For reasons not quite explained, a huge number of SMEs have ended up with a policy designed for large corporations and financial institutions. Businesses were sold interest rate swaps and told they would guard against rates surging. It seems, however, that many never had explained to them what would happen if interest rates dropped through the floor.
Now, like the PPI scandal in consumer banking, the interest rate swaps issue is gaining traction, with a Financial Service Authority probe ordered and MPs making political capital out of it. Businesses are facing large payments because of low interest rates and large exit fees if they try to terminate the arrangements. Many businesses simply cannot afford to exit and are caught with these arrangements, unable to take advantage of the current low interest rates. This ‘flies in the face’ of the government‘s attempts to encourage business growth and so the economy is being starved of millions of pounds of potential investment in a crucial time.
Admittedly, those businesses must share some responsibility for entering into these arrangements. But if companies were not told by banks about the risks alongside the potential benefits of hedging against rising interest rates, then they may have a case. So what should you do now if you think your business is affected?
The first priority is to collect all the documentation that was produced at the time your business entered into the arrangement, including emails, presentation documents, loan and interest rate swap agreements. But also strive to remember conversations you had – what you agreed verbally can be important as can who those conversations were with and when. Armed with this information there are six key areas that need to be looked at:
A policy may have been mis-sold if, for example, a bank over-emphasised the positives and failed to explain the down-sides, like penalty fees and payments rising as interest rates fall.
If the terms and amount of the loan and the hedging agreement are vastly different.
Did banks insist on your business taking out the policy in order to qualify for other facilities or to extend existing borrowing?
4. Independent advice
Were you advised or encouraged to seek independent advice before taking the policy?
5. Breach of FSA guidelines
Was there a breach of the Financial Services Authority’s Code, a principal aim of which is to treat customers fairly?
A bank failed if it did not ensure that the product sold met the needs of your business.
Above all the message is: act now. Interest rates are set to remain at their historic low for some time to come. This is a time for businesses to take advantage of cheaper than usual lending and grow, not be facing increased finance costs and penalties.
Alison Loveday is managing partner at Berg.
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