Interest Rate Swap Misselling
Many small and medium sized businesses have been mis-sold interest-rate hedging products. These products were sold, alongside loans to purportedly protect businesses from fluctuations in interest rates which could effect their loan repayments.
There are broadly four types of the products: swaps, caps, collars and structured collars.
The products are, by their nature, complex and it is therefore common for business not to be aware which product, if any, they have been sold. However, the products can lead to a significant increase loan repayments as they rely on a degree of speculation as to interest rates which effect the loan.
The FSA in the UK has found that major retail banks, including Barclays, HSBC, Lloyds and RBS, had poor sales methods. They did not fully inform businesses as to the benefits and risks of the products, assess if the products were suitable for the business’ circumstances, advising on products when they were not authorised to and financially rewarding employees for selling the products which may have skewed their judgment.
Our SWAPS brochure
The following provides an example of a typical SWAP contract:
The contract was sold on the basis that interest rates were more likely to rise than fall with little or no mention of the ramifications of falling/low interest rates.
Bank Funding is structured over a specified term at 2% + Base Rate (typically c5% at the time)
A hedge contract SWAPs the payment of base rate (c5 %) for a fixed rate 5.5% (+ 2% margin)
If Base Rate rises (above the 5% example) the hedge contract settles the difference thereby creating a fixed rate
Maximum interest paid is fixed at 7.5% (5.5% fixed rate + 2% margin) and protects against rate rise
Whilst this structure caps rate rises what happens if they fall significantly? A number of contracts had limits on how much rates could fall and be covered by the hedge contract
Many hedge contracts also included collars which allowed the fixed rate to move within a range in line with Base Rate movement
However when Base Rate fell below the collar floor, contracted into the hedge facility, the Company became liable for the shortfall cost in addition to their contracted fixed rate + margin
With Base Rate at 0.5% many of these contracts have breached their terms and applied significant additional cost to Companies, in many instances with serious consequences and implications.
These contracts have cost Irish businesses significantly more than they were intended to mitigate
How can we help?
At McHale Muldoon we have experience in advising and recovering monies for business clients regarding claims against the banks to recover monies lost as a result of being mis-sold an interest rate swap product.
Please view our SWAPS brochure McHale_Muldoon_Swaps_Brochure.pdf and to discuss your loan and interest rate swap product, please contact our Dublin office today on 01 659 9405 or email us at firstname.lastname@example.org.
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