The FCA review into standalone interest rate hedging products is now reaching conclusion and we are negotiating settlements across the board for our clients. Lesser known however is the concept of an embedded or “hidden swap”.
These hidden swaps were sold as ways to protect against increasing interest rates and could include swaps (fixed rates), collars and structured collars.
An example of a hidden swap is a Tailored Business Loan (“TBL”) which were being made available to customers of Clydesdale and Yorkshire Bank (“CYB”) (now known as National Australia Bank).
Other banks and building societies, notably Barclays, RBS, Lloyds and Nationwide also sold these products to small and medium sized businesses.
It is estimated that over 60,000 of these have been sold, putting the number far in excess of the standalone swaps which are currently being reviewed by the banks after the FCA found that they had been systematically mis-sold.
These loans contain hedging agreements embedded within the loan agreement and are not separate hedging transactions like the FCA review is currently dealing with.
Hidden Swaps - The Issue
The problem facing customers with hidden swaps is broadly similar to customers with standalone swaps; namely the poor (or non) disclosure of substantial exit costs along with a poor explanation of the risks of the products.
As with a standalone swap, in order to exit the embedded swap, the customer would need to pay a breakage cost if it was “out of the money” i.e. if it was paying a higher fixed rate than floating base rate.
Typically these breakage costs, which could amount to up to 50% of the loan, were not explained leaving the customer with no way to exit potentially expensive and uncompetitive loans.
Inclusion in the FCA Review
So why did the FCA not include these loans into its review? The simple answer is because they are not standalone derivatives; they are fixed rate loans which incorporate a derivative and as such the sale of theses products are not covered by the relevant regulations and do not concern the FCA.
CYB have set up their own review into structured collar equivalent TBLs, but customers will need to prove that these products have been mis-sold; in the FCA review, standalone structured collars were deemed to have been automatically mis-sold, so there is an additional hurdle in CYB’s review process for customers to negotiate. CYB will not review fixed rate TBLs (i.e. fixed rate loans), leaving customers with effectively the same thing as a standalone swap with little chance of obtaining redress through the review.
The seemingly unjustness for customers with hidden swaps has led to Bully Banks, the national campaign group, to raise the issue with the FCA and Parliament to get these loans reviewed, much like it did with the standalone swaps originally with the intention of setting up a similar review scheme for customers who have been sold these loans.
What to Do Next
Customers with these loans would be encouraged to seek professional legal advice in view of the 6 year time limit in which they have to bring a claim in court for mis-selling. Whilst hopeful that the banks and government will provide for a redress scheme, customers must be mindful that this may take a long time and so should take steps to protect their position.
For assistance please call Slater and Gordon Lawyers on freephone 0800 916 9015 or contact us online.
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