The latest mis-selling scandal in the banking industry emerged on Friday morning as four of the biggest banks in the UK admitted to mis-selling ‘SWAP’ securities. This time, the financial products and questions were interest rate swaps sold to small and medium-sized businesses.

Mis Sold Financial products

The Financial Services Authority discovered that these banks were selling interest rate swaps to smaller businesses knowing that they were not what they claimed. Apparently, the securities were sold to more than 28,000 businesses along the way. Many of the businesses were negatively affected financially, and some of them had to go out of business due to the products they invested in.

The interest rate swaps were sold as a diversified investment that would provide the businesses with steady returns. When the low interest rate market emerged, this doomed the investments to fail, which cause a lot of pain for many of the businesses that purchased them. The four banks in question are Barclay’s, HSBC, Lloyds Banking Group, and the Royal Bank of Scotland. Barclay’s was originally haggling in the negotiations with the FSA to determine whether they should officially admit to mis-selling the bad securities on purpose.

They eventually relented and joined the other three banks in admitting wrongdoing. Barclay’s was facing fines of 290 million pounds from the UK and the US earlier in the week, and wasn’t exactly keen on the idea of paying more to their customers. Thanks to the prodding of the FSA, the four banks have agreed to compensate the businesses that were wrong by purchasing the securities. It is currently unclear how much the banks will have to pay out to make up for the mistake, but it will most likely be a large sum.

So what exactly was wrong with these interest rate swaps? The main problem with them was that the bank did not fully address the point of how much it would cost for companies to exit their positions. The costs associated with getting out of their interest rate swaps was very high, and eliminated any possibility of making money on the deal. The stress on the investments was exacerbated by the low market interest rates of the last few years as well. The investments were sold as a way to protect businesses against potentially rising interest rates.

The interest rate swaps made it possible to hedge against rising interest rates in the future. When interest rates didn’t rise like they claimed they would, this lead to some pretty big problems for the small businesses who held onto them. What will happen to the small businesses that were affected by these misdeeds? It remains to be seen, but speculation indicates that the businesses will receive compensation equal to the amount between what they lost on the investment and what they would have paid for a fixed rate loan over the same time.

Barclay’s and RBS were the two biggest suppliers of these interest rate swaps and because of this, they stand to face the biggest penalties. They were hesitant to sign up for the agreement initially because of all of the money that they would have to pay. Eventually, they relented because they did not want the political backlash that would come from not repaying customers that they took advantage of. Banks have enough ill will built up with customers from the financial crisis of 2008, that they need to do everything they can to save face.

The Financial Services Authority has been performing an investigation on the securities for the past two months, and found significant problems with the interest rate swaps along the way. After the banking industry problems of the last few years, they are not quite as lenient as they once were in this area. Customers of the banks are sick of being taken advantage of, and do not like the idea of doing business with companies who will lie and cheat to make a little bit of extra money. Many of the businesses who purchase of it in this type of investment are not around any longer to be able to get the money that they were cheated out of.

It remains unclear what will happen to these companies, since the interest rate hedges were largely responsible for them going out of business in the first place. The scandal is just the latest in a long line of banking industry fraud. There have been many problems with the banking industry, including selling fraudulent CFD’s and mortgage-backed securities that were no good. Many clients of the banks are not surprised at the mis-selling, but it still hurts them financially.

Over the coming weeks, independent assessors will be used to determine how much the banks should pay compensation to their clients. For example, Lloyd’s is using an independent assessor to look at each case and determine how much they need to be compensated. Heads of the bank have made assurances to customers to try to calm the storm a bit. Brian Robertson, an executive at HSBC and Chris Sullivan of RBS said that they would do everything they could to avoid for closing on these businesses that were affected, except in extreme circumstances.

At first glance, it appears that the banks will do everything that they can to make sure that the businesses negatively affected by this scandal will not be hurt any further. While it may not fully make up for the mistake, it will help.

Interest Rate Swap: News & Information

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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Interest Rate Swaps : FCA Fair & Reasonable Redress

The regulatory failings of bank interest rate swaps have left thousands upon thousands of disgruntled customers looking for redress. Fair and reasonable redress, including consequential losses, by the banks and the FCA helps put customers in the same position they would have been in if the regulatory failings had not occurred.

The exact definition of fair and reasonable redress is malleable as it varies from case to case. In each case, the testimony of the customer and the evidence is reviewed by an independent reviewer to determine the appropriate redress. Therefore, when discussing fair and reasonable redress, it is important to have an understanding of basic redress and consequential losses.

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RBS exposed to new swap mis-selling

Investec reports that RBS is likely to be the next bank exposed to interest rate swap claims from mis-selling and should be putting extra provisions aside for likely calls for swap compesation.

After the FCA set up the interest rate swap rate redress scheme with the banking sector, only 10 claims have been compensated so date. RBS is the most likely big bank to need to put aside extra provisions to compensate customers for mis-selling of interest rate swaps, reckons Cityfirm Investec.

The rate swap issue is the latest mis-selling scandal to hit the banking sector – still reeling from the PPI debacle. Such interest rate hedging products (IRHP) were designed to protect against rising interest rates but when they fell – customers were landed with a big headache and big bills.

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Justifed Interest Rate Swap 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 under the FSA Conduct of Business.

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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.