Stung by interest rate swaps?

A major review by the Financial Services Authority (FSA) has shown that some of the leading major high street banks have been mis-selling complex interest rate hedging products to tens of thousands of small and medium sized businesses. This has resulted in losses which could run into billions.

The policies limit the risk in interest rate fluctuations and range in complexity from straightforward ‘swaps’ and ‘caps’ that fix or cap the interest rate of a loan, to more complex ‘collars’ and ‘structured collars’.

However, the complex nature of the policies means that where interest rates fall dramatically (as has been the case recently), the interest charged on the loan ‘rebounds’ to the cap resulting in thousands now being charged interest at a significantly higher rate than they would normally.

A thorough investigation by the FSA has revealed ‘serious failings’ in the way the banks have been selling these products. In particular, banks have been failing to ensure that their customers understood the risks involved with these products. Banks have also failed to disclose the substantial exit costs, which has resulted in many businesses now being forced to service loans at punitive rates of interest.

After months of negotiation, the FSA has now reached an agreement with 10 major UK banks who’ve agreed to halt the sale of these products and to provide compensation where mis-selling has occurred.

As part of the agreement, each bank should notify customers who have been missold products, but whether the banks will provide suitable recompense in a timely manner is yet to be seen.

If you have these products and believe they were missold, you should seek professional advice as soon as possible. Claims against banks can be funded on a no win, no fee basis with the legal costs being paid by the bank if the claim is successful. Make sure you act quickly as incoming reforms to legislation mean that this type of funding arrangement is unlikely to be available from April 2013 onwards.

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