Ask the Expert: Interest-rate Swap Mis-Selling

Q: My bank says I don’t need professional advice about my interest-rate swap claim - they will provide redress. Is this the case?

Banks will fight claims all the way and I don’t think anyone will find it easy. In general, avoidance of liability is a huge problem and even now, we see communications from banks to customers which are misleading.

To suggest, for instance, that people don’t need specialist advice is disingenuous and, frankly, ludicrous. These products are in reality complex, financial derivatives, with hedging arrangements often tucked away inside the detail of ‘structured’ products.

A couple of the banks have some really nasty structured products - as business secretary Vince Cable recently pointed out. What’s required is an experienced and specialist eye to unravel what has been sold and the breaches of acceptable practice. It’s not a job for a lay person or even an inexperienced lawyer. A high number of the cases we are dealing with are referred to us by accountants and general practice law firms.

The banks have consistently downplayed the issue but the depth of the problem for small and medium sized businesses is there for all to see. In our view, across the 11 banks which led the mis-selling, there are claims worth about £20b. Sky News has estimated that the average claim size of £500,000 – which think that’s actually a little low.

The destructive effects of these policies have manifested themselves in a variety of ways. These include administrations and outright company failures, plus a whole spectrum of problems such as redundancy and restricted cash flows. In some cases it has proved a deal-breaker where a principal wants to sell the business but is unable to do so because of the existence of the swap.

In others, it’s forced people to sell up completely or to dispose of assets at below market rates to fund the astronomical fees associated with exiting these hedges. It’s also responsible for personal loss – severe stress, marriage failures, having to withdraw children from fee-paying schools.

All answers are for general guidance only. Each case must be handled on the individual facts.

Source: http://www.insidermedia.com/insider/yorkshire/88752-ask-expert-interest-rate-swap-mis-selling

FCA intervenes in RBS Interest Rate Swap Misselling Case

The Financial Conduct Authority has intervened in a Royal Bank of Scotland interest rate swap misselling court case to explain its rules.

The FT reports the regulator will not take a side in the case but has written to the court asking to explain its rules and its interpretation of them.

The case involves Lancashire hotelier Paul Rowley and his business partner John Green, who were sold an interest rate swap by RBS in 2005.

The pair sued RBS claiming they were missold the swap, however RBS won the case by arguing it had properly explained the risks.

Rowley and Green have appealed and are set to argue the case at the Court of Appeal in mid-October.

Jon Green of Clarke Willmott, who is representing Rowley and Green, told the FT the FCA’s intervention is positive.

He says: “Any assistance that the FCA can provide to the Court of Appeal in determining the appeal is to be welcomed.”

In February, RBS agreed to review the full extent of interest rate swap misselling at the bank and pay any appropriate redress.

Source: http://www.moneymarketing.co.uk/regulation/fca-intervenes-in-rbs-interest-rate-swap-misselling-case/1069929.article

Property Firms Targeted by Interest-Rate "Swaps", warns Berg

Manchester-based law firm Berg has warned that thousands of property businesses have been targeted by banks who mis-sold complex interest rate protection agreements known as “swaps”.


The law firm, which also has offices in London, has said banks were regularly selling swaps, which hedged against rising interest rates, to property businesses as a result of rising property valuations before the 2008 financial crash.

Berg said approximately one third of the 100 cases it dealt with for mis-sold interest rate swaps involved property firms, which suggests that banks were targeting these types of companies in particular.

Against its own experiences, the firm estimates that as many as 10,000 real estate companies across the UK may have fallen victim to mis-selling, while some experts have estimated around 80,000 UK businesses overall may have been affected.

According to Berg, banks frequently and aggressively targeted property firms and even brought real estate firms to businesses during the ‘boom’ years to increase their loan value ratio.

When the financial crisis hit, however, property firms did not have the sufficient funds to cover the fees imposed by swaps, which led to a decimation of the loan value ratio.

Swaps were presented as low risk products and hedged against the risk of rising interest rates. Massive charges were then imposed when rates were lowered to 0.5% by the Bank of England in 2009.

Among those affected was Manchester student accommodation provider, Opal Property Group, who has blamed an interest rate swap for its collapse into administration and debts of over £900m.

Alison Loveday, managing partner at Berg, commented: “It has become clear to us as the interest-rate swaps scandal has unfolded that property businesses were very deliberately targeted by banks.

