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Service Areas: Business Services, Dispute Resolution (for You), Dispute Resolution (for Business), Professional Negligence

Interest rate swap mis-selling

Ian Robotham, Associate in the Dispute Resolution Team, reports that Steeles Law is one of the earliest to warn businesses of this issue!

Those regular readers of the various financial periodicals will be fully aware of the recently reported claims of interest-rate swaps being allegedly mis-sold by major financial institutions. These cases have been brought to particular prominence in April this year following the reporting by national newspapers.

However, were you aware that as early as 25 October 2010, Steeles Law’s Nigel Lubbock, Head of the Company Commercial department, was quoted in The Eastern Daily Press’ Business Supplement warning businesses to seek independent legal advice on the circumstances and arrangement of interest-rate swap facilities with their banks. See the previous article - Businesses Regretting Taking out Hedge Funds.

What are Interest-rate swaps?

An interest rate swap (often referred to as “hedging”) is a complex financial instrument (a type of derivative) where two parties agree to exchange interest rate cash flows. The parties interchange from floating to fixed interest rates. So one party goes from paying fixed interest rates to a floating interest rate and vice versa. The parties do not swap interest rates directly but rather through a financial ‘middle man’, often a bank.

What is the problem?

Interest rate swaps were aggressively marketed by retail banks to their small to medium business customers from around 2006 to 2008, which generated huge profits for the banks. Banks were offering loans which included a condition that these businesses enter into interest rate swaps, often for higher amounts and for a longer period of time than was necessary. Such swaps were sold as the ideal interest rate protection product guarding against the financial consequences of interest rate rises.

However, businesses found themselves paying far higher rates of interest than they expected as bank base rates fell to historic low rates. Many businesses are now complaining that they were unaware of both the significant costs attached to the products that were supposed to protect against upward movements in interest rates, and the significant ‘breakage’ costs of exiting these instruments. Businesses are alleging that, as a result of the banks failing to provide this information, they did not understand the instruments, were not advised of the risks in agreeing to them and were “mis-sold” by the banks. The banks of course deny these allegations.

What is happening now?

In response to the increasing number of complaints by businesses, the Financial Services Authority in March this year commenced a formal review of interest rate swap mis-selling cases and is meeting with some of the many businesses claiming to be victims. In addition, the FSA has sent a “shopping list” to the UK’s major banks asking them to provide details of their sales of interest rate hedging products to small and medium-sized businesses.

As well as the regulator’s actions, political support is gathering for a full investigation to claims that banks systematically mis-sold highly complex interest rate swap instruments. MP’s are calling for a full parliamentary debate on the issue and for representatives of the leading banks to be ordered to answer questions.

What should you do?

If you feel that you have been mis-sold interest rate swap instruments you should seek urgent legal advice.

In the last 18 months, Nigel Lubbock, assisted by Ian Robotham, Associate Solicitor in the Dispute Resolution department at Steeles Law, has advised a number of businesses on potential claims against banks alleged to have mis-sold products.

Ian comments: "In recent months, particularly in light of the increased media coverage of late, we have received more and more enquiries from small to medium businesses with complaints against banks. Typically, although not exclusively, the complaints relate to allegations of mis-selling of interest rate swap products."

"We have advised a number of these businesses in relation to potential claims and the prospects of bringing a successful action against banks."

"Recently, we secured a significant refund from a major banking institution and have commenced High Court litigation against a bank to recover a sum in excess of half a million pounds."

"Every case is different, must be assessed subjectively and there is no guarantee that there will be a claim to pursue. However, we do urge small to medium businesses to invest in legal advice to ascertain their legal position given the significant sums which are often involved."

If you require legal assistance, please do not hesitate to contact Ian Robotham or Nigel Lubbock who will be happy to assist. Telephone 01603 598000 or click on the hyperlinks to their profile pages for contact details.

Published: 11 May 2012
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