The scandal of interst rate swap mis-selling in the United Kingdom has gained significant press over the last few years, especially since the Financial Services Authority indicated it would begin a review of the matter to determine responsibility and the extent of damage caused by the practice. In March 2013 the result were released, vindicating many small businesses country-wide who believed they had been duped and taken advantage of by their lenders.

40,000 plus businesses have been affected by interest rate swap mis-selling, with some of the victims having impacts dating back for a number of years. The FSA found after examining the nature and use of 173 different interest rate loan tools that nine out of 10 products were misrepresented by the lender involved.

The Culprit Product Itself – Interest Rate Swaps

An interest rate hedge, otherwise known technically as a swap, involves a type of insurance coverage for a loan. Generally, a buyer uses this kind of a product to protect himself when the loan he has borrowed involves a fluctuating interest rate and that rate begins to rise due to some independent factor, such as a market index. The swap helps offset the cost of the rising interest rate, which makes the related loan payments cost more to pay each month.

Where things went awry in the U.K. is that many banks and lenders for commercial loans to small businesses also required them to buy with a loan. The swap was marketed as a protection plan to make sure the small business had the ability to pay the loan should the interest rate rise, and many commercial loans were sold with fluctuating rates. So the swaps made sense from a business owner perspective. However, the rate market ultimately went the opposite direction, downward, but banks still required the swaps anyways. Further, the banks also required payment for useless insurance coverage, even when the rates dropped. The fine print required customers to pay the banks for its losses when the rate fell lower than loan charges. As a result, small businesses duped into the deals lost money either way.

The Settlement Process, Swap Claims

Now, given the conclusions, the FSA is requiring involved banks to settle complaints on almost 40,000 something loans. Unfortunately, the FSA is still leaving the banks in charge of how the settlement process will work. Anything remotely fair will be a very expensive process for the banks, to the tune of billions of British pounds.

Four of the big banks are definitely involved, including HSBC, Lloyds, Barclays and Royal Bank of Scotland. 11 banks are involved and willing to settle so far. All four banks are putting aside significant sums of money to address expected settlements to business borrowers. So far 720 million pounds are in stasis, with that figure expected to increase.

Clearly, banks have a lot at stake being involved with the settlements and how they are approved. They want some kind of offset to how the FSA has written the eligibility rules for who can claim a recovery and how liberal those parameters are. And the population is large; banks were selling the suspect swaps until just last year.

The Size of the Scope

The scope of impact is large and getting larger. The big banks have already set aside serious pots of money to address claims, with more expected to be added. The known amounts are:

• Barclays – £450m
• HSBC – £150m
• RBS – £50m
• Lloyds – £90m

These figures in total are expected by some financial industry experts to double by the time the full scope of recovery is determined and addressed. As a result, the full scope of the swap mis-selling is yet to be determined and will likely take some time as the FSA and the banks involved hammer out a middle road position on the matter. For many small businesses, that recovery can’t come soon enough. Many have paid thousands of pounds in swap penalties that were unnecessary. Some businesses were even forced close to ruin as a result. So the faster the FSA can get the process started officially, the faster these businesses can actually realize receiving a refund.

Time will tell the actual level of recovery realized, and few trust the banks to independently settle claims fairly. However, the FSA has made it clear it will step in immediately where it thinks a bank is low-balling claims unfairly. How that government regulatory promise is fulfilled remains to be seen.


Interest Rate Swap News

Dealing with Consequential Loss from Interest Rate Swaps

When will the investors who were mis-sold interest rate swaps (IRS) be compensated for their losses? The High Street banks were paid in 2008, but why aren’t the regular investors being compensated? The banks have admitted guilt. So why the slow process?

The UK has changed its primary financial regulatory agency and made new rules. In November 2013, there are promises for letters dealing with consequential loss from interest rate swaps. Here are the details and what you discover when you “read between the lines.”

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What is the FCA Sophisticated Customer Test?

In January 2013, the FCA published what it found with regard to the pilot review scheme for the mis-selling of IRHPs, or interest rate hedging products, otherwise known as swaps. In a number of ways, the results were welcomed: the company found over 90 percent of sales to “non-sophisticated” customers did not comply with regulatory requirements, such as the COBS Rules. In addition, the FCA noted that most of these sales have the chance to result in redress to the customer.

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FCA: Interest Rate SWAP redress set to Increase

One of the biggest scandals to affect the financial industry in recent decades has been the rise to prominence, and subsequent crash, or interest rate swaps and related securities. In a period of stock marketing trading and banking practises that were generally less regulated than in earlier eras, these products played a central role in boosting consumer fortunes and building up economies both in the United Kingdom and around the world. Their subsequent fall from grace led to one of the biggest financial crises of the last half-century.

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Interest Rate SWAP Claims

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.