The interest rate swap fiasco

Andrew Brown, partner at London and Cardiff-based law firm Capital Law, discusses the legal ramifications of the sale of controversial derivatives which has put thousands of small businesses at risk.

With thousands of SMEs discovering that they have been victims of interest rate swap mis-selling as part of their business loan, more and more of my work has been involved with trying to sort out this legal and financial quagmire.

Interest rate swaps were marketed to protect against rising interest rates, and some companies are now arguing that they were not made aware of the implications of the rate going down, or having the risks properly explained by the lender.

With the interest rates slashed by the Bank of England since 2008, companies with an otherwise profitable business may now be crippled by massive fees or faced with buying their way out of these ‘hedges’ at considerable cost.

The situation is a ticking time-bomb for UK SMEs, many of whom now find they are out of their comfort zone and saddled with a costly financial product which was never properly assessed by the bank to be suitable for their business.

Often such products were imposed as a condition of further funding so the customer was deprived of making an informed choice. I regularly come across businesses that feel trapped, not only by the onerous terms of the agreement which continue to damage their business, but also by a paradoxical concern that they will lose the continued support of their bank should they rock the boat.

Clearly it is an extremely complex issue and before any negotiation or litigation can take place the viability of a claim must first be assessed. Once viability has been established businesses can work towards the goal of exiting the hedge and recovering their losses – whether through negotiation or litigation.

By far the most favourable outcome is a negotiated settlement and a continuation of the banking relationship (if that is what the client wants), but if court proceedings are required, there are legal avenues to be pursued. But of course litigation is an expensive business and so alternative methods of funding legal action should be assessed in order to ensure that any businesses suffering from hedge products have an affordable route to recovery.

In this regard there are a number of leading third party litigation funders who will fund the claim in return for a modest share of the winnings.

Ben Lobel

Ben Lobel

Ben Lobel was the editor of from 2010 to 2018. He specialises in writing for start-up and scale-up companies in the areas of finance, marketing and HR.

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