An Interest Rate Swap or Interest Rate Swap Agreement is a type of complex financial derivative known as an Interest Rate Hedging Product. Not every Interest Rate Hedging Product is a Swap. There are many different types of Interest Rate Hedging Products that the Banks have mis-sold to unsuspecting individuals, partnerships, small, medium and large companies.
In addition to an Interest Rate Swap, there are Interest Rate Hedging Products known as Caps, Collars, Enhanced Collars, Dual-rate Swaps, Bermudian Swaps, and many other exotic derivatives designed for, and by, financial experts. Interest Rate Hedging Products are complex and were marketed with the expectation that interest rates would rise.
Interest Rate Hedging Products are separate from the loan facilities against which they were sold. The Banks have attempted to sell Interest Rate Hedging Products as ‘protection’ against rising interest rates. These products are financially speculative and overly complex and were often a requirement or condition for the Bank agreeing to provide the loan facility.
The Banks actively incentivised the sale of these products and the extent of exit fees/break costs were not fully disclosed in most cases. Successfully exiting these contracts with appropriate redress is not straightforward and requires specialist advice. Banks often over or under-hedged the loan facility with little explanation given to the client as to why the proportions of the facility hedged were required.
Types of Interest Rate Hedging Products
- Swap – enable the customer to ‘fix’ their interest rate;
- Cap – places a limit on any interest rate rises;
- Collar – enables the customer to limit interest rate fluctuations to within a simple range; and
- Structured collar – enables a customer to limit interest rate fluctuations to within a specified range, but involves arrangements where, if the reference interest rate falls below the bottom of the range, the interest rate payable by the customer may increase above the bottom of the range.
The following provides an example of a typical Swap contract:
- The Interest Rate Hedging Product was sold on the basis that interest rates were more likely to rise than fall, with little or no mention of the ramifications of falling/low interest rates.
- Bank Funding is structured over a specified term at 2% (margin) + Base Rate (Variable, typically c5% at the time)
- The Swap is entered into so that the customer swaps the payment of the margin plus base rate (2% + c5 %) for a fixed rate 5.5% (+ 2% margin)
- If Base Rate rises (above the 5% example) the Interest Rate Hedging Product settles the difference thereby creating a fixed rate
- The maximum interest paid by the customer is fixed at 7.5% (5.5% fixed rate + 2% margin) and protects against potential rate rises
- Whilst this Interest Rate Hedging Product caps the payment due, should rates rise, what happens if they fall significantly? A number of Interest Rate Hedging Products limited how much rates could fall and still remain covered by the product
- Many Interest Rate Hedging Products also included collars which allowed the fixed rate to move within a range in line with Base Rate movement
- However when Base Rate fell below the collar floor, contracted into the Interest Rate Hedging Product, the customer became liable for the shortfall cost in addition to their contracted fixed rate + margin
- With Base Rate at 0.5% many Interest Rate Hedging Products have breached their terms and resulted in significant additional cost to the customer, in many instances with serious consequences
- Interest Rate Hedging Products have cost UK businesses significantly more than they were intended to mitigate
Interest Rate Hedging Products have been identified as being mis-sold because of the following:
- inappropriate selling of more complex varieties of Interest Rate Hedging Products;
- a number of poor sales practices used in selling other Interest Rate Hedging Products; and
- sales rewards and incentive schemes which exacerbated the risk of poor sales practice within the banks.
Seneca Banking Consultants is dedicated to getting back the money you’re owed if you’ve been inappropriately mis-sold sold an Interest Rate Swap or other Interest Rate Hedging Product. We are professional business advisors that can help you find your way through the financial and banking regulatory minefield and make a successful claim against your bank.
It is not just the money from the mis-selling that you’re owed that we care about; it’s the associated financial implications you might experience too. Weakened balance sheets, reduced working capital and the inability to borrow other finance are some of the consequences of your mis-sold Interest Rate Hedging Product we can investigate for you and calculate just how much you’re owed.
- weakened balance sheets
- stretched or reduced working capital positions
- inability to refinance with another bank
- increased overdrafts and cash flow pressure
- increased personal debt positions to meet funding requirements of the business
- opportunity costs of not having the cash retained within the business to develop new products and business lines
- breaches of banking covenants
- transfer of the company’s banking relationship to the specialist department with the bank
If you believe you may have been mis-sold an Interest Rate Swap or other Interest Rate Hedging Product, there are a number of options available for pursuing your claim:
The FCA Review Scheme;
The Bank’s Internal Complaints Procedure;
The Financial Ombudsman Service; and
Negotiations and/or Litigation.
To help identify if you have been mis-sold an Interest Rate Swap Agreement (IRSA) or other Interest Rate Hedging Product, please see our ‘Can I Claim?’ section.