In an article on the BBC website today (http://www.bbc.co.uk/news/business-15358930) the question was asked as to whether British banks are on the cusp of another mis-selling scandal?
This follows last April’s ruling, where the major High Street banks were ordered to pay out billions of pound in compensation to borrowers whom they forced into buying unnecessary payment protection insurance (PPI).
The current accusations that are becoming clearer by the day are that the banks adopted similar mis-selling tactics against their business clients.
Some loans that were made to SMEs came with an key condition under which banks were (it is alleged) forcing borrowers to “hedge” their interest rate risk.
The most affected businesses appear to be pubs, restaurants and care homes, most often involving a mortgage element to the financing package and when interest rates were higher lenders were concerned about interest rates rising further still. The bank were therefore telling their customers that they would have to take out a hedge with its investment banking unit.
These hedges were actually complicated financial derivative contracts known as an “interest rate swap” – which is an instrument that is most commonly traded between sophisticated investors, most often financial institutions and much bigger companies.
The bottom line is that without the appropriate advice, small businesses would have no way of understanding the implications of the contract they were entering into.
As the banks were focused on covering themselves for rate rises, it is alleged that the were telling customers that the contract was a precaution against rising interest rates, ignoring the flipside.
As the economy entered the most severe recession in living memory, in 2008-2009, the Bank of England slashed its interest rates from 5.75% to 0.5%, in order to assist borrowers.
However, many small businesses who had entered into the hedging contracts, effectively fixing their rates, saw no benefit. In fact, many small businesses have been paying premiums in order to cancel the swap or hedging contract.
From the bank’s point of view, the premium is understandable due to the “hedge” requiring customers to pay a higher interest rate than the bank would be able to relend the money at in the current market.
However, the point for small businesses is that it appears that on many occasions, lenders did not explained the risk that that businesses could end up stuck in the hedge, and therefore the loan.
The BBC article alleges that the alleged mis-selling of Interest Rate Swaps problem is widespread, with a figure put at “tens, and possibly hundreds, of thousands of these products being sold by High Street banks, mainly in the period 2006 to 2008,”.
The Financial Services Authority told the BBC that it believes only some 2,000 such hedging transactions have been sold each year in theUK, although complaints have been low. However,
Irrespective of the numbers, there are clearly many small businesses who have been affected by the additional cost burden of these hedges, which have become unsustainable for many of the businesses they were sold to.
The article states that some claims have been settled with confidentiality agreements and other non-disclosure strings attached.
How can Gregory Abrams Davidson LLP help you or your business?
At GAD, we are acting for a number of clients who believe that they have been mis-sold financial products including Interest Rate Swaps. Our specialist Financial Misselling departing fully understand the sensitivity of the commercial issues, where continuation of the banking relationship through a negotiated settlement may be in our client’s best interests. We also recognise, however, that there may be a need to resort to litigation, which would be used to improve a your or your business’s bargaining position.
In terms of costs, GAD would discuss all available options with you and your business in order to reach the most favourable means of proceeding with your matter.
We would urge clients to act sooner rather than later, due to the current media attention. With interest rates at a low point, businesses should be looking to take advantage of any possibility to be placed in a stronger position, which would surely make a difference to the bottom line and their survival and growth.
If you would like to find out more about financial misselling, hedging products or interest rate swaps or any other issue mentioned in the above article as it is relevant to you or your business, especially if you feel that you may have a case, then please call Ciaran Montague now on 0151 236 5000 or email email@example.com