic. Some businesses have “gone to the wall” because they cannot afford the increased payments. Others who have tried to refinance have found that the huge exit payments of up to 50% of the total loan have denied them any such opportunity.
Some of the products offer little or no protection, allowing the banks to cancel the arrangement if interest rates rose and the bank felt that it was not earning as much money as it would have liked. But when the interest rates fell, there was no such right available to the borrower.
Some borrowers have experienced a mismatch between the hedge and the loan itself. For example the period of time the hedge has been set to run has in some cases exceeded the period of the loan or the amount of the hedge has been much far higher than the borrowing.
This is a critical time for businesses to consider their overheads. Interest rates are at their lowest for decades and their ability to take advantage of them is not only essential to their survival but also their potential growth.
THE FSA SCHEME
n 29th June 2012 the FSA announced that it had found serious failings in the sale of interest rate hedging products to SME’s and announced that a scheme had been set up with the four main banks to undertake a review and provide redress to ‘non sophisticated’ customers.
The scheme fails, however, to afford any redress to what the FSA term ‘Sophisticated Customers’. That is not to say that those ‘Sophisticated Customers’ have not been mis-sold hedge products by the banks.
The FSA investigations identified the following bad practice:-
PROBLEMS WITH FSA SCHEME
The difficulty with the FSA’s approach is that it leaves the matter of redress for those ‘non sophisticated customers’ firmly in the hands of the banks themselves.
A non-sophisticated customer is a customer who meets at least two of the following criteria: –
However, even if the customer is not a sophisticated customer under the above test, the bank still has the get out clause of declaring the customer to be a sophisticated customer if it believes that the customer:-
Had the necessary experience and knowledge to understand the service to be provided and the type of product or transaction envisaged, including their complexity and risk involved”.
The FSA scheme also creates a process of uncertainty for those who fall within its scope: www.fsa.gov.uk/static/pubs/other/interest-rate-hedging-products.pdf
SPEAK TO A SOLICITOR ABOUT INTEREST RATE SWAP MIS-SELLING
If you or your business are affected by the potential mis-selling of Interest Rate Swap arrangements or other similar products then we can help you to recover payments made under the Swap, as well as save you substantial exit fees that would otherwise be payable in order to terminate the arrangement.
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