Bank mis-selling scandal – now businesses are affected


Accusations of mis-selling are emerging just months after high street banks were ordered to pay billions in compensation to borrowers sold unnecessary payment protection insurance (PPI).

It is now alleged that similar mis-selling tactics were adopted by the banks against their business customers.

Mis-selling hedge to business customersThe government has set lending targets for the banks because of the importance to the UK's economic recovery of loans to small and medium-sized businesses, or SMEs.

However, some businesses have found in recent years that their loans carry the condition that they must "hedge" their interest rate risk.

In 2005, at a time when lenders were mainly worried about rising interest rates, Roy Myers asked HSBC for a mortgage to buy the freehold on 1 of 3 pubs he runs in Redcar.

The bank said he would have to take out a hedge, which turned out to be a complicated financial contract known as an "interest rate swap" - something normally traded between financial institutions and bigger corporations.

"We didn't understand it at the time," said Roy. "They said it was a precaution against interest rates rising. They never looked at the flipside."

As the recession started to bite in 2008-09, the Bank of England looked to help borrowers like Roy by slashing interest rates from 5.75% to 0.5%; a benefit denied Roy since his interest rate had been fixed by the "hedge".

He was also told he would have to pay £173,000 to cancel the swap, despite asking HSBC to let him repay the remaining £770,000 of his loan.

The "hedge" required Roy to pay a far higher interest rate than one at which the bank would be able to relend the money in the current climate.

But Roy contends that at no time did his lender properly explain the risks inherent in the hedge transaction.

Although HSBC declined to comment on Roy's specific case, the bank insisted that it "provides clients with appropriate products according to their needs, knowledge and experience as well as a full explanation of the products and relevant risks".

A borrower in another case said that, while he foresaw the risk of being trapped in a hedge transaction, his bank still gave him no other option.

The businessman - who does not wish to be named because he plans to take legal action against the bank – asked for a loan to build new care homes.

He was told that he had to take out a hedge, with his bank insisting on the full amount for the 20-year life of the loan instead of the 5-year period he wanted, even though this meant him paying a much higher interest rate.

With local authorities now cutting the fees they pay his company for looking after the elderly, the cost of the hedge is strangling his business, leaving him critically short of cash and, ironically, at risk of breaching the terms of his loans.

Yet the hedge also leaves him unable to sell any of his mortgaged properties to remedy the situation.

Law firms are already becoming inundated with complaints about similar hedging and mis-selling practises. Bryan Nott of Simpson Millar LLP said that many thousands of such products have been mis-sold by the main retail banks.

"The Financial Services Authority insists that these mis-selling transactions have been low and so have the complaints," said Bryan. "However a common complaint from small businesses concerns the banks' reluctance to properly explain to the customer the risks of these products, even though they've been very quick to enthuse about the benefits."

An FSA spokesman said: "We would expect banks to adequately explain risks and product details to customers."

This article has been written for information purposes only and if you require legal advice on this matter please contact the Law Society who will be able to recommend a solicitor in your area who can assist you.

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