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Nationwide Building Society has become the first building society to be enveloped by the current scandal concerning the mis-selling of interest rate hedging products. The scandal broke when a property developer initiated legal action against Nationwide – Britain’s largest mutual.

Interest Rate Swap Mis-Selling Allegations in Court

Urban Lime, an investor and property developer based in London, has made a claim that Nationwide failed in their disclosure responsibilities. Urban Lime alleges that Nationwide did not properly disclose the true extent of possible break costs on a loan totaling £9.8 million that it took out with Nationwide in 2007. The loan ended up having a cost of more than half of its debt.

The legal documents that have been released thus far reveal that the CEO of Urban Lime, Jonathan Friedman, is claiming that Nationwide intentionally mis-sold his company a loan that possesses and embedded interest rate derivative without making him aware of the fact that the derivative existed.

According to a sworn affidavit by Mr. Friedman, Nationwide initially told him that he would be able to get the loan refinanced with a cost range that measured in the low tens of thousands of pounds. However, Friedman was eventually informed that the loan bore a £2.68 million break charge when attempting to refinance the loan in 2010.

“I was utterly shocked and distraught at what the implications were for our business and my family’s future,” said Friedman.

According to the legal documents, it has been a difficult endeavor for Urban Lime to reach a resolution with Nationwide on the matter. It seems that Nationwide continues to vacillate in their commitment to the cost for Urban Lime to dispatch the current loan. In 2012, Nationwide informed Urban Lime that it would cost them £1.6 million to exit or refinance the loan; however, the company was informed weeks later that the break cost would be £4.74 million.

Despite the numerous complaints by Mr. Friedman, the mutual has refused to budge, asserting that they do not believe that they mis-sold the loan. A representative from the building society issued the following statement concerning the matter: “Having reviewed the documentation, I cannot agree therefore that the fixed rate or loan were mis-sold in any way by Nationwide.”

According to another representative of Nationwide, the mutual has not and will not offer or provide interest rate swaps to businesses. Nationwide says that it has more than 20 years of experience in the lending industry across the United Kingdom and provides quality products for commercial development. The mutual iterates that it works closely with its customers to insure that they are receiving quality services and products. The representative further expressed that the company is committed to provide a high level of services and products that are suited for the customer.

The lender also insists that they have functioned within the parameters of the obligations to disclose the details of the loan in question.

The financial experts that have been contracted by Urban Lime to investigate the intricate details of the loan are estimating that Nationwide may have earned as much as £530,000 when it initially sold the loan to Urban Lime.

The key to understanding this particular issue is that the interest rate hedges that were a part of this particular loan were embedded in the loan, rather than being sold separately as is the traditional method. Because the interest rate hedges were embedded, they fall outside of the parameters of what would be considered a redress scheme by the Financial Conduct Authority.

According to Martin Wheatley, the chief executive of the FCA, embedded derivatives have the potential to become a significant issue. Wheatley noted that more than 60,000 swaps had been sold since 2001. The significance of this issue will not be fully illuminated for some time. With an estimated 60,000 swaps over the past decade, the outcome of the battle between Urban Lime and Nationwide has far reaching implications. If Mr. Friedman and Urban Lime were to win the case against Nationwide, it would set the precedence that could establish a sea of bad paper that will call a number of significant mutual companies to the table to settle with their customers. This could easy enter into the tens of billions of British pounds.

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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.