Four banks have agreed a settlement with the Financial Services Authority over “serious failings” in the sale of interest rate swaps to small businesses, including many farmers.
Barclays, HSBC, Lloyds and RBS have agreed to compensate customers who were mis-sold interest rate hedging products that were supposed to protect them against the risk of interest rate movements.
Hundreds of customers complained about being locked into agreements by high exit fees, forced into hedging in order to get loans and sold products under advice from staff.
Since 2001, banks have sold about 28,000 interest rate protection products to customers, meaning there could be thousands of potential claimants – many of these farmers.
The FSA found a number of bad practices, including poor disclosure of exit costs, non-advised sales straying into advice, “over-hedging” – where amounts and/or duration did not match the underlying loans as well as using rewards and incentives to drive these practices.
The FSA also found banks did not always make sure their customers understood the risks.
• Compensation rates will vary from customer to customer under the settlement and not all businesses will be offered money.
• Other measures could include a mixture of cancelling or replacing existing products, together with partial or full refunds, said the FSA.
However, this ruling does not apply to businesses with two out of three of the following conditions: a turnover of more than £6.5m, a balance sheet of more than £3.2m or more than 50 employees, warns solicitor Bracewell Law, which has spoken to several farmers who believe they were mis-sold hedging products.
• Anyone running a business larger than this is considered “sophisticated” and better able to understand hedging and risk so may find it more difficult to establish a claim.
Farmers had been directly targeted because they were largely owner-managed businesses, said solicitor Chris Hale at Bracewell Law.
“Farmers traditionally have a particularly good relationship with their bank manager as they often have been with their banks for a long time. People trust their bank manager and think he or she is acting in their best interests.”
The banks did not make clear where advice stopped and selling began, said Mr Hale. Sales people were heavily incentivised and rewarded, he said.
“When customers were approached for these schemes they were presented with the positive outcomes of interest rate hedging but no-one ever suggested there was a downside.
“Many small business owners are blaming themselves for signing up. For family businesses like farms, they’ve had to explain to their families what’s happened, which has been very difficult.
“Many of our clients are very emotional about this. We’ve spoken to people who were crying and people who are taking anti-depressants because of this. At least with this verdict people will realise that they’re not on their own and they’re victims of mis-selling.
“These are small, often family businesses that are not normally exposed to hedging and risk. If they had everything explained to them fully, they would have probably said no,” said Mr Hale.
“For many small businesses this has been a difficult and distressing experience, with many people’s livelihoods affected,” said Martin Wheatley, managing director of the FSA’s Conduct Business Unit.
“Our work has focused on ensuring a swift outcome for these businesses that form such an important part of the economy.”
How to make a claim
Bracewell Law is advising farmers who think they may have been victims of mis-selling to start by writing to their banks. “There’s no need to include too much detail at this stage and do not worry about damaging your relationship with the bank. Claims will be taken on by an independent assessor,” said Mr Hale.
Those businesses that are over the threshold and considered sophisticated should take legal advice as it may be more difficult to make a claim. However, banks are more likely to consider claims from medium-sized businesses now than before the ruling was made, said Mr Hale.