Your Guide toInterest Rate Swaps

ContentsIntroduction - What are Interest Rate Swaps and other Hedges?

Why Goldsmith Williams?

Why Use a Lawyer?

Our Service

Interest Rates: The Story so Far

The Impact of Interest Rate Swaps

FSA Findings and Limitation

FSA Pilot Scheme Findings

Win-Win for Lenders, Lose-Lose for Clients

Tailored Business Loans

Case Studies

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Our full terms of business will be provided to you at the time of instruction.

3Introduction

What are Interest Rate Swaps and other Hedges?

Many small and medium enterprises have been mis-sold complex interest rate swap derivatives.

Sold on the basis of a rising market, these hedging products were designed to protect SMEs from increasing interest rates. However, lenders failed to provide a full explanation of the associated risks and therefore could be deemed culpable of mis-selling many of these products.

Many interest rate swaps were mis-sold because:

• Banks did not fully explain the financial implication of the product should interest rates fall

• Clients were not made aware of the substantial exit fees – often 50% of the total loan

• Banks were able to terminate the policy at any time without charge• Clients were put under undue pressure to take out the policy

or given incorrect information about its requirements (i.e, they were told it was a condition of the loan).

It is estimated that 40,000 SMEs could have been a victim of interest rate swap mis-selling, although many within the industry predict the figure, in reality, is closer to 100,000.

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Why Goldsmith Williams?

Highly practised in dealing with lenders and securing financial redress through our work during the Payment Protection Insurance mis-selling scandal, we have already recovered in excess of £32 million in compensation. We are committed to helping SMEs left in dire straits as a result of inappropriately sold interest rate swap derivatives.

We understand the devastating effects interest rate swaps have had, and are still having, on many SMEs. That is why we will endeavour to get your fees frozen throughout the progression of your case.

As one of the UK’s leading national law firms, Goldsmith Williams has over 25 years experience in legal services. We are able to draw upon our expertise and use this to help small to medium enterprises that may have been mis-sold interest rate swap arrangements.

Highly practised in dealing with lenders and securing financial redress through our work during the Payment Protection Insurance mis-selling scandal, we have already recovered in excess of £32 million in compensation. We are committed to helping SMEs left in dire straits as a result of inappropriately sold interest rate swap derivatives.

We understand the devastating effects interest rate swaps have had, and are still having, on many SMEs. That is why we will endeavour to get your fees frozen throughout the progression of your case.

As one of the UK’s leading national law firms, Goldsmith Williams has over 25 years experience in legal services. We are able to draw upon our expertise and use this to help small to medium enterprises that may have been mis-sold interest rate swap arrangements.

We will be dealing with four types of products that have been sold to SMEs:

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Why use a Lawyer?

The findings do not make any reference to limitation which will be a major factor for clients.

The bank will appoint the independent reviewer. The independent reviewer will be a solicitor and a representative from KPMG or Deloitte. This will not create an even playing field.

The failure by the redress scheme to provide any transparent information in relation to time scales, level of redress and limitation means it is imperative to have legal representation.

The best way for SMEs to gain access to justice and secure compensation which adequately addresses the damage it has brought is to seek specialist legal representation .

It is not sensible for a client to rely upon the same bank that missold these products to provide fair and reasonable redress.

Clients which are deemed sophisticated are not included in the review. Therefore all sophisticated clients will need legal representation.

Our Service

If you wish to progress with your complaint, we would like, wherever possible, to meet in person to discuss and further understand the details of your case. Our Legal Plus team covers the whole of the UK and we are able to schedule an appointment fairly quickly.

We will gather together all of the information relating to your claim. Once we have assessed your documentation we will advise you of your options including presenting your case to the Financial Ombudsman Service (FOS) and / or Litigation and recommend the best option for you to proceed with.

Every case is different and we will thoroughly examine each complaint on an individual basis and advise you on the strength of your case, the likely outcome and the money you may recover.

The findings do not make any reference to limitation which will be a major factor for clients.

The bank will appoint the independent reviewer. The independent reviewer will be a solicitor and a representative from KPMG or Deloitte. This will not create an even playing field.

The failure by the redress scheme to provide any transparent information in relation to time scales, level of redress and limitation means it is imperative to have legal representation.

