Small business loan mis-selling – have you fallen victim?

Major banks have mis-sold complex financial products to small businesses – and thousands of firms could be in line for a refund.

An investigation by the Financial Services Authority (FSA) has found “serious failings” in the sale of interest rate ‘hedging products’ to SMEs. These products have legitimate uses as a means by which borrowers can help to mitigate the impacts of changes in interest rates. But thousands of businesses claim they were mis-sold the products – and many say they have been left thousands of pounds out of pocket as a result.

How has this affected businesses?

Small firms across the country claim that they have suffered significant financial loss and cashflow issues as a result of the alleged mis-selling of these products. Hedging products are most commonly sold as a kind of ‘insurance policy’ to protect against interest rate rises when businesses took out loans.

But many small firms claim they were sold products that were not suitable for them. Some insist that they have paid hundreds of thousands of pounds in extra fees because, rather than rising, interest rates fell – and they were still forced to pay higher rates. Others suggest that they were sold hedging products that lasted longer than the term of the loan in question, leaving them forced to pay fees even after they had repaid the money.

 What can I do if I think I’ve been a victim?

If you think you may have been mis-sold an interest rate hedging product, your course of action will depend on the type of product you were sold and the size of your business.

For the purposes of the FSA’s review into mis-selling, businesses are being separated into two categories: sophisticated and non-sophisticated. The review is concentrating on the sale of these products to non-sophisticated customers – those that the FSA believes were “unlikely to possess the specific expertise to understand all of the risks.” This is the crux of the issue – the allegation that banks were selling complex financial products to businesses that lacked the capacity to determine their suitability.

A business will be considered to be a sophisticated customer if, in the relevant financial year, at least two of the following statements were true:

  1. The business had a turnover of more than £6.5 million
  2. Its balance sheet total exceeded £3.26 million
  3. It had more than 50 employees.

In all other cases a business will be considered to be non-sophisticated – unless the bank in question can prove that the customer had the expertise to properly understand the product and its risks.

The FSA’s review takes in four product types: caps, structured collars, simple collars, and swaps. It will consider sales of these products made to non-sophisticated customers since 1 December 2001.

If you bought a cap on or after this date and you believe you are a non-sophisticated customer, you need to contact your bank and explain why you think you have been mis-sold to. Your complaint will then be dealt with as part of the independent review.

If you bought a structured collar on or after this date, your bank will contact you. If it considers you to be a non-sophisticated customer you will be dealt with as part of the independent review. You may have to provide the bank with further information.

If you bought a swap or simple collar on or after this date, your bank will contact you. If you are considered to be a non-sophisticated customer and you would like for your sale to be reviewed, it will be considered as part of the independent review.

If you are a sophisticated customer but you are still concerned that your product was mis-sold, you can make a complaint using your bank’s standard procedures. If you are unhappy with the outcome you may be able to take your case to the Financial Ombudsman Service. It is important to understand that sophisticated customers will not be dealt with as part of the FSA’s review.

Similarly, if you believe that you have been incorrectly classified as a sophisticated customer, you can complain to your bank and to the Financial Ombudsman Service – provided that your turnover is less than €2 million and that you have fewer than 10 employees.

The FSA has attempted to keep the process as simple as possible for small businesses, and it has stressed that firms do not need to pay third parties to bring complaints on their behalf. However, this area of the law can be confusing. If you are in any doubt, contact the FSA directly or seek independent advice.

Josh Hall is an experienced financial journalist.

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