Cost of mis-sold rate protection products soars

The depth of the scandal around mis-sold interest rate protection products is revealed in new figures from Seneca Banking Consultants, which is now managing claims against £1bn of debt.

The figure reflects over 170 claims made by businesses in the North West, Yorkshire and Midlands, operating across sectors that included property, construction, retail, hotel and leisure, and care homes.

The majority of the claims are for hedging products made conditional by banks against property loans.

The scandal emerged last year when the Financial Services Authority announced that it had 'serious concerns' over the way these products were sold to more than 40,000 businesses.

A subsequent pilot scheme revealed that in over 90% of the 173 cases the FSA examined, mis-selling and breaches of acceptable practice had taken place.

The FSA exampled sample of cases from Barclays, HSBC, Lloyds and Royal Bank of Scotland.

Daniel Fallows, a director at Seneca Banking Consultants, Haydock, said: "Property companies were a major focus for the banks and that's reflected in our case load.

"But we are acting for every kind of organisation that had a debt requirement, including a Christian charity which has been very badly affected by products its bank insisted it took out.

"The £1bn landmark is an indicator of the scale of the problem in the North of England – not least because we believe we are one of the larger firms in terms of case load.

"But the damage caused by these products means the compensation bill could eventually be much higher.

"Every time one of the banks publishes financial results, the amount set aside to cover liabilities arising out of interest rate swap mis-selling just keeps getting higher.

"The most conservative estimates put the eventual cost of compensation at £3bn – but some analysts go much higher."

Banks targeted SMEs between 2001 and 2008 with interest rate swap policies to increase their loan value ratio.

Marketed as a simple means of protecting against rises in the cost of borrowing, these products were in fact highly complex financial derivatives.

They were sold on the basis that the products allowed borrowers to fix their rates and control their costs, but when interest rates fell the 'swap' became very costly.

In most cases, the lower interest rates fell, the higher the exit fees became – which the regulators said the banks often hid from customers.

William Newsom, UK head of valuation at Savills Commercial estimates that more than 90% of bank lending secured against commercial investment property before 2009 was subject to an interest rate swap product.

The UK regulator has established a compensation scheme for businesses, but many firms have resorted to direct litigation against banks as there is a six-year limitation on suing for breach of contract.