• Banks tying small businesses to long term swaps to boost their profits

Comments on interest rate swap mis-selling, from Andy McGregor, Banking Litigation Partner at City law firm RPC (Reynolds Porter Chamberlain LLP).

“These products were often recommended to customers with no prior experience of derivatives together with documentation that failed properly to identify the risks involved and to explain how the product worked in a way that was clear, fair and not misleading.”

“The complex nature of some of these swaps could lead to a customer being in a position where it would cost more to exit the swap than to stay in. The customer was effectively tied to the swap and to paying the bank a large spread over base rate.”

“Of particular concern, there was often a mismatch in maturity between the swap and the loan that was supposedly being hedged.  That meant that the customer would have to continue paying under the swap for many years after the loan was repaid. This could create an enormous amount of extra interest rate risk without the customer appreciating that risk.”

“Many of these swaps were wholly unsuitable products to hedge the customer’s risk. Even if some hedging was required, there would normally have been other cheaper and less volatile products which would have hedged the customer’s position.”

“Many customers believed that if interest rates went against them they could simply pay off the mortgage to exit the swap. In fact, an exit fee would be payable calculated by reference to the mark to market value of the swap. Most customers were completely unaware of how such values are calculated which in any event requires sophisticated software. In most cases the bank would have made little or no effort to explain how the mark to market value of the swap (and hence break fee) would be calculated.”

ENDS

Press enquiries

Andy McGregor, Partner
Reynolds Porter Chamberlain LLP
Tel: +44 (0) 20 3060 6000

Nick Mattison or Louis Auty
Mattison Public Relations
Tel: +44 (0) 20 7645 3636