“Once you put these hedging contracts in place, you can concentrate on your business. We don’t want you exposed to… all the turmoil that’s going on in the markets at the moment.”
Elaine Keet regrets heeding that advice, given to her by a Royal Bank of Scotland salesperson during a 2008 phone call. Saying “yes” to hedging products that she claims weren’t properly explained ended up costing her £400,000 a year – and ultimately, her business, she says.
Like hundreds – and possibly thousands – of companies she claims her small care home company, Msaada Group, was mis-sold interest rate hedging products by her bank.
While she was initially cheered when, last week, the Financial Services Authority said it had found “serious failings” in the sale of the products to small and medium-sized businesses, the details of a deal struck between the regulator and Barclays, HSBC, Lloyds and RBS have left her despairing once again.
The FSA said that about 28,000 interest rate hedging products have been sold to small and medium-sized companies, including caravan parks, children’s nurseries, farms and fish and chip shops reports the Telegraph.
Small business owners say they were often poorly explained, complex and frequently sold as a condition of loans – and that they weren’t warned about the costs if interest rates fell, or about the significant “break costs” if they wanted to exit the swaps, which often lasted longer than the loan with which they were sold.
Now the fear is that lenders are in control of the process of redress for a problem they caused – the banks will each appoint an independent assessor for the process, understood to be in at least one case an accountancy firm that handled some of the administrations that the swaps gave rise to.
Liz Hunter, director of Darby’s Glass & DIY in Cleveland – another small firm that claims to have been mis-sold an interest rate swap – fears this banking “scandal” has been “swamped” by another – Libor fixing. Guto Bebb, the Conservative MP who has taken up the issue, has written to Vince Cable to outline affected companies’ concerns that “the balance of power within the redress process favours the banks”.
Mr Bebb, who is also due to meet the FSA next week to highlight the misgivings, told the Business Secretary that, alongside their concerns over the independent assessors – who will be overseen by the FSA – many affected firms will be excluded by the fact that the agreement only directly offers redress to “unsophisticated customers” who were sold the most complex “structured collar” products.
Only firms that meet at least two of three qualifications are covered by the agreement: turnover of no more than £6.5m; a balance sheet of no more than £3.26m; or having more than 50 staff.
“You can have a larger turnover [than £6.5m] and still be a simple business,” Mr Bebb said. “You don’t suddenly become a derivatives expert because you’re successful.”
Alternatively, the bank can merely “demonstrate” that the customer had the “necessary experience and knowledge to understand… [the] complexity and the risks involved”.
“This… allows a decision to made at the discretion of the bank,” Mr Bebb wrote to Mr Cable.
Marcus Pearcey, of Norwich firm Distinct Hotels, was sold a structured collar product by Barclays. He says he had £20,000 in hedging payments taken out of his account on the day the FSA agreement was announced – “the final insult,” he said.
He says he has since been told by the bank that he may be eligible to be refunded the difference between the repayments on the hedging product and that of a fixed-rate loan, tracked back to when the debt was taken on in March 2008 – when the base rate was 5.25pc, although Barclays says it merely “discussed conceptually a range of possible scenarios … of redress” with Mr Pearcey.
“What about all the other costs? What about the people who lost their business? A few thousand pounds won’t make a difference.”
He said the “FSA should have given stronger guidance on how compensation will be resolved” and criticised the lack of a clear timeline.
“Hopefully things will be done properly, but I’m much more distrusting now.”
Those sold less sophisticated hedging arrangements – which still caused considerable financial damage in some cases – fear they won’t be compensated, although the banks have agreed to “review” these sales.
Other concerns include how those who have lost their business will be offered redress, and the omission from the agreement of contractual clauses that made the products a one-way bet.
“The banks are being put in charge of deciding whether there was a mis-sale in each case,” said Jeremy Roe of Bully-Banks, a campaign group representing affected small businesses.
He said the companies felt like they have been “rescued by the Good Samaritan and then been left in the custody of the bandits who robbed us in the first place”.
Mr Bebb also told the Business Secretary that he feared an agreed “moratorium on foreclosure has not been upheld”.
The FSA settlement included a guarantee that the banks would not foreclose on affected businesses in anything but “exceptional circumstances”. However, Riz Malik, director of Bradford-based Premier Housing, said he received a notice of default from HSBC threatening to remove borrowing facilities this week. “The major banks have shown complete disregard for the weak FSA announcement,” he said.
He said he would now reluctantly take legal advice. “We’d prefer to use mediation, but people will have no other choice if the banks won’t sit down with us.”
HSBC did not comment on Mr Malik’s case.
Mr Bebb warned that unless the issues he identified are addressed, “the claimants will be driven into the arms of the claims management companies and legal system to the detriment of the claimants and banks alike”.
The FSA is expected to give further details on the terms of the oversight process.
A spokesman for Barclays said: “As part of the review process Barclays will be contacting all eligible customers, and where there is evidence of failures in the way these products were sold, we will work hard to make things right.”
HSBC said it has 79 small business customers with ‘structured collars’ taken out since 2001.
“These customers will be contacted as soon as possible, within timescales to be agreed with the FSA. With regards to those small business customers who took out a simple interest rate product, this process will be overseen by an independent reviewer and the bank is currently co-operating with the FSA to agree this appointment,” a spokesman said.