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"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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Welcome to the May edition of Banking and Capital Markets Insight, which focuses on technical issues currently coming out of the banking, capital markets, securities and fund management arenas.
This weekly update from Clyde & Co's Financial Services Regulatory Team summarises new developments as reported by the FCA, the PRA, the UKLA, the Upper Tribunal, the Financial Ombudsman Service and the London Stock Exchange over the past week.
This weekly update from Clyde & Co’s Financial Services Regulatory Team summarises new developments as reported by the FCA, the PRA, the UKLA, the Upper Tribunal, the Financial Ombudsman Service and the London Stock Exchange over the past week, with links to the full documents where these are available.
1 September 2013 will see the implementation of new guidance issued by the Institute of Chartered Accountants in England and Wales in relation to the financial reporting procedures that directors of companies seeking a premium listing must establish.
A summary of the most recent developments as reported by the FCA, the PRA, the UKLA, the Upper Tribunal, the Financial Ombudsman Service and the London Stock Exchange over the past week.
A summary of the new developments as reported by the FCA, the PRA, the UKLA, the Upper Tribunal, the Financial Ombudsman Service and the London Stock Exchange over the past week, with links to the full documents where these are available.
Some comments from our readers… “The articles are extremely timely and highly applicable” “I often find critical information not available elsewhere” “As in-house counsel, Mondaq’s service is of great value”
