Interest Rate Swaps: Misselling

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Updated: 14th January 2021

How UK Banks Mis Sold Interest Rate Swaps

In recent years there have been a number of scandals which have rocked high street, but perhaps the biggest travesty is the magnitude of mis sold interest rate swaps. It isn’t just that high street banks mis sold interest rate swaps but that they did so knowing that the average business man or woman just didn’t understand the risks they were taking on. In fact, this particular type of hedging product is so complex that the FSA (Financial Services Authority) had to define which type of businesses they felt were capable of making an informed decision.

Understanding the Depth of Mis Sold Interest Rate Swaps with Bank Involvement and Intent

The unfortunate aspect (from a small business perspective) is that banks knowingly pressured distressed businesses into purchasing a financial product which they could ill afford. Bear in mind that a business that could qualify for fixed rate loans have great credit ratings and literally have no real need for a hedging product. Swap rates are ‘supposed’ to be a cushion against rising interest rates in which customers ‘bet’ that rates will continue to rise. They choose an interest rate swap alongside their loan so that their interest rate remains the same. Herein lays the root of the problem. 

Mis Selling from UK Banks for Interest Rate Swaps: LIBOR at the Root of the Controversy

It is quite difficult to get a handle on just how LIBOR sets rates as there are at least 12 different time periods they take into consideration. Not only is it difficult for the seasoned investor to understand UK prime rates but the average business person has no clue. Since LIBOR consists of the major banks, they can manipulate rates as they see fit. Although this is highly illegal and unethical, they have been accused of doing just this. If a business is led to believe that rates will continue rising (conned into believing?) and then the banks suddenly, with no logical reason, lower interest rates, the losses could be huge. 

How Does the FSA Determine Who is Knowledgeable Enough to Purchase Swaps?

In an attempt to rectify wrongs perpetrated by high street banks, the FSA clearly defined those businesses that they felt ‘should be’ capable of understanding interest rate swaps. If that business had, at the time of purchase at least 50 employees and a balance sheet with a positive tally totalling at least £2.36 million then they are considered to be sophisticated. One other condition which defines a sophisticated client is if their annual sales total a minimum of £6.5 million. Any one of the above criterion can prove sophistication. If all are lacking, the business is considered unsophisticated and unable to make a good business decision in regards to interest rate swaps. 

If you feel that banks mis sold interest rate swaps to your business then please give Real Business Rescue a call. We can offer a free consultation in order to determine the amount of damage which was done to your business. You may also be eligible for compensation for losses incurred and we can match you with a claims specialist who can represent you to claim back what you should never have been sold. Real Business Rescue provide director advice online, over the phone, or in-person at one of our 100 UK offices or a place of your convenience.

Jonathan Munnery


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