What is an Interest Rate Swap Agreement?
An Interest Rate Swap Agreement is a complex hedging financial product designed to protect against rising interest rates. When taking out loans, many businesses, usually SMEs, were given the option to ‘swap' their existing loan with a variable interest rate for a loan with a fixed rate.
If interest rates continued to rise, as borrowers expected at the time, these ‘swaps' were then sold, meaning that the business was protected from higher interest rates because these were now fixed under the new loan. The apparent goal? To enable businesses to benefit from the ‘swap' by making lower repayments.
Why were Interest Rate Swap Agreements mis-sold?
Because interest rates did not rise but instead dropped, many business who were sold swap agreements now find themselves having to pay huge interest payments and are unable to terminate the loan as well.
There are many ways in which an Interest Rate Swap Agreement may have been mis-sold:
- The Lender failed to explain how the agreement worked fully or at all, particularly what would happen if interest rates dropped (as some lenders in fact knew they would, see below);
- The Lender did not explain the circumstances surrounding the Lender's ability to terminate the swap agreement;
- The Lender did not explain the huge fees that would be payable by the business to get out of the agreement. These ‘exit fees' are often as much as 50% of the loan so the business was effectively tied in with no way out;
- The Interest Rate Swap Agreement was for longer than the original loan it was replacing. This was often not explained to the business;
- The Lender failed to comply with various rules of the Financial Service Authority (‘the FSA' now known as the Financial Conduct Authority (‘the FCA');
- The Lender often suggested or implied that the loan could only proceed if the business agreed to the swap or that it was a condition of the loan;
It is now believed that lenders knew that interest rates were likely to go down not up yet continued to sell swap agreements.
What is being done about this mis-selling scandal?
The FCA review and redress scheme
In June 2012, certain lenders including Barclays, HSBC, Lloyds TSB and Royal Bank of Scotland, agreed with the FSA (as it then was) a review and redress scheme for victims of mis-sold Interest Rate Swap Agreements. However, the scheme has been criticized by experts and victims groups as businesses are still not getting the redress they deserve. More than 50 MPs have supported the campaign for compensation. Vince Cable told the FCA that it must put pressure on banks to speed up the compensation process. Since August 2013, the FCA has been required to publish data to show what stages cases are at so that the process can be properly monitored.
In its first progress report, the FCA confirmed that more SMEs were being compensated for the mis-selling of interest rate swaps. It said that banks had paid out £500,000 to 10 August 2013. Whilst this was a step in the right direction, the banks clearly had a long way to go.
The FCA reported in April 2014 that the total payout by the banks under the FCA's review and redress scheme to date was £598.4m with £116.4m being paid out to 1,143 customers in compensation in March 2014 alone. By then, a total of 4,573 customers had received some level of redress under the scheme.
Furthermore, figures published in May 2014 revealed that 14,400 customers were in the redress phase, with approximately 80 per cent having received redress determination.
At least 60,000 firms were eligible to claim under the FCA review and redress scheme but as the scheme was restricted to businesses that were not 'sophisticated', then any deemed to be sophisticated fell outside of the scheme and would have to resort to the courts for compensation. This was on the basis that businesses that were deemed to be ‘sophisticated' ought to have known what they were getting into. The Guardian Care Homes Case shows that a business can succeed even where it is argues that it is ‘sophisticated'.
The delay of the banks in compensating victims of mis-sold swap agreements under the review and redress scheme may ultimately prevent SMEs from obtaining compensation at all as the limitation period for bringing a claim through the courts may soon expire (the limitation period is usually six years). Therefore it is imperative that if you believe you may have been mis-sold an Interest Rate Swap Agreement you take expert legal advice as soon as possible.
There are time limits to bring a professional negligence claim. You have 6 years from the act of negligence or 3 years from the date of knowledge
How we can help
Seth Lovis & Co's professional negligence department has considerable experience acting for individuals and SMEs in mis-sold financial product litigation. We understand the huge impact the crippling repayments and large exit fees under the swap agreements can have on your business and will do all we can to obtain redress via either the FCA review and redress scheme or litigation through the courts.
Funding a Mis-Sold Interest Rate Swap Claim
We have various options for funding your claim to suit your needs.
Click here to read more about the mis-selling of interest rate swap agreements