Banks hit by interest rate swaps scandal

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Robert Lovell
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A Financial Services Authority (FSA)  review of interest rate swaps sold to small businesses by four leading banks has found 90% failed to meet regulatory requirements and a that significant portion of customers should get compensation.

The regulator has ordered Barclays, HSBC, Lloyds and RBS to review all their sales of interest rate hedging products, including swaps, to businesses that were unlikely to understand the risks associated with those products.

As highlighted by AccountingWEB members following an earlier FSA probe into more complex cases, the UK’s largest banks agreed to compensate victims after it found “serious failings” in the way customers were sold products.

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By number3
31st Jan 2013 12:00

oh no not more like ppi, i can't stand any more dodgy phone calls! 

Thanks (2)
01st Feb 2013 09:54

Banks are so untrustworthy

They are become more like Cowboy Builders.

They will be persuading old ladies to make long term savings/investments next, with heavy penalties for early release.

Ooops .. they have already done this to someone I know!

Thanks (1)
01st Feb 2013 14:15

The banks were wrong to sell like this ....

Very questionnable selling manner

But so far as one understands these loans were sold on the basis of saving money if interest rates went up - did no-one in the entire business community ask what would happen if interest rates went down, or penalties for early redemption?

Surely these are basic questions, and anyone with a fixed-term mortgage should be familiar with the concept of penalties for early redemption

In any event, if I were one of the banks my defense would include words to the effect that  ....

Interest rates are at their current artifical level because of interference by the Government/BOE lowering them for their own purposes. Accordingly because of this market interference Banks were perhaps not entirely to blame for the extent of this 'unforseen' scenario. Furthermore, the BOE has compounded the issue by their actions, to support amongst other things, the housing market

Nevertheless, interference of Governments in markets (currently occuring in Foxex 'mainpulation' to reduce x-rates & increase competiveness) does inevitably cause fallout which everyone else has to accommodate

Now supposing that interest rates were up at 15% (per 1990's) - would we still be having this discussion?

Thanks (1)
01st Feb 2013 16:04

I have had some direct experience over this with one particular client.  A lady farmer in her 60's, who had only just lost her husband was sold one these arrangements as a condition of continued funding. 

All the sales patter highlighted that it would fix the interest for her over time and that the bank would pick up the bill if interest rates rose.  However, this was done just before the base rate fell sharply , meaning she quickly started fully funding the swap. 

Yes, these products can achieve a fixed rate over time eventually but it was the extent of the exit clause and penalty that was never disclosed.  In my particular example something like £40,000.  Therefore, many small businesses were left tied into arrangements that were virtually impossible to renegotiate.  There in lies the mis-sale. 

The associated documentation and terminology that comes out with these products is so complex that even a reasonably financially asute person would struggle to understand the full implications of what was being put in front of them.  I had never seen anything like it before and it took a long while to understand how the deal was structured.  Each year I raised the query with my client that something was not right with her arrangement and that she should query its suitability.  This misselling issue has been gradually breaking over the last 2 years.  She has finally instructed a solicitor who has a number of similar cases.   Unfortunately, it may be too late to save her business. 

These were products designed for multi-million pound finance deals, for organisations with people who fully understand hedging concepts.  However, some group of bright sparks saw fit to package them alongside term loans for small businesses.

The banks again played on their role as a trusted party and abused their position with some vulnerable customers in return for a pat on the back and healthy commission.  To me this is worse than the PPI incident because the concept of PPI is a relatively straightforward one.  As the rate swaps affect a smaller group of customers it is unlikely that it will create such interest as PPI.  

To date the FSA's approach has been to allow the banks to largely self review the situation and give them seemingly endless time to come to any findings.  The last guidance I read from the FSA was that if misselling was found then "reasonable redress" should be paid.  This seems to only extend to repaying interest paid out under the swap product.  It doesn't encompass secondary losses such as increased overdraft interest or suppliers interest incurred because of funding the swap.  Neither does it address professional fees for taking some action.  Redress is negotiable with the banks directly and if a customer wants to claim for other costs then they are looking at pursuing a civil case personally.

Some businesses will undoubtedly go to the wall before their positions get addressed.


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