Many businesses have become disillusioned due to the compensation schemes set aside for the interest rate swap mis-selling derivatives. The Financial Services Authority has agreed to look into the cases of the mis-sold financial products of the big four banks (Barclays, Royal Bank of Scotland, Lloyds, and HSBC). There are several other banking institutions that have become involved in this Swap claims dilemma, also.

Update:

The two businessmen involved in the RBS Interest rate Swap appeal in court this week have lost their court appeal. The appeals court ruled that they were out of time.

The appeal court ruled that they had missed the six year limit on compensation claims for mis-selling under the breaches of regulatory guidelines for selling financial products had elapsed.  This was the first serious test case on Interest Rate Swaps claims and the time period on claiming compensation.

This case will not affect small businesses that were mis sold an Interest rate swap product within the time period.

Court Appeal Article

Interest Rate Swap Settlements

The small firms are saying, however, that the settlement solutions are problematic in the following ways:

1) There is concern that the rate swap mis-sold compensation schemes are overly complex and too slow in compensating the victims of these improper hedge products.

2) The views of small firms may be ignored in designing the compensation process. There has been little response by the Financial Services Authority about these small business fears.

3) There may be a problem with the independent reviewers who have been appointed to analyse and offer final judgments on the financial products cases. It seems that major accounting firms have been hired, and this choice may have a conflict of interest, according to the small businesses. Will these large accounting firms give honest and unbiased assessments of these derivatives products?

4) The Financial Services Authority scheme is set to launch fully in November of 2012. There are concerns by small firms that the solutions may be inadequate from the beginning.

5) Legal actions may be the only solutions to what may seem a fair settlement of these claims. A law firm has been hired to take on cases for a no-win-no-fee arrangement. This selected law firm has been hired by a group of small business owners, who have alleged claims against their banks for mis-selling of financial derivatives.

6) Financial backing has occurred in order to finance several law suits involving several hundred mis-selling cases.

 

Small Businesses to Design the Process

Small firms have come together to design a redress process themselves. They say that little response has occurred surrounding their claims of derivatives mis-selling. There are other concerns about the FSA compensation plan:

1) What form of compensation should be accepted is a central question for these small business owners. Court settlements have generally seen banks return all of the premiums paid due to the interest-rate swap. The breakage charge is apparently being written off, and the interest-rate swap is being cancelled.

2) Lenders are offering settlements that could involve replacing the existing interest-rate swap product with a fixed rate loan. Derivatives experts say that this kind of replacement with a fixed rate loan will still involve a large breakage fee. The business will still be left with the same dilemma it had previously.

3) The cost to the banking industry has been significant. This problem of payment protection insurance may turn out to be the most expensive mis-selling issue in the modern history of British banking. Swap mis-selling costs could reach into the billions.

Interest Rate Swap Compensation

The scandal has involved products sold to firms over the past ten years. These derivatives products were sold to protect small businesses from the adverse interest rate movements. There was a two-month review by the FSA, which concluded that the major banks would agree to pay-out arrangements, in order to compensate their customers against mis-sold financial products.

Calculating the compensation to each customer was determined to be complex because some of the derivatives products needed to be cancelled.

Types of Financial products to be Reviewed

There are four types of financial derivative products that are in need of review:

1) The interest rate swap is being analysed, since it allowed customers to fix their interest rate.

2) Caps are being reviewed, since these place a limit on any interest rate when it rises.

3) Collars are being analysed for value, since these protected customers from interest rate fluctuations within a simple range of values.

4) Structured collars are being reviewed. These derivatives are more complex and allow a customer to limit the interest rate fluctuations to within a specific range. The customer, however, is vulnerable to any interest rate increases.

Calculating the Compensation on mis sold Swaps

Calculating the amount of redress, or claims settlement, for each customer is likely to be complex. HSBC has claimed that it has sold one-hundred-and-seventy-one of the most complex products, that have been analysed by the FSA. These products have been sold by HSBC over the past ten years. Seventy-nine of these complex derivatives are still in existence. This bank has indicated that these seventy-nine forms have been contacted and offered assistance with claims settlement.

Some documentation has indicated that HSBC sold around seven thousand of a simpler type of the interest rate derivative product. Lloyds has said that the cost of the claims settlement should not affect its banking finances. Barclays has indicated that it is cooperating fully with the Financial Services Authority. A representative for Barclays has said that they are committed to resolving these problems.

The Fight Back

This fight back began when interest rates actually declined, after a massive sell off to these small businesses. It seems that these businesses were actually sold something that they did not need. Some small firms said that they were pressured into purchasing these hedges, that would actually last many more years longer than their loans. The banks were explaining that these customers would probably borrow the money again, when the loans came up for repayment. The banks themselves made no commitment to lend the money again, however.

 


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.