The FSA (The Financial Services Authority) has looked into the mis-selling of business swap loans and considered that there may be a claim for compensation. The FSA provided a review of the mis-selling of business swap loans sold to small to medium size businesses (SMEs) by the four largest banks in the UK; HSBC, Barclays, Lloyds TSB and RBS.
Simply put:
- Around 28,000 swap loans have been mis-sold by the banks.
- The swap loan have poor disclosure of any exit costs.
- Customers were not made fully aware of the risks they were taking on with the swap loans.
- The sales staff giving professional advice were not regulated or qualified to do so.
- Loans were “over-hedged” where the amounts and or duration did not match the underlying loan.
- Rewards and incentives were given to staff for selling the swap loans.
It must be remembered that the majority of business owners mis-sold business swap loans had no idea that it was a speculative loan, a gamble. The swap loan was sold on the basis that it was simply a fixed loan, like a fixed mortgage. Interest rate swaps allow hedging loans as a separate entity to the underlying asset based loan, and therefore, are paid on top of the existing loan.
The banking industry failed to advise the small business owner of the risks in detail, failed to advise the business owner of the onerous penalty clauses for cancelling the business swap loan resulting in unfair lock-ins. The bank, however, had a far onerous “get out clause” if the interest rate fluctuation did not suit them. In one case reported in The Sunday Telegraph, a 5 year, £5 million swap loan would costs the small business owner the sum of £4.1 million to terminate the business swap loan early.
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