Interest rate swap solicitor, Emma Slade, launches Slee Blackwell’s dedicated free interest rate swap legal helpline to assist victims of mis-sold interest rate swap products
The banks have been hit hard in 2012 following a series of financial scandals and mishaps: LIBOR rate fixing, tax avoidance schemes and PPI mis-selling to name but a few. But the latest scandal and one which seems to be bubbling away under the surface, is Interest Rate Swaps or IRS. The mis-selling of these hedge-based derivatives has been brought to the public’s attention by a series of articles in The Daily Telegraph and has led to the FSA entering into a deal with the four big High Street banks – Lloyds TSB, Barclays, HSBC and RBS – that they will set up independent reviewing schemes to look at this latest problem. Ten other banks including Clydesdale, Allied Irish Bank (UK), Santander (UK), have also agreed to review their sales.
In response to the enquiries we have received from worried consumers, Slee Blackwell Solicitors have set up a dedicated FREE legal helpline to deal with interest rate swap mis-selling queries. The helpline is being run by professional negligence solicitor, Emma Slade, who has developed a keen interest in IRS litigation
For anyone who is not entirely familiar with interest rate swaps and the legal issues involved, Emma has prepared a useful guide:
A BRIEF GUIDE TO INTEREST RATE SWAPS
Interest Rate Swaps are sophisticated but highly complicated financial instruments. They were intended to protect a customer from fluctuations in interest rates and, whilst they have been around since the early part of this century, they were being heavily promoted by the banks between 2005 and 2008.
The hedging products are usually based on another underlying product which the bank will hold for a specified period of time with the agreement to sell it back into the market in the future at a specified price. Based on the perceived value of that hedge, the bank is able to raise funds to provide a loan to the customer. What is not apparent to most people is that the hedging instrument of the underlying asset is entirely separate from the loan itself; the bank will charge a rate to the customer under the hedging instrument as well as a lending rate under the loan itself.
There are many different types of Interest Rate swap products available but probably the easiest one to describe is a “collar”. In essence, the bank will set a maximum interest rate (the “cap”) and a minimum interest rate (the “floor”). Whilst the Bank of England interest rate or LIBOR rate fluctuates between the cap and the floor, the customer will be charged the actual rate plus the lending margin of the loan itself. If the interest rate goes above the cap, the customer will pay the cap plus the lending margin; if it falls below the floor, the customer will pay the floor rate plus the lending margin.
To put it into figures, let us say that the cap is set at 5% and the floor is 4%. Whilst the LIBOR rate, for example, is 4.25%, the customer will pay 4.25% plus the lending margin; if LIBOR becomes 6.5%, the customer will pay 5% (the cap) plus the lending margin; if LIBOR falls to 3%, the customer will pay 4% (the floor) plus the lending margin.
Between 2005 and 2008, interest rates were fluctuating and the banks were promoting IRS schemes to customers (especially SMEs), giving the impression that an IRS was akin to a fixed rate mortgage. Special emphasis was placed on what would occur if interest rates rose but rarely was there any real explanation of what would happen should interest rates fall. As we know, since 2009, we have had an all-time low base rate of 0.5%. Many SMEs who entered into an IRS are therefore facing crippling interest rate charges on their loans and hedging instruments.
To make matters worse, because of the nature of the hedging instrument where the bank is tied in for a specified period of time, should a customer wish to terminate the arrangement, they face significant “break costs” which can run into many hundreds of thousands of pounds.
The FSA have been investigating the selling of these products and have come to the conclusion that a lot of them have been mis-sold. From the viewpoint of interest rate swap solicitors like us, it is obvious that the banks were not complying with FSA Rules which require them to provide full and clear information. In virtually every case, we have heard that the customer simply did not understand what was being sold to them. In particular they did not know what would happen if the interest rate levels fell. They were simply not properly advised.
Similarly – and this is the biggest issue – customers were not informed of the potential break costs. Many of the banks have argued that it is impossible for them to calculate what the break costs of a broken hedging product would be but given the sophistication of computer software available to the banks, they should have been able to give examples to client’s should they wish to break the product at various intervals in the agreement.
Ultimately though, it is clear that Interest rate swaps were simply not suitable for the majority of purchasers. Most of the customers were SME’s or what the FSA would call “unsophisticated investors”. Given that these products were initially created for the professional investor and money trader, it is difficult to see how the banks can justify selling these products to the unwary public.
As outlined above, the Big Four banks have been required to set up investigations into the mis-selling of these products with another ten banks voluntarily offering to consider the matter. The FSA itself has agreed to become involved but will only look at an interest rate swap case where the break cost is less than £100,000, the business has less than ten staff and less than £2m in assets. Given that the majority of cases are looking at break costs in excess of £100,000, they are not going to be reviewing the majority of claims. Instead, it falls to the customer to try and negotiate a deal with the bank direct or to approach specialist interest rate swap solicitors to pursue a interest rate swap claim.
