Outcome of FSA Investigation into the Mis-selling of Interest Rate Hedging Products

Posted on 29/06/2012 · Posted in Financial Litigation, Interest Rate Swap

The FSA concludes that interest rate hedging products have been mis-sold by the 4 main retail banks to small and medium sized businesses

At the end of June the FSA published the findings of its investigation into the selling of interest rate hedging products to businesses. Their focus was on four types of product: swaps, caps, collars and structured collars. Such a product was commonly purchased by a business because it was a requirement of the business’s loan arrangements with its bank and had the effect of ‘fixing’ or ‘limiting’ the interest rate payable on loans thereby protecting the business from an increase in interest rates more generally.

The FSA found that there were serious failings on the part of banks in the sale of interest rate hedging products to small and medium sized businesses, and that in some cases such failings would amount to mis-selling. The FSA believe that:

  1. Some of the products sold to customers were complex and required a high level of judgment on their part;
  2. Banks failed to discover their customer’s understanding of the risks involved;
  3. Advice given should not have been or was not suitable for the customer;
  4. Loans were over-hedged (notional value was too high and/or the hedge was too long);
  5. Risks, including high exit fees and the possibility of the base rate dropping, were not adequately explained; and
  6. Banks were driven by rewards and incentives.

In light of its findings the FSA has reached agreement with four of the major retail banks: Barclays, HSBC, Lloyds and RBS. These banks have agreed to provide certain redress to customers, depending on the precise type of hedging product held by the customer. Broadly speaking the banks will:

  1. Provide redress to non-sophisticated structured collar holders;
  2. Review the sale of swaps and collars to non-sophisticated customers;
  3. If a complaint is received, review the sale of caps to non-sophisticated customers; and
  4. No longer sell structured collars to retail clients.

Where redress is given it will be on a basis of what is fair an reasonable, and in some circumstances no adverse action will be taken against a defaulting business (e.g. foreclosure) until redress has been considered. However, no agreement has been made for there to be a moratorium on repayments under hedging products.

All redress and review will be overseen by an independent reviewer and the FSA.

Link: FSA Update Interest Rate Hedging Products

Interested in dispute resolution services?


Disclaimer: The above summary is derived from publicly available information and is not intended to be anything more than a statement of the author’s views on the salient factors of the FSA’s findings. It is not intended and should not be understood to be legal advice of any sort. All views are solely those of the author and no use of the summary should be made without statements being checked against the source of information. Expert Evidence Limited takes no responsibility for the views expressed. The copyright of the summary is owned by Expert Evidence Limited but may be used with written permission which may be forthcoming on application through the contact us page. This news item is not intended to imply or suggest that Expert Evidence Limited was involved in the investigation, only that it is considered an interesting legal development.