Interest Rate Swaps – the clock is ticking

HUNDREDS of businesses could be entitled to compensation if they were mis-sold interest rate “hedging” products.  However, if they delay in taking action they could lose out.  David Astbury, Corporate Litigation Partner, at AB Corporate looks at the background to this issue and what actions businesses should be taking now.

Up to 28,000 small and medium sized businesses across the UK are receiving letters from their banks informing them that they may have been mis-sold financial products, known as interest swaps.

The move follows an agreement between the Financial Services Authority (FSA) and the banks after months of media pressure and the outcome of an FSA investigation, which concluded in June that there had been “serious failings” in the sales of swap products.

Products were overcomplicated and poorly explained

Interest swap agreements were intended to protect businesses from interest rates increases, but businesses complained that the products were unnecessarily complicated and unclear.

Some were also not properly explained by banks and could “lock” businesses to swaps — sometimes even beyond the period of the loan they were supposed to protect and imposing additional charges or early termination costs.

Review Scheme

Banks have set aside provisions reported to be at least £450 million for potential claims and agreed with the FSA to set up the review scheme, under the independent supervision of accountants KPMG

While the scheme is clearly good news but businesses will need to read the small print.  The agreement between the banks and the FSA provides for only so-called ‘unsophisticated’ business customers to qualify for the reviews and potential compensation for swaps sold after December 1, 2001.

Businesses above a certain size are automatically deemed to be “sophisticated” — ones with net assets of £3.2 million, turnover £6.5 million and more than 50 employees — and so are outside the review.

Even if firms match these criteria, their bank has a get-out if it can demonstrate that at the time of the sale the firm had the necessary experience and knowledge to understand the products and risks.

The time for bringing claims may be about to run out

The danger is that businesses are approaching the limit of the statutory time frame in which they are able to claim, as most interest swaps were sold between 2005 and 2008.

If businesses wait for the review outcome and find they are excluded or rejected for compensation, it may be too late to commence court proceedings unless they have taken legal advice and protected their position.  We are advising our clients to negotiate “stand still” agreements with the Banks to stop the clock running on their claims.

Think you might have a claim – free review

For further information or advice on the issues raised by this briefing note or indeed any commercial dispute please contact me by calling 0844 824 8744 or by completing the form below.  We are offering a free initial review for all our clients on their interest swaps.

Contact us, find out how we can help you