Interest Rate Swap Agreements were frequently marketed to customers who had or took out a loan with the bank. There are broadly four types of products that have been sold to customers:
- Swaps – enabling the customer to ‘fix’ their interest rate;
- Caps – placing a limit on any interest rate rises
- Collars – enabling the customer to limit interest rate fluctuations to within a simple range; and
- Structured collars – enabling a customer to limit interest rate fluctuations to within a specified range, but involves arrangements where, if the reference interest rate falls below the bottom of the range, the interest rate payable by the customer may increase above the bottom of the range.
It is estimated that tens of thousands of these complex derivative products have been mis-sold by high street banks (including HSBC, Barclays, Lloyds TSB and RBS) to individuals and small and medium size limited companies, mainly in the period 2005 to 2008.
Interest Rate Swap Agreements can protect customers against the risk of interest rate movements and can be appropriate when properly sold in the right circumstances. However, when sold to customers who are likely to lack expertise and understanding of the product (i.e. ‘non-sophisticated customers’), some Interest Rate Swap Agreements may be inappropriate. (Non-sophisticated customers can include caravan and leisure park owners, pub owners or licensees or small hotel owners, farm owners or even the local coffee shop owner, as well as many other businesses).
Many businesses have been left struggling as a result of these Interest Rate Swap Agreements. The FSA (The Financial Services Authority) have found evidence of a number of poor sales practices across a number of products. These practices vary across banks and include:
- Poor disclosure of exit costs;
- Failure to ascertain the customers’ understanding of risk;
- Non advised sales straying into advice
- ‘Over-hedging’ (i.e. where the amounts and/or duration did not match the underlying loans); and
- Rewards and incentives being a driver of these practices
The ‘protection’ against rising interest rates these products provided came with a price: businesses had to pay more if interest rates fell. And after rates were slashed in 2008, many businesses found themselves worse off instead of better.
Many businesses have also found to their peril that once locked in to these costly agreements, many were unable to escape, as exit costs – which in some cases reached £1m – would be enough to bankrupt them. It has been found that one company went out of business after being charged interest amounting to more than twice the original loan amount – a £3m loan racked up an extra £6.1m to pay back.
Many hard working, decent, dedicated individuals have faced financial ruin, stress and ill-health as a result of the consequences of the mis-selling of interest swap loans.
If you are a small to medium size business that has been mis-sold a business loan with swap interest rate product please do not hesitate to Contact Us to see if you have a claim for compensation.