"The announcement today by the FSA of an agreement with four retail banks over reviewing interest rate hedging deals is welcome" says Paul Voller, Corporate Partner at Bircham Dyson Bell LLP "but medium and larger businesses are left out in the cold".
The interest rate hedging debacle means that for example, instead of swap agreements protecting borrowers only from the risk of interest rates increasing they now find themselves locked into high fixed rates.
Speaking about the implications of the announcement, Paul said:
"The FSA and four leading banks have agreed a deal to help "non-sophisticated" businesses. Unless the bank shows that its customer was equipped to deal with the complexities of swaps transactions, the customer will be within the scheme if it satisfies at least two criteria: for turnover (up to £6.5m), balance sheet total (up to £3.26m) or number of employees (up to 50).
But this leaves many medium size and larger businesses exposed.
"Most people grew up believing that the bank manager was the man you could trust. The scandal of the LIBOR interest fixing shows that the investment banking divisions employed people who would break basic standards of honesty. When a customer's trusted bank manager introduced them to the bank's investment team to advise them about interest rate swaps the relationship of trust continued and in some cases that trust was betrayed.
Clearly, the swap agreements were supposed to protect borrowers from the risk of interest rates going up. In a sense they did but when rates were slashed by the Bank of England in 2008, many borrowers were locked into high rates. What's worse is that the break costs for deals in some cases as long as 30 years can be enormous. Some of the selling of the products appears to have been cynically motivated by the advantages to the salesman. I spoke to one former banker who told me 'Selling a forty year swap was the Holy Grail'."
The announcement today will be good for smaller businesses. Details of how the scheme will help them can be found on the FSA website, but medium and larger businesses are outside the scheme and will have to fight their own corner.
Smaller businesses should be able to avoid expensive legal fees if the scheme does what it says on the tin. There will probably still be arguments over who is within the scheme and whether any redress is fair.
"If larger businesses believe they have been sold complex financial contracts by major High Street lenders without properly explaining the risks involved, they should seek legal advice."
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