UK enterprises due to be compensated by leading banks for swaps mis selling

Small to medium-sized businesses in the UK are due to be compensated after the Financial Services Authority estimated

What's in the bag? Business of Software 2010

that 90% of interest rate swap contracts were mis sold. The scandal has thrown up a number of similarities with the Payment Protection Insurance controversy, in which scores of British banking customers were duped into paying into PPI schemes when they didn’t want, need or ask for them.

It’s expected that the forthcoming reviews will shine light on a series of underhand tactics being used by the banks. One of the banks that have been instructed to review cases of mis sold interest rate swapsBarclays – has already set aside £850m in order to repay customers that it may have mis sold the products to.

It’s been estimated that the UK banking industry will eventually need to compensate its customers with around £2bn once all the reviews have taken place. It’s said that many of the businesses that signed up for interest rate swaps did so without being told of the risks that they were taken.

The products were sold to customers on the basis that no matter how high interest rates rose, they would in effect have interest rates fixed for them. The FSA suspects that the banks may have targeted struggling businesses who were in no position to make an informed decision about whether the products were right for them.

The interest rates swapped worked on the basis that if interest rates rose, they would be protected from them by being paid money by the banks to cover the fees that were generated from them. However, if interest rates fell, customers would need to pay extra to offset the lower rates.

Problems began when interest rates actually fell to historic lows. By signing up for the products, customers were essentially ‘betting’ that interest rates would continue to rise when in fact they came to do exactly the opposite.

The challenge for the Financial Services Authority and the banks is to determine which businesses they would deem to have been capable of understanding the risks. As such high risk hedging products were unlikely to be of interest to prosperous businesses, it’s said that the banks exploited companies that were faring as well by directly targeting them.

The FSA have put certain guidelines in place to make it easier to distinguish between ‘sophisticated’ and ‘unsophisticated’ businesses, with ‘sophisticated’ businesses apparently likely to be equipped to make an informed decision before signing up for these services. Evidently, some businesses are likely to receive bigger payouts than others, with some sources predicting that smaller claims are liable to be faced with less resistance. You can find out more information about interest rate swap claims at

Guest Post : by Paul Simms


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