The Telegraph just published an article on the huge claims faced by Banks over the interest rate swap mis-selling scandal.
This is also an outcome over the Telegraphs campaign that they launched over Interest Rate Swaps
Banks face ‘huge’ claims over fixed-rate loans
The Financial Services Authority and the Treasury have begun discussing the problem of unregulated commercial loans that contain embedded interest rate derivatives that have led to complaints from businesses such as farms and small property developers about huge breakage costs they say they were never warned about.
Vince Cable, the Business Secretary, is set to take up the issue directly with the FSA and told The Telegraph he was aware that the problem of fixed-rate loans could be “akin to swaps mis-selling”.
“I am going to ask the FSA to look at the question of whether these are comparable to part of the swap mis-selling problem,” said Mr Cable.
Speaking yesterday in Parliament, Greg Clark, Financial Secretary to the Treasury, confirmed that Yorkshire and Clydesdale Bank had agreed to review one customer’s fixed-rate loan, opening the way to a flood of additional claims.
The FSA estimates that more than 40,000 interest rate swaps were sold to SMEs over the last decade. Including fixed-rate loans would increase the potential number of businesses impacted by the mis-selling of interest rate derivatives to more than 100,000, according to industry experts.
James Ducker, a former derivatives salesman who now advises companies mis-sold swaps, has pointed out that the issues faced by businesses sold fixed-rate loans by their lenders are very similar to those for firms with an interest rate swaps.
Businesses with fixed-rate loans have been hit with breakage costs on a similar scale to those with a separate interest rate hedging product. In some cases, the breakage costs have been equivalent to as much as 40pc of the value of the original loan – a cost many businesses claim their lender never warned them about.
“The break costs can be virtually identical. However, we have a ridiculous situation where a bank can embed a regulated interest rate derivative into an unregulated commercial loan and create an unregulated product,” said Mr Ducker, who now runs his consultancy business, Benchmark Treasury Pricing.
Abhishek Sachdev, at Vedanta Hedging and also a former derivatives salesman, said yesterday’s statement by Mr Clark had “large ramifications”.
He said: “This is a very significant announcement and could mean a lot more business are included in the redress scheme.”
The FSA has written to the Treasury to bring up the issue of the lack of regulation, which means at present regulators are unable to include fixed-rate loans within the redress scheme for interest rate swaps.
Yorkshire and Clydesdale Banks, owned by Australian financial group NAB, have so far been the main lenders to face claims over mis-sold fixed-rate loans. Yorkshire and Clydesdale have said in the past they could allow some of the claims to go through the FSA scheme on a voluntary basis.
A spokesman for Yorkshire and Clydesdale Banks said: “I can confirm the product in question is a Fixed rate TBL [tailored business loan] and is therefore out of the scope of the review. We are not looking at any fixed rate TBLs as part of the review but have been clear from the outset that we will look at any complaint about product sales within our existing complaints process.”
Since The Telegraph began its campaign on interest rate swaps mis-selling Britain’s largest banks have been forced to set aside more than £2bn to cover the cost of compensating victims.
Including fixed-rate loans in the redress scheme would likely increase these provisions by about 50pc, or about £1bn. Barclays has made the largest provision for swap mis-selling of £850m, while Royal Bank of Scotland has so far put aside £750m.
Major banks are becoming increasingly aware of the likelihood they will face claims over commercial loan products, which would either have to be included within the existing scheme or see the establishment of a new compensation process.
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