INTEREST RATE SWAP AGREEMENTS
As we have heard, the latest banking product to have reached the headlines in the media concerns LIBOR rates, so what is LIBOR? LIBOR stands for The London Interbank Offered Rate, in short the interest rate charged by one bank when lending to another. That’s all good and well I hear you say, but how does it affect me?
Ordinarily the LIBOR rate would not affect the individual or business; however, as we are currently subject to a record low interest rate of 0.5% we are finding more and more that our own borrowing costs have increased. Some of you may wonder why your own loans seem to be costing your much more than you had anticipated.
Between 2005 and 2008 banks began making loans available to customers on a variable interest rate. As we all know, the basis of these products is that if the cost of lending to the bank goes up the amount you pay on your loan follows suit and vice versa. The interest rate is however capped with the lowest rate known as a ‘collar’ and the highest rate known as a ‘cap’. Unfortunately, some of you may have been sold a product which was connected to the LIBOR rate, which would mean that if the LIBOR rate fell below the level of the collar then the cap rate would apply. This was known in the banking sector as a ‘rebound facility’.
An example will assist. You take out a variable rate loan with a collar set at 3% and a cap set at 6% over 5 years. In the first 3 years the LIBOR rate is 3% so you pay interest on your loan of 3%. In year 4 the LIBOR rate is 3.5% so you pay interest of 3.5% on your loan. In the fifth year the LIBOR rate drops to 2.5%. This triggers the rebound facility and you are required to pay interest at 6% with the high cost implication this has for you and your business.
Unfortunately, many of the staff selling the products did not fully understand their terms and conditions and accordingly failed to explain the advantages and disadvantages of the rebound facility to the customer! As a result, many customers have been faced with rising borrowing costs and have sought to exercise their right to terminate the facility. In doing so, they have been faced with exit charges, which are calculated by reference to the anticipated profit which would have been generated had the rebound remained in place. These often amount to several hundreds of thousands of pounds.
The FSA has now carried out its own investigations into the selling practices of these products and has found there to be wide-spread mis-selling. In many cases, the product was sold after an initial loan had already been put in place and was sold as being of benefit to the customer, on rare occasions has this been the case. The common theme is that the customer who elected to take a rebound facility on the basis of what bank employees were telling them has lost out financially to the tune of several thousands of pounds. Had the product been explained fully, it is doubtful that most customers would have elected to increase the risk to themselves.
How do I know if I have a rebound facility? On 27th June 2012, the FSA publicised an agreement it had made with Barclays, HSBC, Lloyds and RBS, the crux of which is that the bank should inform you if you have been affected by such a facility. They should also inform you of your right to make a complaint which will initially be dealt with by the bank’s own internal complaints procedure. On 23rd July 2012, the FSA announced that Allied Irish Bank (UK), Bank of Ireland, Clydesdale and Yorkshire Banks, Co-operative Bank, Northern Bank and Santander (UK) will also participate in the review.
So what are your options?
- You can complain to your bank and hope that their own internal processes either compensate you or allow you to rescind the facility;
- You can elect to rescind the rebound facility if it was entered into as a result of a misrepresentation, either deliberately, negligently or innocently by the bank;
- Alternatively you may seek damages from the bank.
In any event, it is sensible to seek legal advice before taking any steps. If your bank is not willing to cooperate, you may consider legal action. Whilst you may feel that this could be a real case of David taking on Goliath, there are however funding options available to assist you should you wish to explore this further.
There is a 6 year “Limitation period” in respect of commencing court proceedings. Time ordinarily starts to run from the date the hedge was entered into i.e. the trade date, but there may be earlier trigger events which bring the Limitation date forward. Your case may therefore need urgent attention.
If you require further information, please do not hesitate to contact the author who successfully conducted what is believed to be the only decided court case on this subject:
Ian Gee, Director of JWK Solicitors, Lancaster Tel: 01524 598304 E-mail: email@example.com
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