What is interest rate swap mis-selling?

Financial Conduct Authority definition

Interest Rate Hedging Products (IRHP) are defined by the Financial Conduct Authority (FCA) as products which enabled ‘the customer to manage fluctuations in interest rates’.

The FCA had identified four broad categories of Interest Rate Hedging Products:

  1. Swaps: which enable customers to ‘fix’ their interest rate.
  2. Caps: which place a limit on any interest rate rises.
  3. Collars: which enable customers to limit interest rate fluctuations to within a simple range.
  4.  Structured collars: which enable customers 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.

Problems caused by complex financial products

Many of these products were sold before the financial crisis in 2007, when the interest rates appeared stable.

When interest rates fell dramatically in 2008-2009 many customers were not aware that fees would become payable under their agreement. Customers were often not informed of the size of the fee required to terminate the agreement early.

Financial Conduct Authority response

A recent review of Interest Rate Hedging Products undertaken by the FCA has highlighted serious failings in the sale of these products to small and medium sized businesses (SMEs).

The FCA estimated around 40,000 customers were mis-sold products. They found that, where customers lack expertise and understanding of the product, some Interest Rate Hedging Products may be inappropriate.

These poor sales practices included:

  • Failure to match appropriate products to the consumer
  • Failure to explain the effects of exit costs;
  • Failure to ascertain the customer’s understanding of risks;
  • Failure to provide independent advice;
  • Failure to adequately explain the risks involved;
  •  'over-hedging' - ie where the amounts and/or duration did not match the underlying loans;
  • Rewards and incentives being a driver of these practices.

Financial Conduct Authority redress

The FCA has reached an agreement with Barclays Bank Plc, HSBC Bank Plc, Lloyds Banking Group and The Royal Bank of Scotland Plc and National Westminster Bank Plc banks to provide appropriate redress where mis-selling has occurred, including:

  • Providing fair and reasonable redress to customers who are demonstrated to lack expertise and understanding of the products sold and review sales of other Interest Rate Hedging Products.
  • In some cases customers may have suffered additional losses over and above the ‘normal’ losses that may have been caused by the breach of regulatory requirements during the sale of the Interest Rate Hedging Products, i.e. overdraft charges, these ‘consequential losses’ may also be taken into account.

We can advise you if redress through the courts may be appropriate.

It may be advisable to consider initiating the court process for misrepresentation and breach of contract.

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Key Contacts

Peter Hawkes

Senior Partner & Head of Dispute Resolution