Small and medium-sized businesses which entered into Interest Rate Swap (IRS) schemes when they borrowed from banks are being urged to seek legal advice into challenging the validity of the products.
The warning comes after the Financial Services Authority (FSA) announced last week that some banks have mis-sold Interest Rate Swap deals to potentially thousands of SMEs.
These deals, which installed a lower and higher cap on interest rates, were sold by a variety of banks from 2001 onwards to encourage businesses to protect themselves against rate rises. If the rate rose above the cap, the business would be protected from extra charges and the bank would refund the customer the increase in the interest above this rate.
However, it appears the banks have been failing to notify business borrowers that the reverse is also true. With interest rates at an all-time low, customers are paying banks the excess since the rates have gone below the lower cap amounts agreed in many of the IRS deals.
Jonathan Chadwick, Partner and head of commercial services at North West law firm, Stephensons Solicitors LLP, believes that many businesses could be struggling with these charges when in reality they may have been mis-sold and could have a reason to challenge them.
He said: “The investigation by the FSA involved speaking to 100 businesses over two months to gather evidence. They found ‘serious failings’ with the products.
“The complaints are a mixture of mis-selling of the deals to customers who did not want or need the product, banks failing to properly advise and also the banks failing to comply with their regulatory obligations. We are already acting for several businesses who have taken out IRS deals, and I would urge concerned businesses to contact us for advice.”
A landmark test case involving the alleged mis-selling of IRS will be heard at the High Court this October. The claimant – the owner of a public relations agency – claims that the business suffered losses of around £228,000. She further contends that the bank, Barclays in this case, approached her ‘unsolicited’ to recommend the purchase of an Interest Rate Swap deal and that they did not meet the standards of customer care demanded by the FSA. Barclays denies the allegations made in the claim.
Jonathan adds: “It is not known whether there is any settlement likely in this case, but it’s clear from the test case and the FSA’s findings, that this is a developing area so we would encourage businesses to seek legal advice as soon as possible.”
A number of banks have already agreed with the FSA to provide compensation in appropriate cases. Since 2001, around 28,000 interest rate protection products were sold to businesses.
ENDS
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Media information: Lianne Tracey
Stephensons Solicitors LLP
T: 01616 966 229
E: lianne.tracey@stephensons.co.uk