Banks drag their heels on ‘mis-sold’ interest rate swaps

The Burlington Hotel in Folkestone has the façade of a grand Edwardian mansion. But behind the scenes, the picture’s not so pretty.

Its owners are one of thousands up and down the country who say there were the victims of mis-selling by the banks.

The story goes they were offered a loan back in 2008 – a chance to grow their business and expand. The Sangiuseppe family who own the hotel were keen, but to proceed, they were told they had to take out a separate product, called a swap.

Complex instruments

Swaps are complex financial instruments that, in many cases, swathes of lawyers have struggled to understand.

The idea is that they sit on top of the loan and protect a customer from rising interest rates.

Now, small and medium businesses tend to be a cautious bunch. So when they were told swaps were like insurance, that offered protection, thousands of them signed up for it. What they didn’t realise – or were never told? – is that if interest rates fell they were liable for massive penalty payments.

And unfortunately that’s exactly what happened. Many of these products were sold in the run up to the financial crash, when interest rates tumbled. And businesses suddenly found themselves paying hefty fees.

Evidence of mis-selling

We’ve known about swaps for a while now. In fact, in June of this year, the Financial Services Authority, the FSA – the banking regulator – said it found evidence of mis-selling and instructed the banks to start an urgent review.

Yet this programme has discovered that nearly six months on, not a single penny in compensation has been paid. And, worse still, many businesses are still having to pay the crippling fees.

In some instances, like the Sangiuseppe family in the Burlington Hotel, they’re having to pay the fees and – incredibly – they didn’t ever receive the loan. Yes, they ended up with the complex financial instrument that they probably didn’t want – and not the loan that they really did.

Pilot study

The FSA has told the banks to sift through their cases in a pilot study, so HSBC, Barclays, Lloyds and RBS, have each taken 50 claims to assess them. That pilot was supposed to be finished by the end of October. But it’s still not finished yet.

And only after it’s concluded will the FSA begin its own review. Having hoped to have all 40,000 (the best estimate for now) instances of mis-selling addressed within six months, the FSA is now warning businesses the process could take a year.

Many say the banks are dragging their heels because they want to delay paying out compensation. They’re already up to their necks in a number of other scandals – the mis-selling of payment protection insurance (PPI) and fines for fixing the inter-bank lending rate, Libor. So they’re having to set aside billions of pounds for those too.

So far, the big four banks – HSBC, Barclays, RBS, and Lloyds – have between them allocated about £1bn for mis-sold swaps. But if just a fraction of the 40,000 cases end up winning compensation, the bets are the final bill will be a whole lot bigger.

Is it any wonder the banks aren’t in a hurry?

If you are a small or medium sized business and think you may have been mis-sold a swap, you can contact Bully Banks for help. They are a group of more than 850 businesses who have come together to lobby the case around SWAPS and press the banks, the FSA and the government for action. Contact them at www.bully-banks.co.uk or via email at info@bullybanks.co.uk