Over the years banks have developed a number of products for customers to hedge against the risk of rising interest rates on their loans. Many were sold in 2005 – 2008, preceding the sharp fall in the BoE base rate - this fluctuated between 5% and 5.75% from November 2006 to April 2008 but by March 2009 it had reached a low of 0.5%.
The products include interest rate swaps (i.e. swapping a variable interest rate with a fixed rate), interest rate caps (agreeing a maximum cap on interest rates) and interest rate "collars" (i.e. limiting any increase in interest rates to a fixed range). The products are designed to give the customer certainty in a market of fluctuating interest rates.
However, there have been numerous complaints of mis-selling of these products. Most complaints focus on the failure to explain all the risks involved, given the complexity of the products. In particular, it has been felt by many that there was not enough emphasis placed on the risk that the base rate could fall sharply, as it did, and the costs that would have to be paid to "break" (or exit) the product. These "break" costs could be very substantial.
Some customers were sophisticated investors familiar with the risks; others were small or medium sized businesses who had no experience of these types of products. The FSA has undertaken a review and recently announced that it has uncovered "serious failings" in the sale of these products to small and medium sized businesses. Following talks it has now been agreed that certain banks will provide redress on a particular product known as a "structured collar" mis-sold to "non-sophisticated" customers on or after 1 December 2001, and will review sales of other interest rate hedging products to non-sophisticated customers after this date. About 28,000 such products were sold to smaller businesses in this period.
This follows the FSA requirement for redress in the case of mis-sold payment protection insurance sold by banks. Billions of pounds have already been set aside by banks for this redress, with the pay-out increasing since January 2011 and the largest monthly pay-out being made in May 2012 (£730.5m).
Commenting on this, Jennifer Bowes, a lawyer at Trethowans Solicitors who advises clients on mis-selling claims said; "We have found that for some customers the possibility of bringing a mis-selling claim risks becoming "time-barred". This usually happens 6 years after the claim arose so is a particular issue for those customers who were sold products in the mid-2000s."