In yet another in a series of scandals plaguing British banking institutions, a ruling has determined that a large number of small business clients are due compensation after widespread mis-selling of interest rate hedging products that were poorly explained and too aggressively sold.

UK banks have already faced considerable compensation payments and fines related to a number of other regulatory scandals, including pervasive mis-selling of payment protection insurance, outright deceit to influence global benchmark interest rates, and investigations into allegations of money laundering on a huge scale.

Mis Sold Interest Rate Swaps

This particular incident is regarding interest rate swap derivatives sold to small businesses over the past several years, as well as similar hedging products such as interest rate swaps, caps, and complex derivatives known as “structured collars” that fixed the rate paid to the bank. The ostensible purpose of the financial products is to protect the borrower against swings in interest rates over the life of the loan, so payments do not dramatically increase; however, the past several years saw interest rates at historical lows, prompting many small business owners to seek refinancing.

When business owners returned to their lenders, many found they had agreed to interest rate hedging products they were never aware of, or that breaking the hedge to take advantage of the lower interest rates would necessitate payment of a large fee, sometimes totaling thousands of pounds.

To determine that the products were improperly sold, the Financial Services Authority examined 173 sales to “unsophisticated” customers for breaches in regulation. The watchdog group found that over 90% of such sales were made improperly, and that a “significant” amount of customers would be entitled to compensation. Since 2001, between thirty and forty thousand such sales have been made by British banks.

The four banks included in that initial examination were Barclays, HSBC, Lloyds, and Royal Bank of Scotland. Investigations into sales made by Co-operative Bank, Santander UK, Clydesdale and Yorkshire banks, Bank of Ireland, and Allied Irish Bank (UK) are currently ongoing.

The conclusion of the review was a surprise to the banks, who had hoped a favorable ruling for RBS in the first trial related to interest rate swaps would narrow the overall scope of potential compensation. The FSA determined that the ruling, which found that RBS properly informed its customers regarding the interest rate swaps and the risks associated with them, was too specific to apply to the broader situation.

An earlier finding stated that there were “serious failings” in the way such sales were being handled by the banks, with products being misrepresented, using overly aggressive sales techniques, and in some cases, customers being told that purchasing the products was a prerequisite to receiving a loan.

The total impact of providing compensation for these incidents is not yet clear, though statements by bank officials to clients have said that the impact will be much smaller than the LIBOR and payment protection insurance scandals. Estimates by some consultants place the potential impact on the banks collectively from 1 billion pounds to as much as 10 billion pounds.

The banks themselves have already set aside comparatively little in light of such estimates; the most provided for so far has been from Barclays, which set aside 450 million pounds for compensation claims. HSBC has set aside only 150 million pounds, while RBS has provisions of 50 million pounds. Lloyds has made a statement that the cost to them will not be material.

These costs come on top of the 12 billion pounds banks have already set aside for payment protection insurance compensation claims, as well as the £1.3 billion paid by UBS in fines related to the LIBOR scandal, and an expected large settlement with U.S. authorities and Royal Bank of Scotland regarding money laundering.

Advocacy groups such as the Federation of Small Businesses, as well as business secretary Vince Cable, have stressed the need for quick and decisive action to compensate those damaged by these mis-sales, cautioning that to cause small businesses to close due to banks pursuing inappropriate liabilities would be a huge strain on an already weak and recovering economy.

The delays associated with examining each case individually as well as beginning the compensation process are a big worry for many struggling businesses. Some hope the ruling will serve as additional leverage to receiving a moratorium on payments until the issue is clearer.

HSBC has already announced they will be writing to customers who purchased qualified financial products to inform them of the review and advise them on actions they should take, including whether their particular purchase falls under the scope of the determination.

Banks are especially eager to keep this matter between them and their customers, without involving claims management companies. Such companies played a huge role in instigating and pursuing PPI claims, and banks blame them for greatly increasing the overall cost of compensation.

Justifed Claims for Interest Rate Swaps – Interest Rate Protection Arrangement Claims

  • discrepancies between the underlying value of the loan and the interest rate swap, with customers being sold swaps which far exceed the term of their underlying borrowing, or where the notional amount of the swap is far in excess of the actual borrowing.
  • substantial discrepancy between the length of the loan facility and the length of the swap product.
  • customers being forced to continue with the interest rate hedges in order to maintain their current lending facility upon renewal.
  • banks failing to explain to their customers the extent of the exit or breakage costs of the swaps and failing to ensure that the derivative products offered meet the needs of the customers.
  • breaches by the banks of their duty of care to customers coupled with negligent misrepresentations by the banks as to the nature or effect of the products sold.
  • failure by the banks to comply with their regulatory obligations under the FSA Conduct of Business.

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 your Business 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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Business Compensation Claims and a whole lot More

In what can only be seen as a blow to big banks and a benefit to small business owners, the Financial; Services Authority confirmed that many of the large banks in England will be required to repay small businesses compensation for mis-selling insurance products to them with their loans.

Known as Interest Rate Swap Arrangements (IRSA’s), these complicated insurance products were sold as a way for small business owners to avoid increasing interest rates on their loan products. In many cases, purchasing one of these products was required to obtain a loan.

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Interest Rate SWAP Claims UK

Maple Leaf Financial have a specialist team of solicitors dedicated to dealing with the mis-selling of interest rate swap protection products by the banks. We are happy to review these relatively complex swap arrangements and to claim compensation for our clients where appropriate.

If you believe you have incorrectly been classified as a ‘sophisticated’ customer and have, therefore, not been eligible for interest rate swap redress. Maple Leaf Financial will review your interest rate product and we will be happy to discuss your individual concerns and requirements

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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.