Reversal of Fortune


David Astbury – Head of Commercial Litigation at AB Corporate LLP

In October this year the Financial Services Ombudsman ruled against the Bank in what may be a landmark decision in relation to mis-sold interest rate hedging – or ‘swap’ products.  The decision (a successful appeal against an earlier ruling which had gone in the Bank’s favour) may mark the turning of the tide against the banks for small businesses fighting for swap compensation.

Interest rate swaps were supposedly sold by banks as a means of fixing interest rates to protect customers from base rate rises.

Three critical issues

In reaching his decision, the Ombudsman identified three critical issues:

  • Did the bank provide the business with advice about the swap?
  • If it did, did it take adequate steps to ensure that the advice was suitable?
  • If it did not provide advice, did the bank provide the business with information which was clear, fair and not misleading so that an informed choice could be made about whether or not to enter into the swap?

The Ombudsman found against the bank on all three issues.  He said in reaching his decision:

“it seems to me that in this case the swap was put in place primarily for the bank’s commercial convenience and with little or no attention to the needs of its client’.

Background to the case in question

The swap purported to protect a £2M loan which was repayable over a 14 year period. However, the swap actually lasted for longer than the loan period and was fixed at £2M for the whole term of the swap rather than reducing in line with the planned capital repayments in respect of the loan.

In reality, the swap provided very limited protection to the borrower and was more akin to a one way bet for the bank, the Ombudsman said.

This was because the bank included a term allowing it to end the swap after two years.  So if interest rates rose, the bank could get out of the swap leaving the customer exposed to higher interest rate charges.  Alternatively, if rates fell the customer was locked in, unless it paid very substantial early termination  ‘breakage’ charges to the bank.

The Ombudsman decided that the bank had encouraged the customer to rely on its advice and recommendations and provided inadequate information to the customer by reference to which it could have decided on the suitability of the swap.

In particular he described the information in respect of the early cancellation charges as at best ‘opaque’ and inadequate to the point that it ‘effectively hid the potential impact of cancellation charges’.

Bank’s disclaimers did not protect it from the claim

The Ombudsman rejected the bank’s attempts to hide behind its standard disclaimers in its documentation, finding that in reality the Bank should have been well aware that in the real world, customers do not have access to professional financial and legal advice in relation to such complex financial products.  The Bank must therefore have known that its customer was not capable of understanding and accepting the terms and risks of the swap.

What does this mean for you?

Property buy-to-let businesses, hoteliers and other SME’s with swaps supposedly protecting property based lending will no doubt see many similarities with their own situation and welcome the comments and the decision of the Ombudsman.

However, they must also be aware that they need to take pro-active steps to make their own case for compensation.  Each case will be reviewed on its own facts by the Ombudsman’s service or the Courts.  Time limits apply to claims.

Calculating ‘fair and reasonable’ compensation can also be a complex exercise, focussing not only on the ‘breakage’ charges but on other consequential financial losses suffered by the business.

Why use AB Corporate?

AB Corporate employs a multi-disciplinary approach to assess your case including:

  • a legal assessment, including consideration of Ombudsman and Court based procedures for compensation claims;
  • an analysis of your swap by an expert in derivative products to identify all the key features and potential instances of mis-selling;
  • assistance in calculating financial compensation claims, including the identification of consequential financial loss with expert forensic accounting advice as appropriate;
  • access to litigation funding and after the event insurance together with conditional fee arrangements in appropriate cases; and
  • advice in connection with business restructuring or refinancing.

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