INTEREST RATE SWAP MIS-SELLING – THE BANKS’ TYPICAL FAILURES
Rick Munro, Partner at the Lamport Bassitt Interest Rate Swaps Mis-Selling Team, is commonly asked by Bank customers with potential claims “what amounts “to mis-selling’?” Rick commented:
“The Banks owe a number of obligations under the FSA Handbook including communicating information to customers in a way which is clear, fair and not misleading. Where they give a personal recommendation the Banks must ensure it is suitable for the customer and they must take reasonable steps to ensure that the customer understands the nature of the risks involved.
Typically, customers had no prior knowledge or experience of interest rate hedging products whereas the Banks are experienced operators in the financial markets. They knew that there were few, if any, sources of independent expert advice available to small and medium sized enterprises.
The Banks rarely offered a balanced and impartial overview of all of the different types of hedging product available, some of which are far less risky for the customer than others. For example, interest rate “caps” are not risky at all but do involve the payment of an up front “premium”. Instead, the Banks promoted one or two particular products that did not cost the customer any money immediately but opened the customer up to significant risk and the Bank to significant reward. The nature and extent of these risks were rarely adequately explained.
Often the products were for too long a period far exceeding the period for which the Bank was committed to lending to the customer. Generally, the potentially large breakage or exit costs to get out of interest rate hedging products were mentioned only in passing without any attempt to quantify them. Such exit costs are generally far more than the premium saved.
Customers were generally not told that the interest hedging product would continue even if the loan was repaid nor that the existence of it would not prevent the Banks from increasing the lending margin on the loan as they have all, in the event, done.
Nor did the Banks explain that the customer would require a credit line for a substantial sum (representing the Bank’s assessment of the value at risk as a result of the swap) which credit line was secured on the customer’s property. This has often created problems when a customer tries to raise further money on their properties or tries to remortgage.
Whilst every case is different, most of the cases we are dealing with involve most, if not all, of the failures”.
Lamport Bassitt Solicitors is a full service law firm established over 130 years ago with a specialist team obtaining compensation for customers who were mis-sold interest rate hedging products.