A pilot study by the Financial Services Authority (FSA) found that over 90 per cent of the interest rate hedging products that banks encouraged small and medium-sized firms (SMEs) to take out, were mis-sold.
In the 173 test cases that the study examined across the UK, the majority of sales did not comply with one or more regulatory requirements. Although a significant proportion of the cases will receive compensation pay-outs, there are concerns that local firms will not get the level of compensation they are due. In the study, the FSA looked at a sample of cases from Barclays, HSBC, Lloyds and Royal Bank of Scotland.
The swap products were sold to companies on the basis that they would be protected from interest rate rises due to fixing rates on their loans. When interest rates dropped to historic lows, some businesses were hit with massive fees. Others complained they faced penalties for cancelling the hedges or refinancing their loans to take advantage of lower rates. Businesses across sectors were affected – including farms, hotels, manufacturing firms and golf clubs.
SMEs reported they were told that buying the swaps was a condition of taking out the loan, while others have complained of high-pressure sales tactics and large fees to exit the swaps.
Alison Loveday, managing partner of Berg, which is advising more than 50 businesses on mis-sold interest-rate swaps, said: “This is a fair assessment of the situation from the FSA and its findings reflect what we have seen through the businesses we are advising. A big concern remains the length of time it has taken to get to this point and how long it will take to process what are inevitably complex claims. Since the FSA’s initial findings, thousands of businesses have been pushed to the wall and others have been effectively turned into ‘zombies’ which can barely survive because of huge interest rate swap payments.”
The Federation of Small Businesses said that banks need to take “swift and decisive action” to compensate the businesses caught up in the mis-selling scandal.
Daniel Fallows, a specialist in interest rate swaps at Seneca Banking Consultants, handling the claims of SMEs across the North of England, said: “There is some good news in the FSA report – particularly that they have widened the test for claimants. Whether you are considered a ‘sophisticated’ or ‘non-sophisticated’ business is a key factor in whether you can claim. Previously, the threshold was nominally at companies with a turnover of £6.5m. The FSA has broadened this definition slightly but we still feel that this will deny many businesses who may fall marginally outside this test, a right to redress on a product they did not understand.”
The FSA has made it clear that the “consequential loss” is to be part of a redress welcomed by the 40,000+ business across the UK believed to be affected.
“We wholeheartedly support the FSA on this point,” said Mr Fallows. “It’s simply not sufficient for banks to reimburse the interest paid – these products have in many cases destroyed good businesses that have been going for decades.”
Customers are discouraged to take advice on these claims as the process is straight-forward – a view disputed by the legal teams representing the firms which were mis-sold.
Alison Loveday, when hearing about the tug-of-war solutions, continued: “Our advice remains the same – businesses which believe they have been mis-sold swaps should seek professional advice. Remember, this is not a PPI-style free-for-all and there is no one size fits all for each case. In many cases the consequential loses suffered by a business will be very substantial and so the compensation the customer may be entitled to will need to be carefully assessed in each case.”By Shané Schutte
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