The best way for SMEs to gain access to justice and secure compensation which adequately addresses the damage it has brought is to seek specialist legal representation .

It is not sensible for a client to rely upon the same bank that missold these products to provide fair and reasonable redress.

Clients which are deemed sophisticated are not included in the review. Therefore all sophisticated clients will need legal representation.

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The interest rate swap saga began at the height of the financial boom; interest rates were sky rocketing and businesses, when taking out a loan, were offered ‘protection’ by swapping their variable rate loan for a fixed rate.

However interest rate swaps were highly complex products, originally devised for trading between financial institutions and much bigger corporations typically with their own trading team. This therefore started to raise questions regarding the suitability of the product and, more importantly, the level of understanding from the client. As a result the Financial Services Authority (FSA now FCA) began to look into the sales practice.

The FSA first discovered serious failings in the sales practice of interest rate swaps back in June 2012 and ordered Barclays, HSBC, Lloyds and RBS to undertake a full review interest rate swaps selling.

Six months later, the FSA released the findings of its pilot scheme which reviewed a sampling of interest rate swaps sales. It found that a staggering 90% of cases did not meet regulatory requirements.

Interest Rates:The Story so Far

Yet despite this compelling evidence of mis selling the issue of compensation remained hazy and unclear. While the FSA did suggest that a significant proportion of the pilot scheme was likely to be eligible for some degree of redress, there has been a real reluctance to provide any transparency of what those amounts may be or what, in fact, constituted “fair and reasonable” redress.

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In a rising market environment, an interest rate swap could prove to be of real benefit to a business. In a declining market however, it can have devastating results. In its simplest form, the essence of a vanilla interest rate swap means that should interest rates increase above the fixed rate, the lender pays the difference. Should interest rates fall below, the client is required to make up the difference.

Lenders failed to highlight this risk to clients who agreed to the ‘swap’.

This means, in the current climate, not only are SMEs unable to benefit from the historically low Bank of England base rate, but they are also liable for the cost of the swap. These crippling repayments have led to many SMEs going out of business.

The Impact of Interest Rate Swaps

It also failed to set any deadlines or timeframes, something which could be of real detriment to clients approaching their limitation expiry date.

Since the results of the pilot scheme, lenders have started to write to some affected clients and in some cases, invited them to attend a ‘simple’ fact find meeting. These encounters however have proved to be somewhat of an ‘on the record’ interrogation which could actually jeopardise a client’s chance of redress. It is therefore essential that all clients have legal representation with them when attending any meeting with their lender to ensure you are not left legally exposed.

Almost a year on and only a handful of businesses have received any form of compensation. For those who have payments are understood to be minimal.

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FSA Findings

The FSA conducted a review of the sale of the Interest Rate Hedging Products and issued their finding in June 2012.

It agreed with Barclays, HSBC, Lloyds and RBS that they would review the sales and provide redress to customers, if appropriate to “non-sophisticated customers”

“Our review has found serious failings in the sale of interest rate hedging products to small and medium sized businesses (SMEs). We have evidence which raises concerns about the sales we have reviewed in certain banks. These concerns include:

(i) inappropriate sales of more complex varieties of interest rate hedging products (such as structured collars) and

(ii) a number of poor sales practices used in selling other interest rate hedging products.

We also found that sales rewards and incentive schemes could have exacerbated the risk of poor sales practice. Practices varied across banks, but we found sufficient evidence of poor practices to justify action by the FSA.”

LimitationTime is running out to reclaim financial damages.

A claim must be issued within 6 years from the date of signing the agreement.

This is pursuant to the Limitation Act 1980.

The majority of hedge products were sold between January and June 2007.

The FSA conducted a review of the sale of the Interest Rate Hedging Products and issued their finding in June 2012.

It agreed with Barclays, HSBC, Lloyds and RBS that they would review the sales and provide redress to customers, if appropriate to “non-sophisticated customers”

“Our review has found serious failings in the sale of interest rate hedging products to small and medium sized businesses (SMEs). We have evidence which raises concerns about the sales we have reviewed in certain banks. These concerns include:

(i) inappropriate sales of more complex varieties of interest rate hedging products (such as structured collars) and

(ii) a number of poor sales practices used in selling other interest rate hedging products.

