As a forensic accountant, Inquesta has been involved in interest rate hedging claims for the last 12 months instructed by solicitors, but also acting for individuals and companies.
Interest rate hedging products, or swaps as they are now more commonly known, were aggressively sold to individuals and SME’s from around 2001 onwards, 2006 and 2007 being the most prolific time.
They are made up of many different products of varying complexities, including a basic swap, cap and collar. They are complex derivative instruments which can be appropriate for certain types of businesses. However, in many cases the products were sold by the banks without the bank fully considering the client’s business or ability and willingness to take on the risk.
Businesses were not given enough information to make an informed decision on whether the product was right for them. In many cases, the swap was a condition of the loan, even if the client didn’t want it.
When the swap was a condition of the loan, we have found that the most appropriate product would have been a Cap. A Cap places a ceiling on the interest rate the business may have to pay if rates go up, but gives it the ability to take advantage of reduced interest rates. In my view, this is a good product.
The problem with a cap is that there is a premium to pay. Often businesses were put off by the premium, some being told that they simply can’t afford it. However, had they known the potential breakage costs of entering into the swap, a cap would have been a ‘no brainer’.
Through our sister company, Prolific Claims Limited, we are acting for a number of individuals and companies who claim they have been mis-sold a hedging product. Examples of some of the mis-selling are:
- An individual who was persuaded to sign up to an extendable swap 2 years before his existing swap finished. By the time the swap was effective, interest rates had already dropped to 0.5%
- Businesses who have only been offered ‘zero premium’ products, i.e. a swap, without being given any other, more appropriate, options
- An individual who was pressurised into signing the swap contract whilst he was on holiday. The bank faxed the form to him at his hotel. It turns out the date of the contract was 30 April, which happens to be the end of the month. The sceptic in me tells me that this was done to reach bonus targets.
- A company that was sold a 10 year swap when, from the very beginning, it was made clear that it wanted to keep its properties for no more than 3 years.
As forensic accountants, we have been instructed on numerous cases to value both the direct interest losses to the business and consequential losses.
If you require any assistance on valuing the losses resulting from the mis-sale of a hedging product, contact Rob Miller on 0845 223 4700.