Once again the toothless old nag also known as the FSA has ridden in to slam the barn door -this time containing bad hedge loans and swap rates-firmly shut. Another week, another banking scandal. This is the price we pay for banking lenience and American style bank chairmen encouraged by previous governments. Our ‘regulator’ the FSA is reluctant to instigate criminal proceedings for wrong doings with LIBOR and interest rate swap loans, preferring instead to hand out meaningless fines.
Consequently, banks felt that they were above the law, and with selling swaps, they bypassed regulations by using the excuse of it being business to business sales.This is one trend which we have inherited from America. Many key executives employed in UK banks are either American or worked in the US where the banking culture is more of a dog eats dog business attitude. This replaced our previous more ethical and cautious way of doing business back in the ’90′s.
So What Are LIBOR Rate Swap Loans About?
LIBOR rate swaps effectively gamble against whether rates will go up or down each period. Banks paid most attention to the possibility of rates rising and not if they were to fall for any extended period. Current long term historic lows of 0.5% mean that businesses and individuals who bought (or in latter times were forced onto) these products, are facing crippling monthly repayments and massive costs to get themselves off of the loans.
LIBOR interest rate swaps allow hedging loans as a separate entity to the to the underlying asset based loan, and therefore, are paid on top of the existing loan.
For those who don’t understand what is going on, here is a brief run down of what the FSA has fined for;
- Banks have sold around 28,000 swap rate products.
- The products have poor disclosure of any exit fees.
- Customers were not fully made aware for the risks they were taking on with the loans.
- Sales staff giving professional advice when not regulated or qualified to do so.
- Loans were ‘over-hedged’, where the amounts and or duration did not match the underlying loan.
- Rewards and incentives were given for take up of the loans and to staff selling them.
As you can see, banks came unstuck because they never expected any government or the Bank Of England to lower rates so drastically. Their dirty dealings have exposed them with their pants down in full public view. From the many clients we have dealt with regarding these business loans, a common complaint from the banks is that they could not have foretold the extreme costs of breaking or wanting to get out of the contracts. This is untrue. Banking software allows this to be a simple procedure taking minutes only. In fact, exit charges ranged from 2-5% of the cost of the loan, depending on at what year point the exit was required.
Lets be clear, these products were created to err excessively in favour of the bank so that they could indulge in price fixing. Add to this the fact that banks could terminate if things went wrong for them, and yet customers clearly could not do so without a major expense.
If your company or business has been forced onto one of these LIBOR and interest swap rate loans which is resulting in a LPA receivers or some form of repossession proceedings we can and do help many clients in trouble fight back against these decidedly dodgy practices.
**Update* The British Bankers’ Association (BBA) have now announced they will step down in overseeing LIBOR swap rates in favour of more formal regulations. Barclays was fined a mere £290 million for it’s role in the debacle.