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Interest rate swap mis-selling

There has been a lot of media coverage of interest rate swap mis-selling recently and MPs have been calling for an inquiry by the regulators.

This follows on from the LIBOR and PPI scandals faced by our major banks. From early 2005 onwards, financial institutions and major banks started selling complex financial instruments called interest rate swaps to individuals and small businesses seeking loans. The banks told customers they needed the swap arrangement to protect themselves from the risk that interest rates would increase, potentially making their loan repayments too high to cope with. The banks often presented the swap as a form of fixed rate loan, whereas the reality was the swap was a complex bet on the movement of interest rates that carried very substantial risks. Many customers were misled into expensive deals under which they were worse off but from which the banks made huge profits.

These and other complicated interest rate hedging products were sold without fully explaining the risks involved.

Many different products sold including;
  • Swaps - this allowed  a customer to ‘fix’ their interest rate;
  • Collars – this allowed customers to limit fluctuations in the interest rate set between a simple range;
  • Caps – placed a limit or ‘cap’ on any interest rates; and
  • Structured Collars – this is similar to cap and collar however had a lower ceiling limit and and involves a far more complex strategy if the base falls below the floor limit.
Many customers simply did not understand what they were signing up to. The risks included that interest rates would fall as they actually did and that the customer would be charged an enormous fee to break the agreement early. The bank, however, would often have a clause allowing them to break the agreement early if the swap started to work against the bank. In many cases the interest rate swaps simply were not a suitable product to be selling to small business customers and some business lost massive amounts of money.

Expert guidance is vital. It is important to consider your relationship with your bank and our advice at focuses on maintaining relations so that current bank and loan facilities are not jeopardised.You should avoid rip off claims management firms and ambulance chasing type lawyers at all costs!

FSA Scheme for Interest Rate Swap Compensation

For businesses defined by the Financial Services Authority (FSA) as ‘non-sophisticated’, there is a compensation scheme involving Barclays, Lloyds, RBS and NatWest. To qualify for this scheme, your business must be turning over £6.5 million or less, have a balance sheet total of no more than £3.26 million and employ 50 staff or less.

If your product was a ‘structured collar’ you may be offered compensation. If you entered into another type of interest rate swap arrangement, then you may be entitled to have your complaint reviewed. However, the banks themselves have been given responsibility for these reviews, so for the best outcome, legal representation is advised.

Should the issue not reach a satisfactory outcome using this avenue, we can assist you in making an application to the Financial Service Ombudsman. Compensation is limited to £150,000 in such cases and this will be considered when planning the next step on your behalf.We will discuss and agree funding and costs at the outset of the case.

If your business is classed as ‘sophisticated’ then the FSA scheme will not apply. We can advise you on the strength of a claim for compensation and pursue compensation for you through negotiations with the bank, via a complaint to the Financial Ombudsman Service, or if necessary through litigation.

EDWARD HAYES instruct ABBAS LAHKA QC and GRAHAM BROUDIE QC to advise and litigate these cases. If a compensation claim is not possible, we can negotiate a cheaper exit from the swap.


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