“Many saw them as ‘dead certs’ for easy fees from these products because property valuations were rising.

“However, the financial crisis changed all that. The interest rate swap products imposed huge exit fees or breakage penalties on the businesses that had bought the swaps, if they wanted to refinance.

“Many companies did not have ability to pay these exit fees, and so they are stuck with the swap.

“This is one of the reasons why we are now seeing so many real estate companies going to the wall.

“The guidance from us to property firms is to seek professional advice immediately. We will investigate if there is a case for an interest-rate swap being mis-sold by a bank which if pursued could result in a significant damages claim and assist in opening up a dialogue with the bank concerned.”

Source: http://bdaily.co.uk/finance/19-04-2013/property-firms-targeted-by-interest-rate-swaps-warns-berg/

Lifting the Lid on Interest Rate Swaps

Interest rate swaps have become a hot topic with a Commerce Commission investigation and an inquiry by Parliament's Primary Production Select Committee.


What is a swap?

An interest rate swap is a financial derivative that allows a borrower to manage interest rate exposure on their borrowing. Until around 2005 they were used mainly by corporate and institutional customers. After that, swaps were offered by various banks to rural and commercial clients with high 'corporate' levels of debt, but without the sophisticated financial expertise held by corporates.

How do swaps work?

Parties use swaps to exchange, or swap, interest rate payments with each other. The most common swap is where a borrower pays a fixed interest rate - the swap rate - to the bank, while receiving a floating rate indexed to a reference rate.

Each party has their own priorities and requirements, so these exchanges can work to the advantage of both parties. Borrowers can use swaps to hedge against interest rate volatility, especially when these are high and rising.

How do they compare?

A fixed-term loan is simpler than a swap, but the idea is the same; to hedge against volatility. Banks sell fixed-term loans to borrowers at a set interest rate for a set period, such as 6 per cent per annum for 24 months.

The issues

Swaps seemed to work quite well for borrowers until late 2008. In that high interest rate environment, some farmers were in net terms receiving payments from banks and there were not many complaints.

Problems were exposed when floating interest rates fell dramatically from late 2008 and a huge gap opened between the fixed swap rate and the floating reference rate. Farmers who had bought swaps were suddenly locked in at very high cost, with many not realising they had that 'downside' risk. Unfortunately they couldn't escape their swaps without paying high break fees.

What has Federated Farmers done?

Federated Farmers has always taken the approach that farmers need to be very careful when signing up to swaps. We advise people get professional independent advice on how swaps work and the pros and cons. The Federation believes strongly in individual responsibility, but is equally concerned swaps are not mis-sold and has been active on the issue.

Since 2008: Meetings with senior bank executives urging banks to pass on interest rate cuts and treat their customers fairly. Swaps have been discussed at these meetings.

August 2009: Submission to the Opposition's Banking Inquiry, which discussed the Federation's swap concerns.

March 2010: Submission to the Banking Ombudsman seeking an increase in the financial limit for compensation and enabling the Ombudsman to investigate complaints about a bank's 'commercial judgment' or its interest rate policies.

December 2010 and February 2011: Submissions to the NZ Bankers Association's Review of the Code of Banking Practice, which discussed swaps.

November 2012: Letter to the Commerce Commission encouraging it to investigate allegations of mis-selling of swaps.

What do the banks tell us?

Banks have assured Federated Farmers issues with swaps have been, or are being, worked through and settlements or new arrangements have been made where it was alleged that swaps were mis-sold or where there were genuine misunderstandings.

Banks seem to have learnt lessons. Although swaps are still being sold to farmers, their use is not as widespread as between 2006 and 2008 and more care is being taken to ensure people know the benefits and risks. Banks deny that rewards or incentives are being used to sell swaps.

Are all farmers unhappy with swaps?No, we get calls from farmers happy with swaps who find them a useful hedge against volatility. They do not want farmers denied swaps.

What happened in Britain?

A number of commentators have drawn a link between Britain and New Zealand. Many British farmers felt swaps were mis-sold to them by banks, typically between 2006 and 2008 when swaps were frequently sold as conditions of loans. Farmers complained bank staff were heavily incentivised to sell swaps with no warnings about downsides.

