Over the Hedge
As reported in the national news recently, the banking industry has abandoned its legal fight over the mis-selling of payment protection insurance (PPI) to thousands of customers and will now be compensating those customers. There is another area where an increasing number of complaints are being made by customers against the banks. This is over the mis-selling by the banks of interest rate protection products, known as “Interest Rate Swaps”.
Interest Rate Swaps are contracts that allow a customer to swap a variable interest rate loan facility for a fixed rate for a certain period. The products are commonly known as ‘swaps’ because the bank and customer exchange or ‘swap’ loan repayments. If interest rates rise, the bank covers the increase in repayments for the customer. If rates fall, the customer pays a fee back to the bank.
The record fall in interest rates has exposed many customers to the dangers inherent in such products with many now struggling to meet payments. Many customers who entered into ‘swap’ arrangements claim that the risks of low interest rates and exit fees were never explained to them before they entered into the swap.
A number of well known High Street banks have been involved in selling these products on an industrial scale.
Examples of the complaints which have been made against banks include:-
- failing to ensure that the product meets the needs of the customer;
- mismatches between the value of the loan and the interest rate swap, with customers being sold swaps which far exceed the term of the borrowing;
- inconsistency between the length of the loan facility and the length of the swap product;
- failing to explain the extent of the fees that are required to exit the arrangement (these are typically six figure sums);
- insistence by the bank that customers enter into an interest rate protection product as a pre-condition to being provided with lending facilities;
- customers being forced to continue with the interest rate protection in order to maintain their current lending facility upon renewal;
- failure by the banks to comply with their regulatory obligations under the FSA Conduct of Business Sourcebook
This firm has received numerous enquiries from anxious business owners who feel that they have been misled by their banks into purchasing highly unsuitable and sophisticated products. We have been instructed by a number of clients against a well known High Street Bank for selling unsuitable Hedging Instruments and Base Rate Swap products.
In many cases, customers were persuaded by the banks to move from flexible rate repayment mortgages into fixed rate derivative products because they were told that the new arrangements would ensure a fixed monthly charge and protect them from interest rate rises. However the unprecedented and unexpected fall in interest rates in the last few years has revealed how unsuitable these products are and that they should not have been sold by the banks without the customers being made fully aware of the risk they were taking and the impact on their financial position of the increased repayment amounts as a direct result of the swap. Indeed, the Financial Services Authority considers ‘swaps’ to be so complicated that they should only be sold to investment professionals who would have an understanding and appreciation of the risk involved with these very complicated products.
Partner and Head of Dispute Resolution
Commercial Dispute Resolution
LPatel@LawBlacks.com
0113 227 9316
@LukeLawBlacks
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Luke Patel
