Swaps are financial instruments designed to assist the investor in stocks and bonds, commodities, currency funds, and interest rates speculation and hedging. Interest rate swaps are attractive and more complicated instruments that involve the exchange of cash-flow from interest between two parties. When floated, or fixed, between currencies, swaps are popular hedging and speculative instruments.

Interest Rate Swaps

Simply put, a payer pays a fixed rate to a receiver counterparty to get a LIBOR or EURIBOR floating rate they want, while the receiver pays a floating rate, getting a fixed rate they want. This is how the interest rate swap works with the intention of protecting a loan or loan customer from interest rate increases and the lender from interest rate declines. There are many kinds of interest rate swap arrangements (ISRAs) and they may be customized to fit the customer’s needs.

Banks make loans with variable interest to businesses. In the name of protecting a business from interest rate increases, SMEs (small and mid-sized enterprises) are especially targeted, ISRAs are sold during the loan agreement. The intent falters when interest rates fall and the banks begin assessing fees and penalties that were not disclosed to the customer at the time of the loan. SMEs suddenly find themselves in financial predicaments without having been made fully aware of the downside risk of the ISRA they purchased. In the long term, the banks are the only beneficiary of being protected since the marketing of ISRA’s primary intent is to hedge the lender’s risk of losing interest cash flow.

Mis-Sold Interest Rate Swaps

An investigation conducted by banking regulator FSA (Financial Services Authority) determined that SMEs were mis-sold the interest swaps by the banks under the guise the instruments would act as insurance against rising interest rates without fully disclosing the fees and penalties that would be incurred and assessed if interest rates fell. Interest rates began plummeting in the financial crash. As businesses were assessed, mis-selling claims against the lending institutions began rolling in. Their claims included accusations of lenders not providing adequate information about exit costs and risks, and that the banks were not acting with integrity and in the best interest of the customer. Businesses contend these practices were motivated by incentives and rewards by and for the banks.

In June 2012 the FSA directed Barclays, HSBC, RBS, and Lloyds to review mis-selling claims filed by businesses. There is an estimated 40,000 businesses laying claim to the one billion pounds banking institutions have collectively set aside to pay out in compensation for mis-selling the swaps. FSA estimates this will only be a drop in the bucket of the tallied compensation once the review is completed.

The banks were directed to undertake a study of fifty cases each and have their reviews completed by October 2012. Following that, they were to proceed with the remainder of the 40,000 cases. In total, FSA estimated the review would be completed in six months. After the banks complete their reviews, FSA will begin their reviews. The banks’ slow progress prompted the FSA to inform businesses not to expect their payouts for a year.

Although the banks have consented to cease marketing and selling IRSAs, for many businesses this is too little too late and continued delays in compensation are a direct assault on their SME, their livelihoods, and their overall financial survival. Businesses are livid and accuse the banks of “dragging their feet” on resolving this issue because these big four banks and others are already inundated with requirements and levied fines as a result of mis-selling PPI (personal property insurance) and fixing the LIBOR (inter-bank lending) rate. Billions of pounds must be set aside by the banks to pay for those indiscretions. Barclays in particular has been fined £290m for manipulating LIBOR rates. While Lloyds allocated £3.6 billion for PPI compensation, a spokesman said the institution did not widely-sell IRSA derivatives and therefore “the financial impact of this remediation and the associated costs are not expected to be material to the group.” The apparent denial, delays, and irreverence complicates resolution and compensation to the victimized businesses.

Banks to Set Aside £1 Billion

The British Bankers’ Association is working in conjunction with the FSA to resolve the delays and claims. Each business will be evaluated by their bank on a case by case base according to their particular level of distress as a result of the interest swap rate arrangement mis-sellings. The BBA posts on their website that “the bank, will, at the customer’s request, suspend the collection of swap payments pending the outcome of the formal review by the independent skilled person being conducted in conjunction with the Financial Services Authority (FSA).”

 


Interest Rate Swap Claims News

Interest Rate Swaps: Barclays Bank, Fair and Reasonable Redress

Certain interest rate hedging products (IRHPs) have come under question by current banking customers and by several banking agencies within the U.K. These banking products are structured collar financial products that are frequently used to hedge against future interest rate expenses. These complex structured collars were sold to numerous loan customers during the period of time before the great international recession. This financial downturn across the international financial markets created unusual interest rate returns for many of the structured collars sold to Barclays Bank customers.

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Preparing Businesses for an Interest Rate Swap Claim

The interest rate swap mis-selling fiasco has garnered a lot of attention during the past year. Over 12 months after the first cases went up for review, the claimants are just now receiving the compensation they deserve. Although it may seem like businesses around the country are now experiencing financial windfalls, there is much work that needs to be done before anyone can expect to receive compensation from their interest rate swap mis-selling claims. It has become quite clear that the process is much more involved than a PP mark-II.

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Interest Rate Swaps: Natwest, Fair & Reasonable Redress

Natwest Bank in London has begun a direct redress program for those small businesses affected by several interest rate swap products. These interest rate swap products or structured collars were sold to small businesses as a hedge against any risk associated with the interest rate markets. The small businesses or unsophisticated businesses were allowed to purchase these products. The 2008 financial crisis caused many of these hedging products to be of little value against interest rate changes. Small businesses were left with a financial bill that was significantly burdensome.

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FCA Interest Rate Swap Flow Chart

Derivatives may be one of the most complicated financial investments on the market. The Financial Conduct Authority (FCA) has created a chart to help consumers, barristers and bureaucrats understand whether a potentially mis-sold Interest Rate swap Hedging Product (IRHP) can be reviewed.

The Financial Conduct Authority (FCA) Interest Rate Flow Chart uses a flow diagram with “Yes/No” questions to show whether a debtor qualifies for regulatory review.

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Tim Capper reports on Financial Mis-Selling for Maple Leaf Financial. Our aim is to ensure you get honest advice and proper guidance to ensure a suitable recommendation can be made to pursue a financial claim


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Tim Capper

Bringing you financial news and information in plain english for Maple Leaf Financial. My aim is to help readers understand these often complex financial instruments.