In July 2012 four major British banks agreed a settlement with the Financial Services Authority (FSA) over "serious failings" in the sale of interest rate swaps to small businesses, including many farmers. The FSA found a number of bad practices, including poor disclosure of exit costs, non-advised sales straying into advice, 'over-hedging' (where amounts and/or duration did not match the underlying loans) and using rewards and incentives to drive these practices. The banks did not always make sure customers understood the risks.

What could happen here?

In response to complaints, the Commerce Commission is investigating; primarily considering whether customers were misled about swaps' true risk, nature and suitability. Business found guilty of breaching the Fair Trading Act may be fined up to $200,000 for each charge.

Where more than one charge is laid, the court may impose a fine greater than $200,000. Only the courts can decide if a representation breached the Fair Trading Act.

What should I do?

Federated Farmers encourages farmers with allegations of mis-selling of swaps, or other poor treatment from their bank in relation to swaps, to make a complaint to the Commerce Commission (phone 0800 94 3600).

If you also wish to inform Federated Farmers about your concern please call 0800 327 646.

Source: http://www.rotoruadailypost.co.nz/news/lifting-the-lid-on-interest-rate-swaps/1824496/

Swaps Committee Creates Standardized Interest-Rate Contract

Users of over-the-counter derivatives may now use an interest-rate swap contract with preset terms as the industry lobby group seeks to standardize the $379 trillion market.

Stephen O'Connor, chairman of International Swaps Association
and Derivatives and managing director of Morgan Stanley

The contract, which the International Swaps and Derivatives Association developed with the Securities Industry and Financial Markets Association, has pre-agreed terms including on coupons and payment dates, according to a press release distributed today at ISDA’s annual general meeting in Singapore. It will initially be available in six currencies and at nine maturity points from one to 30 years.

For users who want standardized terms, “this gets everyone on the same page, all trading the same thing,” said Stephen O’Connor, ISDA’s chairman. That’s “better for liquidity, better for compression.”

Banks, hedge funds and asset managers are adapting to changes mandated by the Dodd Frank Act passed by Congress in 2010, including a requirement to process most swaps with a clearinghouse to cut counterparty risk. There were $639 trillion in over-the-counter derivatives contracts outstanding as of June 30, while the notional value of interest-rate swaps totaled $379 trillion, according to the Bank for International Settlements.

In the weeks after the demise of Lehman Brothers Holdings Inc. in 2008, LCH.Clearnet Group Ltd., owner of the world’s largest interest-rate swap clearinghouse, had to manage the risk of the defunct bank’s 66,390 rate swaps in five currencies that had tenors as long as 30 years, according to Dan Maguire, head of U.S. operations for its SwapClear service.

The standardized terms of the new contracts allow for thousands of trades to be collapsed down to a much smaller number, according to Steve Kennedy, a spokesman for ISDA, which is the main industry and lobbying group for the privately- negotiated swaps market.

Source: http://www.businessweek.com/news/2013-04-23/swaps-committee-creates-standardized-interest-rate-contract

Ups and Downs of Swaps

Interest rate swaps have become a hot topic with a Commerce Commission investigation and an inquiry by Parliament's Primary Production Select Committee.

What is a swap?

An interest rate swap is a financial derivative that lets borrowers manage interest rate exposure on their borrowing. Until about 2005 they were used mainly by corporate and institutional customers. After that, various banks offered swaps to rural and commercial clients with high "corporate" levels of debt, but without the corporates' sophisticated financial expertise.

How do swaps work?

Parties exchange, or swap, interest rate payments with each other. The most common swap is where a borrower pays a fixed interest rate - the swap rate - to the bank, while receiving a floating rate indexed to a reference rate. Each party has their own priorities and requirements, so these exchanges can help both parties. Borrowers can use swaps to hedge against interest rate volatility.

How do they compare?

A fixed-term loan is simpler than a swap, but the idea is the same; to hedge against volatility. Banks sell fixed-term loans to borrowers at a set interest rate for a set period, such as 6 per cent a year for 24 months.

The issues

Swaps seemed to work quite well for borrowers until late 2008. In that high interest rate environment, some farmers were getting money from banks and there were not many complaints.

But floating interest rates fell dramatically from late 2008 and a huge gap opened between the fixed swap rate and the floating reference rate. Farmers were locked in at very high cost, with many not realising they had that risk. They couldn't escape their swaps without high break fees.

What has Federated Farmers done?

