Commonly called the ‘interest rate swap agreement’, high street “hedge banks” have been selling complicated financial contracts to the small business owner without a thorough explanation of how these loans work. These products were sent outwards with the intent of selling them to the many small time companies such as pubs, vets, haulage firms etc. What these borrowers were sold was what is known as an ‘insurance’ or ‘hedge’ against rising interest rates. What they were not informed about, is what would happen when the interest rate fell, which it has, to an all time low since 2008. These businesses are sitting in the mire of thousands of pounds of debt.
Complicated terminology from the banks
Many of the loans from hedge banks have gone sour and the small businesses are now being pressurized. The client is told that the ‘hedge’ is part of the loan, and other fancy terms such as ‘collars’, ‘caps and floors’ and ‘interest swap agreements’ are bandied about. Many consumers say that when applying for the loan they are given very little time to deliberate the terms, and are put in a ‘take it or leave it’ scenario.
The risk of these ‘hedges’ is that they were put into place to protect the borrowers from a rise in interest rate, but make no concession if the interest rate falls. Borrowers are often pushed into taking out hedge funds that exceed the amount of the loan or the years that it will take for the loan to be paid back. Banks manage to sell these hedges by offering a ‘pie in the sky’ idea that once the loan is repaid, another loan will then be available – hence the long term ‘hedge’ fund. The banks rarely make a serious commitment to re-lending and usually the borrower ends up with a ‘hedge’ that takes tens of thousands of pound to get out of in cancellation fees.
Banks get even craftier. Many borrowers find themselves in the position of being tied to a ‘hedge’ for a loan that does not exist. Banks advise clients to take out hedge funds that exceed the loan they are applying for by a long shot. The reasoning of the bank is that the client would most likely want to take out a loan in the future, so a hedge now, that would exceed the years that the current loan will take to pay off, would come in handy when the borrower would want to take out a loan at a later date. This may sound logical, however, what the consumers fails to note is that the bank has in no way made any kind of commitment to a potential loan in the future.
Four major banks are most responsible for selling these products on the UK market. Barclays, HSBC, RBS and Lloyds. The Financial Services Authority has taken a keen interest in the affair. It seems that thousands of small businesses have found themselves in this very situation. A website called Bully-banks campaign website is currently registering thousands of angry business owners, and the results are astounding.
If you find yourself in this situation, it is now possible to go back to your back and demand a review of your case. Failing that you can ask for an independent reviewer to look at the case, as well as going to your local Financial Ombudsman Service and eventually the civil courts.
Just because it is a bank and has a fancy title does not mean that it is always right or ethical.