What we know about banking practices at the height of the boom is that, banking sales team members were being handsomely rewarded for pitching complex products such as Interest Rate Swaps and other derivative and hedging products to clients – both individuals and businesses – nationwide on behalf of the high street banks’ investment banking units.
The culture at the time the interest rate products was sold was one of high credit and selling as many financial products as possible to clients, without the client fully recognising the consequences. A far cry from the current age of austerity! Bank employees pressurised their employees to meet aggressive sales targets.
At the time, the overwhelming majority of the bank’s clients would negotiate on the loan, but failed to realise – or putting it more appropriately – failed to have the full implications explained to them, that the bank was making the majority of its profit on the hedging product.
We now know that there was little transparency on pricing and the level of profit was almost never disclosed.
In a typical scenario, the bank would charge less sophisticated “retail” clients large margins to generate extra profits. One example might be that if a hedge was for a £10 million loan for 10 years, a bank might charge the equivalent of £300,000 in profit, possibly more, as standard industry practice.
Worse still, the profit on these products was locked-in by the banks from day one of the transaction, meaning that if a client decided shortly after taking out the loan that they wanted to make early repayment of the loan in full, they would potentially face a charge in the form of a break fee of tens of thousands i.e. the bank’s profit on the swap product.
Although the counter argument to the mis-selling allegations is that banking clients have a responsibility to obtain the most favourable deal for themselves, and that professional advice, should be taken, with more than one quote from more than one bank… In order for that argument to stack up, due to the complexity of the products, for SMEs to fully understand what they are entering into, they would need a team of advisers, beyond the level of a local accountant, IFA or commercial solicitor. It is unrealistic to argue that a SME has such resources and it is not simply a case of shopping around for the most preferential quote.
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