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Interest rate swap/hedging deals - The new PPI?

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Banks are facing a growing number of high value claims by small and medium sized businesses in relation to allegations of serious mis-selling. The mis-selling relates to interest rate swap deals or "hedging deals" as they are also known. These deals were sold by a variety of banks from 2006 onwards to small and medium sized businesses with the selling point being that the deals would protect against interest rate rises. For example, interest rates would be subject to a cap of say 6.5%. If interest rates rose above this then the customer would be protected and the bank would refund the customer the increase in the interest above this rate.

However, what it appears some banks have been failing to do, is to notify the customers that the reverse is also true. So, if interest rates fall below the rate of interest in the deal, say 4.5%, then the customer would not get the benefit of this fall and would in fact have to pay compensation to the bank when the interest rates fall below the floor in the deal. Given that interest rates are now at an all time low, customers are facing massive charges and many are unaware of the effect of the deals that they have entered into. 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.

The Financial Services Authority have become so concerned as to the potential mis-selling that they are in the process of undertaking a thorough review to understand the types of products that have been sold and the ways in which they have been sold to assess the scale and severity of any potential issues. The FSA have also written to Andrew Tyrie MP, Chairman of Treasury Select Committee detailing their work in this area. Whilst the investigation will take many months, an initial review is expected by the end of June 2012.

A test case is also due to come before the Courts in October this year and the Claimant in that action is contending that she suffered losses of circa £228,354.00. She further contends that the Bank, Barclays in this case, approached her "unsolicited" to recommend the purchase of an Interest Rate Swap deal. She also contends that the bank had not met the standards of customer care demanded by the FSA.  Barclays denys the allegations made in the claim. It is not known whether there is any settlement likely in this case, or whether the case will set a precedent for future claims. What is clear is that this is a developing area,  so watch this space!

By commercial solicitor, Leanne Millhouse