We also found that sales rewards and incentive schemes could have exacerbated the risk of poor sales practice. Practices varied across banks, but we found sufficient evidence of poor practices to justify action by the FSA.”

Time is running out to reclaim financial damages.

A claim must be issued within 6 years from the date of signing the agreement.

This is pursuant to the Limitation Act 1980.

The majority of hedge products were sold between January and June 2007.

A total of 173 cases were reviewed.90 per cent of cases reviewed were upheld.

What does this mean for clients sold these products?Whilst the headline findings of the FSA review appear to be positive, the detail underneath this is by no means as favourable.

So far the banks appear to be hard balling customers and the result is that these reviews could prove to be a little like putting the wolves in charge of the sheep.

It is clear the banks are not intending to make full offers of redress- this is evident from the provisions set aside for interest rate swap mis-selling. The current provisions would only allow for approximately £2,000 in compensation per customer.

FSA Pilot Scheme FindingsThe FSA published their findings to the Pilot Scheme on 31st January 2013

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Given the many disadvantages to interest rate swaps, the majority of clients were always in a lose-lose situation. After interest rates plummeted and payments increased, clients who looked to cancel the policy were greeted by substantial exit fees – often 50% of the total loan.

There was also the lack of cohesion between the loan and the swap; SMEs were forced to commit to an interest rate swap which would exceed the term of the loan. This meant, even when the loan was repaid, the customer was still paying for the swap.

Meanwhile lenders were in a win-win situation; even if interest rates did increase they had the right to cancel the policy at any point without penalty; a privilege which did not extend to the customer.

Win-Win for Lenders, Lose-Lose for Clients

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Tailored Business Loans

While Tailored Business Loans are a different entity to interest rate swaps, it is alleged that they too have been mis sold to small and medium sized businesses.

These products were predominately sold by Clydesdale Bank. Clients believed tailored business loans were similar to standard fixed rate loans.

Yet unlike a simple fixed rate loan which typically has a break cost of around 1-2%, tailored business loans have a much more significant charge often of up to 50% of the total loan amount.

The alleged mis selling of these products come from lenders’ failure to highlight or explain these costs during the sale process.

Clydesdale Private Review Scheme

We have firsthand knowledge that

Clydesdale Bank has begun its own

investigation into its sales practice of these

products. The review mirrors that of the

FSA’s and the lender has already started

writing to potentially affected clients.

However, similarly to the FSA review, there

remains much ambiguity surrounding its

process and compensation benchmarks.

Therefore, for businesses to receive the

best chance of redress, whether they have

received a letter from their lender or not, it is

essential they seek legal representation.

Given these substantial costs, businesses have been denied the opportunity to switch to a better rate, especially since interest rates have plummeted.

We are already helping businesses with tailored business loans recover their break costs, if applicable, or help them escape the loan without incurring such charges as well as numerous businesses with interest rate swaps products.

Case StudiesSMEs in all shapes and sizes have been dramatically affected by this latest mis-selling scandal.

No way out

In 2005, a publican went to their bank for a mortgage to purchase the freehold on one of his three pubs.

At the time lenders were concerned about rising interest rates. He was therefore told he would have to take out an interest rate swap with the banks investment banking unit.

However when the economy entered into recession and the Bank of England base rate from slashed from 5.75% to 0.5%, he faced the full implication of the swap product. As his interest rate was fixed, he saw none of the benefit of the interest rate cut and, when he enquired about repaying the remaining loan early, he was confronted with a £173,000 exit fee.

This businessman may be entitled to redress as he claims the lender did not properly explain the associated risks and financial implications of the product.

Little other option

In another case, the SME involved did foresee the potential risks associated with an interest rate swap but was forced into taking one anyway.

In this example, a businessman required a loan to build new homes to add to his existing care homes portfolio. Despite only wanting to swap just 75% of the loan, the bank insisted he had to hedge the full amount. Refusing to do so meant he would not receive the loan at all and, as he did not have a relationship with any other lender, he was left with little other choice but to agree to the lender’s terms.

This SME may be able to reclaim these charges as a result of adverse pressure by the lender.

Your Notes

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