Interest rate swap mis-selling - Are you owed thousands?

For some months there have been rumblings about the next big banking scandal.

With the mis-selling of payment protection insurance continuing to cost the banks billions, a series of articles in the Telegraph have suggested that new revelations could be around the corner, and that this time they would focus on small businesses.

Now the paper alleges that thousands of small firms across the country may have been mis-sold products by large banks – and that those products could have cost the firms hundreds of thousands of pounds.

What was happened?

The current row has been bubbling away for some months. It relates to the sale of complex financial products by High Street banks to small businesses between 2006 and 2008.

These products, often referred to as ‘swaps’, ‘hedges’, or ‘collars’, help to determine the interest rates paid by thousands of small businesses across the country. Many customers claim they were sold the products thinking that they were putting a cap on the interest they would pay in the event that base rates rose.

But as rates fell to historic lows, many holders found their interest rates actually increased – and sometimes to crippling levels. A recent BBC piece focused on a small electronics firm that says it is paying 9 per cent on a £900,000 mortgage thanks to the product.

How are they alleged to have been mis-sold?

There are several key ways in which it is alleged that the banks have mis-sold these products.

In the first instance it is alleged that banks sold small firms products that the customers did not understand, or that were unsuitable for them. According to The Telegraph two Turkish patisserie owners are suing Barclays Capital after being sold a swap that they did not understand because they did not speak English. They allege that Barclays knew this, and that the product has cost them £300,000.

Other customers allege that they were told to take out swaps for longer periods than the term of the loan, or for larger amounts than they were borrowing. Others claim they were told their loan would not be approved unless they agreed to the ‘hedge’. Similar practices have been noted in the recent PPI mis-selling scandal.

A number of cases have already been settled out of court, although the terms of the settlements have been subject to confidentiality agreements. It is not yet known how widespread the allegations are, but the Telegraph claims tens of thousands of small firms may be affected.

What should I do if I think I've been mis-sold to?

The allegations of mis-selling are currently being investigated by the Financial Services Authority (FSA). It is thought that these investigations are still in their early stages.

In the meantime a number of support groups have sprung up to help businesses that think they may have been mis-sold to. Of these Bully-Bank and the Consumer Action Group are amongst the most popular.

Small firms also have the option to go to the Financial Ombudsman Service (FOS) if they believe they have a case. They will be able to offer free advice and, in some cases, they can direct banks to pay compensation. It is important to note, however, that the FOS is only open to businesses with 10 employees or less, and with an annual turnover of less than €2 million.

There are indications that some small businesses have been put off legal action because of the costs involved. Already a number of legal firms have begun offering ‘no win no fee’ deals. If you are considering getting legal help, you should remember that this is a very specialised field. Wherever possible you should try to find a firm with experience in similar cases. Members of the Bully-Bank and Consumer Action Group sites may be able to help you find suitable help.