Banking scandals never seem to be far from the front pages of newspapers these days. The mis-selling of financial products to consumers by banks has been widely reported. The payment protection insurance scandal has engulfed banks for months now with millions of pounds being paid out in compensation.
The LIBOR scandal has also erupted recently causing heads to roll at some of the UK’s best known financial institutions.
Hot on their heels is another scandal, the mis-selling of complex financial products to small businesses. Recent information released by the Financial Services Authority finds banks steeped in controversy once again as the extent of the issue becomes apparent.
Interest Rate Swaps
At the heart of this latest banking scandal are interest rate swaps that were sold to small businesses. These are derivative products that can operate like insurance and are designed to reduce the risks posed by fluctuating interest rates.
In many of these cases, businesses that took out variable rate loans were sold interest rate swaps to protect against potential rises in interest rates. It appears that some banks may even have required customers to enter into swaps as a condition for approving their loans.
However, many of these businesses did not understand that there were risks associated with the products.
With the falls in interest rates during the recession many small businesses that had bought interest rate swaps from their bank found that they ended up actually paying out on the contracts. Furthermore, the exit clauses on many contracts were so punitive that small businesses could not afford to pay to cancel them.
In many cases the financial consequences have been catastrophic.
Mis-selling
The FSA originally estimated that 28,000 products had been mis-sold. Latest estimates have dwarfed the original figure though, with the FSA now suggesting that around 40,000 products were mis-sold.
Barclays, RBS and HSBC are believed to have already set aside hundreds of millions of pounds to pay for compensation claims.
According to the FSA there were serious failings in the sales of these products. Rather than selling on the basis of business needs, it is believed that poorly designed reward and incentive mechanisms drove increased sales of these complex products. In addition, many of the customers were not sufficiently informed of the risks and potential exit costs before entering into contracts.
Not all businesses sold these products will be eligible for compensation but if you think you might have been mis-sold interest rate payment insurance and would like advice; Rollingsons has experienced lawyers who can assist you. For more information please contact James Crighton on 0207 611 4848.
