Banks brace for new wave of swaps claims

Tim Wallace
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THE FINANCE watchdog will this week lay out the process for firms to apply for compensation if they think they were mis-sold interest rate swap products, opening the door for potentially billions of pounds of claims.

Small firms argue they have lost out, sometimes to the tune of millions of pounds, by splitting a fixed rate loan into a variable rate loan and a swap product to fix the rate.

That meant they missed out on the chance to save interest payments when rates fell and they blame the banks for selling them swap products which turned out to be expensive.

The Financial Services Authority (FSA) is designing a redress process to avoid lengthy court battles.

It may try to differentiate between sophisticated firms who have only themselves to blame and unsophisticated small firms who were misled by the banks who were supposed to be helping.

But business lobby groups fear that a crude guide based on business size is a poor way to estimate sophistication and will leave business owners with little financial knowledge out of pocket. It is thought the FSA could draw the boundary based on headcount or the capital stock of a firm.

“We have always looked at this debate with a degree of scepticism and think it should be revised,” Graeme Fisher from the Federation of Small Businesses told City A.M. “This could class ordinary farmers as sophisticated just because they have a lot of seasonal labour and a lot of capital value in terms of land.”

Instead he favours looking at the way a loan and swap are structured to determine whether misselling took place – for example, covering any swap for a period longer than the underlying loan.

Meanwhile reports suggest the chief executives of the UK’s biggest banks have met over their joint concern that the new Financial Conduct Authority’s (FCA) is taking an overly aggressive approach to the mis-selling of interest rate-hedging. Sky News said last night the bank bosses were concerned that FCA chief Martin Wheatley was pursuing a compensation scheme over misselling that could cost them a total of up to £10bn.