Interest rate swap loans were designed to provide protection for SMEs against future interest rate rises but were inappropriate for large numbers of customers, many of whom would not have been granted the loan without entering into a complex structured deal, often for a very lengthy period.
Interest rate swap loans are complex products, which banks mis-sold to businesses alongside loans to protect them against rises in interest rates, in anticipation of interest rates going up. However, these interest rate swap loans have caused severe problems for businesses when interest rates subsequently went down, and The Financial Services Authority(FSA) believes that banks did not do an adequate job of warning customers about the risks of Interest Rate Swap loans in the event of interest rates dropping. It was also discovered that in some cases borrowers had been pressurised to sign up or told that the interest swaps were obligatory or made them more likely to succeed in their applications.
The banking industry failed to advise the small business owner of the risk and pitfalls in detail, failed also 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 less onerous “get out clause” if the interest rate fluctuation did not suit them. Thus, it has now become apparent the bank was protected more than the customer and it was normal practice to emphasise the rewards and de-emphasise the risks. For more information, please do not hesitate to Contact Us.
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
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.
Bank customers who consider they may have been mis-sold these financial products should seek legal advice without delay. Banks are likely to argue that mis-selling claims are time-barred 6 years after the date of the sale of the financial product which is the subject of the complaint (or possibly even earlier).
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 toContact Usto see if you have a claim for compensation.