You have probably seen or heard numerous television and radio adverts relating to the mis-selling of payment protection insurance (or PPI as it is often referred to). Many customers entered into a PPI arrangement without receiving proper advice or even without knowing that they had been sold the insurance as part of another financial arrangement. However, unfortunately this is not the only financial mis-selling scandal to tarnish the reputation of the major banks.

These banks have also been embroiled in allegations by the Financial Services Authority (FSA) (the banking regulator) following complaints of the mis-selling of hedging products (including "Swaps", "Caps", "Collars" and "Structured Collars").

The FSA has been in discussions with the banks with regard to them providing appropriate redress for affected customers.

Common amongst these hedging products is the Interest Rate Swap.

What is an Interest Rate Swap?

An Interest Rate Swap is a complex financial product. In its simplest form, it is an agreement under which one party will exchange a floating/fluctuating interest rate liability with another party's fixed interest liability or vice-versa for a set period.

The aim of the product is to reduce a borrower's exposure to changes in interest rates by swapping the interest rate mechanism in their loan with another one which is intended to better serve the borrower's interests.

The problem

There are two main issues:

1. Substantial repayments

Many of these products were sold before 2007 and before the beginning of the financial crisis. At that time, many customers wanted some level of protection against the expected increase in interest rates. As we now know, interest rates did the complete opposite and fell dramatically throughout 2008-2009 following the beginning of the crisis.

However, many of these agreements imposed substantial fees; fees that are now crippling many small to medium sized businesses that signed up to the products.

2. Mis-selling by the banks

Second, certain businesses were mis-sold the products by their bank as they were not aware of the consequences of entering into the agreement as a result of poor sales practices driven in part by sales rewards and incentives.

Despite the fact that banks are under a duty to be satisfied that they have taken reasonable steps to ensure that the product recommended is suitable, it seems that some customers were not aware of what was being sold to them. They were also not aware of the fees payable under the agreement should interest rates fall or the size of the fee required to terminate the agreement early.

The FSA has since estimated that around 40,000 customers were mis-sold such products.

FSA reaction

The FSA has accordingly conducted a review. The review concluded that, when sold to "non-sophisticated" customers (likely to be smaller business which wouldn't necessarily have specific expertise and understanding in this area) some products may not have been appropriate for their needs.

The banks have been instructed by the FSA to contact all customers sold these products and, in particular, to non-sophisticated customers to request instructions as to whether they would like their cases reviewed. The banks are then to offer appropriate redress to those customers where required. This process is controlled by the banks but is to be overseen by an independent reviewer and by the FSA.

"Sophisticated customers"

Sophisticated customers are those that fall outside the definition of non-sophisticated customers and are not therefore within the scope of the above process. If sophisticated (or non-sophisticated) customers think they may have been mis-sold a product, they are entitled to contact their bank and to progress through the bank's usual complaint handling procedures.

However, notwithstanding the above, if you are affected by mis-selling and have not been provided with a satisfactory resolution to your complaint or you do not wish to engage in these processes, you are entitled to progress your complaint through the courts and to pursue a claim for the loss and damage that you have suffered as a result.

Given that many of these types of agreements were entered into before the financial crisis, customers should be aware of the 6 year statutory time limit within which to bring or preserve their claims in order to be able to progress them through the courts if required.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.