How Were Swaps Mis-sold?
According to the Financial Services Authority, 93% of interest rate swaps sold since 2001 may have been mis-sold. So, if you had a business loan since 2001 and were sold a hedging product, the question you need to ask now is not ‘Was I mis-sold?’ but ‘I was mis-sold – so what am I doing about it?’
Interest rate swaps were sold to customers as an insurance policy against rising interest rates. However, customers ended up being locked into long term contracts with exorbitant break costs, and were not able to benefit from the collapse in interest rates. This was because they had not been made fully aware of the risks attached to these hedging products if interest rates fell. Swaps were often sold for periods far exceeding the term of the original loan, or were the only hedging solution made available. In some cases highly complex structures were put in place that were not suitable for SME customers.
Financial Services Authority concerns
In a pilot study published in March 2013, the Financial Services Authority (which has since become the Financial Conduct Authority), listed the following concerns with the way that interest rate swaps were sold:
- Complex varieties of IRHP such as structured collars were sold to customers who were unlikely to understand the full implications if interest rates fell.
- Sales staff who were supposed to give information only, may have strayed into giving advice.
- Sales staff did not explain the risks involved in IRHPs and did not find out enough about the customers’ understanding of risk.
- Hedging products were sold for amounts and lengths of time far exceeding the original loan, on the assumption that the business would require further borrowing when the loan period ended. So a business owner might find they had paid off their loan in five years but still stuck paying premiums on a ten year hedging product.
- Exit costs were not made clear enough. Some business owners assumed that exit costs would be similar to other lending products, for example 5% of the loan amount. However the true exit costs could be up to 40% of the loan amount.
- The fact that sales staff received incentives to sell hedging products, exacerbated these poor practices.
If you took out a business loan from December 2001 onwards, you need to check whether you were sold an interest rate swap alongside it. If so, contact us for advice on redress.