UK regulators in January ordered banks to review the sale of the policies, known as interest rate swaps. The banks are required to compensate customers who were misled or not given relevant information as part of the sales process.
Dentists are amongst the 100,000 SME’s around the UK which have been affected by the issue.
The Financial Conduct Authority (FCA) has given some banks, including Royal Bank of Scotland and Lloyds the authority to begin contacting customers to initiate the compensation process. But other lenders are still engaged in internal reviews to discover the extent of any mis-selling.
Daniel Fallows, a director from Seneca Banking Consultants, who are advising dentists affected, said: “There’s been a trickle of progress in terms of dealing with redress but what’s required is a tidal change. Those businesses which were persuaded – and often required - to take out interest rate swaps by their banks found these products to be damaging and expensive to exit. There are also fundamental question marks about the review process set down by the regulators. The banks appear to have a system of self-adjudication, with no appeal process currently available to the businesses who do not receive a satisfactory response.”
Guto Bebb, the Conservative MP leading the all-party Parliamentary campaign to get redress for business, has warned that some lenders are dragging their feet. He has also reported examples of intimidation from the banks. “Businesses disputing the financial products [have been] told that their existing facilities, such as overdrafts or existing loans, would be withdrawn,” said Mr Bebb.
Banks targeted SMEs between 2001 and 2008 with interest rate swap policies. They were sold on the basis that the products allowed borrowers to fix their rates and control their costs, but when interest rates fell the ‘swap’ became very costly. Crucially, a gearing also kicked-in, making the exit fees astronomical. In most cases, the lower rates fell, the higher the exit fees became – which the regulator said the banks often hid from customers.
The compensation scheme only applies to “non-sophisticated” borrowers, defined as businesses with a turnover of £6.5m or less – a threshold too low to help most medium-sized businesses.
Businesses not covered by the review process have been resorting to litigation but, given that the vast majority of these products were sold between 2005 and 2008, there is a danger that many such claims will (if they are not already) soon be “time barred” (i.e. not brought within the six-year limitation period).
In many cases the products were sold over the phone or made conditional on loans. “The terms and conditions would only turn up weeks later, by which time the contract had, in effect, already been enacted,” said Daniel Fallows.
The effects of interest rate swap policies have included outright company failures. “In some cases the existence of a swap has proved a deal-breaker where a principal wants to sell a business,” added Fallows. “In others, it’s forced people to sell up completely or to dispose of assets at below market rates to fund the vast fees associated with exiting these hedges.”
Daniel Fallows believes banks will fight claims all the way. “In general, avoidance of liability is a huge problem and even now, we see communications from banks to customers which are misleading. To suggest, for instance, that people don’t need specialist advice is disingenuous in the extreme. These products are in reality complex, financial derivatives, with hedging arrangements often tucked away inside the detail of ‘structured’ products. A couple of the banks have some really nasty structured products. What’s required is an experienced and specialist eye to unravel what has been sold and the breaches of acceptable practice. It’s not a job for a lay person or even an inexperienced lawyer. A high number of the cases we are dealing with are referred to us by accountants and general practice law firms.”
Analysts’ estimates start at £2bn for how much this is going to cost UK banks – and go as high as £20 bn. Sky News has estimated that the average size of claim is £600k. The compensation process is likely to roll on well into 2014 and will doubtless be accompanied by litigation as businesses not satisfied with the response start to take legal action.
HM Revenue & Customs is understood to be increasingly sympathetic to businesses which are in financial distress as a result of having been sold an interest-rate swap – some getting leeway on tax payments.