"Money makes the world go round"… all around the world.

May 5, 2014

The ‘Swap Scandal’

Business LoanNearly two years on since the ‘swap scandal’ hit the headlines, the repercussions are still being felt. When this story broke, some financial commentators predicted that this could be a bigger issue for the banks than the PPI mis-selling fiasco. Now, with companies still claiming, not just their money back, but compensation for consequential losses as well, they could have been right.

This latest financial product mis-selling scandal came about because businesses, particularly small & medium sized, were being sold Interest Rate Swap Agreements (IRSAs) without being made fully aware of what they actually were. In addition, similarly to the situation with PPIs, businesses were being told that they had to buy the IRSA as a condition of the loan.

The Bully Banks website, which helps small businesses claim money back from the banks, states that banks did not fully explain the consequences of taking out an IRSA and this resulted in companies not being aware of the huge ‘buy out’ costs of up to 20% of the original loan. Conversely, there is a clause in most of these contracts that states that the bank can stop the IRSA if it becomes too costly for them.

According to Bully Banks, companies seeking loans were told that interest rates were likely to go up and that purchasing an IRSA would protect them if this happened. What they didn’t explain was that, if the interest rates dropped as they did in 2008, the IRSA holder would not benefit from this and would still be stuck paying large monthly fees that could have a detrimental effect on their business. In some cases, these fees affected their credit ratings which meant that their buying power was greatly reduced, making them less competitive.

Financial website, This is Money, reported that in April a case should have gone to court that would have potentially changed the game in IRSA mis-selling claims. Guardian Care Homes were planning to sue Barclays Bank for £70million, which would have been the biggest amount claimed so far. It was settled out of court, however, and the article expressed concern that the legal fees, reported to be around £11million, would put smaller companies off pursuing these claims.

Some small businesses have not been put off though and have pursued claims through the FCA and Financial Ombudsman. Others have hired solicitors to harry the banks on their behalf. Results have been mixed but the most tenacious have often been the most successful. One small business owner in North London pursued a claim, against the advice of his accountant, and received over £150,000 of his money back and is now seeking compensation for consequential losses. Therefore, although these claims appear to be more damaging to the banks’ reputations than their budgets, the successful ones have certainly been beneficial for the claimants and may deter banks from these practices in the future.


Leave a Reply

Copyright © 2015 What the Finance
Economics and Finance blog

Best Deals | Stock Market Watch | Business Finance | Investment Ideas | Business Guide | News Wire | Business Directory