Federated Farmers has always said farmers need to be very careful when signing up to swaps. We advise people get professional independent advice on how swaps work and the pros and cons. The federation believes in individual responsibility, but is concerned swaps are not mis-sold.

Since 2008: Meetings with senior bank executives urging banks to pass on interest rate cuts and treat their customers fairly. Swaps have been discussed at these meetings.

August 2009: Submission to the Opposition's banking inquiry, which discussed the federation's swap concerns.

March 2010: Submission to the banking ombudsman seeking an increase in the financial limit for compensation and enabling the ombudsman to investigate complaints about a bank's "commercial judgment" or its interest rate policies.

December 2010 and February 2011: Submissions to the NZ Bankers Association's Review of the Code of Banking Practice, which discussed swaps.

November 2012: Letter to the Commerce Commission encouraging it to investigate allegations of mis-selling.

What do the banks tell us?

Banks have assured Federated Farmers issues with swaps have been, or are being, worked through and settlements or new arrangements have been made where it was alleged that swaps were mis-sold or where there were genuine misunderstandings.

Banks seem to have learned lessons. Although swaps are still being sold to farmers, their use is not as widespread as between 2006 and 2008 and more care is being taken to ensure people know the benefits and risks. Banks deny that rewards or incentives are being used to sell swaps.

Are all farmers unhappy with swaps?No, we get calls from farmers happy with swaps who find them a useful hedge against volatility. They do not want farmers denied swaps.

What happened in Britain?

A number of commentators have drawn a link between Britain and New Zealand. Many British farmers felt banks mis-sold the swaps, typically between 2006 and 2008 when swaps were frequently sold as conditions of loans.

Farmers complained bank staff were heavily incentivised to sell swaps with no warnings about downsides.

In July last year four major British banks agreed a settlement with the Financial Services Authority (FSA) over "serious failings" in the sale of interest rate swaps to small businesses, including many farmers.

What could happen here?

The Commerce Commission is investigating; primarily considering whether customers were misled about swaps' true risk, nature and suitability. Businesses found guilty of breaching the Fair Trading At may be fined up to $200,000 for each charge. Only the courts can decide if a representation breached the act.

What should I do?

Federated Farmers encourages farmers with allegations of mis-selling of swaps, or other poor treatment from their bank in relation to swaps, to make a complaint to the Commerce Commission, phone 0800 94 3600, or call Federated Farmers with your concerns, 0800 327 646.

Source: http://www.bayofplentytimes.co.nz/news/ups-and-downs-of-swaps/1849026/

Small Businesses 'May Never be Compensated' Over Interest Rate Swap Mis-selling

Small businesses could still be at risk from mis-sold interest rate swap agreements (IRSAs).


This is according to two separate reports into the ongoing mis-selling scandal. One suggests that a new wave of "baby toxic" products could threaten small firms, while the other warns that businesses could be denied compensation - with the cash instead going to the banks who mis-sold the products in the first place.

Bully Banks, an organisation that represents businesses that have been mis-sold swaps, has claimed that some of those firms are having their swaps changed for new products with a shorter term or of less size. The organisation refers to these products as "baby toxic", and is concerned that businesses are not being given the option to opt out.

Bully Banks chairman Jeremy Roe said: "Having won the up-front battle in establishing the principle of mis-selling there is real concern that small businesses could lose the war and fail to obtain the full and fair restitution due to them.

"Even more concerning for SMEs is the very real possibility that the banks may seek to substitute the IRSA that was mis-sold with another IRSA - a 'baby toxic' product as part of the redress process. We need strong guidance from the regulator that this will not be acceptable."

Meanwhile The Times reports that hundreds of small firms forced into administration as a result of the mis-selling could miss out on compensation.

Last week the newspaper pointed out that the banks could end up "compensating themselves as the new owners of the businesses." In many cases the banks will be the firms' biggest creditors, and will therefore be paid during the process of administration.

Bully Banks has been lobbying to stop this, and met with civil servants from the Department for Business, Innovation and Skills last week to seek assurances that business owners would receive compensation where it is due.

IRSAs were sold to businesses on the basis that they would protect against rises in interest rates - but, as rates have remained low, many firms have been required to pay out huge sums. Some commentators believe that banks will have to pay out compensation in the tens of billions. Read more about interest rate swap mis-selling.

Source: http://www.simplybusiness.co.uk/knowledge/news/2013/05/interest-rate-swaps-compensation/