Frequent reports have highlighted the problems faced by small and medium sized businesses, commonly known as SMEs, who have been mis-sold interest rate swaps. The topic becomes especially sensitive when one considers that SMEs have been projected as being solely responsible for lifting the UK out of its current recession. The fact remains that interest rate swaps taken on by SMEs can lead to catastrophic results.
Interest Rate Swap Update
What are Interest Rate Swaps?
Interest rate swaps are commonly sold with business loans as a way of protecting against interest rate rises that may result in unmanageable loan repayments. There are four basic types of interest rate swaps:
• Swaps – enable interest rates to become fixed.
• Caps – an ongoing premium or single upfront fee that caps interest rate rises.
• Collars – interest rates are limited within a range.
• Structured collars – the interest rate range features a lower ceiling than a standard collar, but complex payment arrangements make higher interest rates payable if the base interest rate dips below the floor limit.
The Problem with Interest Rate Swaps
According to the Financial Services Authority, approximately 40,000 interest rate swaps have been bought by SMEs since 2001, with the majority of sales occurring from 2005 to 2008. During this period of heavy interest rate swap marketing, the 5.5 percent base rate of interest was predicted to rise.
Instead, the base rate fell to its current historic low of 0.5 percent. This has left SMEs with the options of facing debilitating monthly payments or paying extraordinarily high interest rate swap exit fees. As such, many SMEs have made the following complaints about interest rate swaps:
• The interest rate swap was a requirement for loan approval.
• The level and duration of the interest rate swap did not match up with the underlying loan.
• A fee of up to 50 percent of the loan amount would be charged for an early interest rate swap termination.
• Banks often sold SMEs on the benefits of interest rate swaps, but they neglected to inform them of the risks.
FSA Review of Interest Rate Swaps
The June 2012 review of interest rate swaps, which was performed as a result of the number of complaints the agency received, concluded that interest rate swaps were seriously mis-sold to SMEs. Since the review, banks have agreed to provide reasonable redress to ‘non-sophisticated customers’ who were sold structured collars, review the interest rate swaps sales process, and review the sale of caps to ‘non-sophisticated customers’ and provide them with fair redress in appropriate circumstances.
‘Non-sophisticated customers’ are defined as anyone lacking adequate knowledge and understanding of interest rate swaps. To identify ‘non-sophisticated customers,’ the FSA has formulated a complex ‘sophistication test’.
The February 2013 results of an FSA pilot test revealed that 90 percent of reviewed cases did not comply with the regulatory requirements outlined by the FSA. A substantially higher number of reviewed cases should have resulted in redress to ‘non-sophisticated customers’.
Possible Legal Action
An SME that does not meet the ‘non-sophisticated customer’ classification can file a civil claim against the offending bank. Additionally, an SME falling within the scope of an FSA review that is unhappy with the offered redress may also file a civil claim against the bank. In either case, a civil claim can be brought against a bank on the basis that it breached the requirements detailed in the Conduct of Business Sourcebook published by the FSA.
A statute of limitations exists that restricts claimants from filing a claim after six years from the date the interest rate swap was taken out. Due to the fact the most interest rate swaps were taken out between 205 and 2008, SMEs should take immediate action now in the civil courts if they hope to be compensated for being mis-sold interest rate swaps.
Changes in Cost Rules
The recent changes in cost rules dictate that the cost of the insurance policy a claimant must take out to cover bank costs in the event of a failed claim can no longer be recoverable from the banks if a claim is successful. Instead, the cost of the policy must come out of the compensation received from the bank. This is likely to result in fewer filings of smaller claims, because the cost of the insurance policy may outweigh any compensation.
Although many claimants may receive considerable compensation to cover the cost of the required insurance policy, many SMEs with smaller claims may end up on the losing end of yet another mis-sold bank product.
Maple Financial Interest Rate Swap Claims
We have a specialist team of solicitors dedicated to dealing with the mis-selling of interest rate swap protection products by the banks. We are very happy to review these relatively complex 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 redress. Maple Leaf Financial swap claims will review your interest rate product and we will be happy to discuss your individual concerns and requirements : 0800 7747624
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