In 2007, few people foresaw the drastic reduction of interest rates to come, including financial advisers. They were enthusiastic about swaps, the hedging products designed to protect business loans from interest rises. Some business funding from banks was conditional on having a swap attached.
This has turned into a bonanza for the banks, because when interest rates drop the swap customer has to pay the difference to the lender. These Interest Rate Swap Agreements (IRSAs) are also very costly to get out of, and that was often not explained to the customers before they signed them.
Losses can be Significant
One entrepreneur, who was persuaded to buy six IRSAs in 2007, says his total losses so far amount to £1.5 million and he is only still in business because the losses are spread among several enterprises and he still has one that is profitable. He maintains that break costs or other options were never mentioned before he purchased the swaps.
Swap Mis-selling Also Significant
This constitutes serious mis-selling because banks and their representatives, as well as independent financial advisers have a responsibility to point out all risks involved in any transaction, and to ensure that products are suitable for a customer before decisions are made. The FSA recently estimated that, of SMEs that purchased swaps, around 90% were mis-sold. Many have had to down-size their staff and their growth, or have even ceased to trade altogether.
So the FSA has set up a scheme and ordered the major banks to sort out their small business swap customers and compensate them for their losses. If you have been a victim, have a total of up to 50 staff, with a turnover of not more than £6.5 million or a balance sheet of up to £3.26 million, and your lender is involved in this scheme, you can expect compensation. You should not have to involve a financial adviser, but you should not delay talking to the lender and asking what they will do about it and how soon. The Financial Service Ombudsman can also intervene in cases where compensation will not reach more than £150,000. To claim from lenders outside this scheme, you will most likely need to get legal support, so your claims will also need to cover your legal costs.
The first step is probably to work out the difference between what repayments you would have made if your loan had been free of the swap and what you actually paid. Your outsourced bookkeepers will be the best people to help you do this.