It is nearly three years since the British Bankers Association made their announcement on the Swaps Misselling debacle;
Interest Rate Swaps: Businesses in Financial Distress (major banks review process)
‘ ……….The banks remain committed to addressing the Interest Rate Swap review as quickly and as fairly as possible with businesses and are working closely and cooperatively with the FSA and the skilled independent reviewers appointed by the FSA to do so ‘
The announcement was an important factor in the British Bankers Association advising the UK’s SME’s to contact their bank if they were in ‘financial distress’, which in December 2012 many businesses were struggling.
Question – So why and what makes the difference to a business who has been missold an Swap ?
Answer – when you are a small business with a Swap in 2012 you are likely paying cash premiums for the Swap and holding liabilities you had no awareness you would be.
Small businesses in the UK were sold irhp on mass around 2007 – 2008.
To ‘ missell ’ these contracts the banks needed to ensure the customers assets could act as suitable Collateral but seldom chose to disclosure this.
Instead there is a pattern of inducement for SME’s to borrow on standard variable rate loan deals from which the bank condition, in writing or verbally, the insistence for a Swap.
These are often sold as ‘protection’ and are often exactly the opposite.
Swap’s needs security, like a loan, but the banks often fail to disclose this.
The banks knew the effects that severe interest rate movements would have (not that fact that the rates would move as they did) but seldom chose to disclose this either. In fact the contracts can be calculated to detail the effects of every 0.01% movement in the benchmark rate.
In simple terms that matter of fact is No Collateral = No Swap
The loan security offered by the SME allows the Swap to be ‘missold’
It appears from our work that the inducement of low headline margin rates, usually between 1 – 2%, allow the bank to induce the required pledges for security and then simply ‘missell’ the Swap.
The loan to value is accounted for in the bank’s credit department before the sale, allowing for both the loan and the Swap liability is agreed.
So time passes by and in March 2009 the Bank Of England reduce rates to stimulate the economy, yet the businesses with Swap are stranded – paying rates averaging at 5% plus the margin instead of 0.5% plus margin.
The effects on the SME are twofold;
- Explicit – premiums are payable
- Implicit – extra Collateral is required as to break the deal could cost £m’s
For the banks this often left them with a non-performing loan (1-2% margins) and a need to secure additional Security & Collateral in case the Swap holder defaults at a time when all the UK banks had new Accounting liquidity requirements.
This problem was recognised by the BBA in 2012 – too late or just in time ?
Many insolvent cases in the FCA review still need concluding.
The banks have and are still taking an ‘unauthorised use of someone else’s assets’ to facilitate profiteering from misselling with the Financial Services Industry simply watching – but do they learn ?
Lessons will be learnt if the necessity arises to litigate for a ‘missold’ Swap that was the reason the business failed as it could change Debenture lending forever