The Financial Ombudsman Service has provisionally upheld two complaints about unsuitable bank advice which recommended interest rate swaps without explaining the substantial exit costs involved.
The FOS has published provisional decisions on two interest rate swap complaints. None of the parties are named in either decision.
The first complaint relates to the sale of an interest rate swap by “Bank E” to “the W family” in early 2007. The family run a small hotel business and took out an initial £4.2m business loan to buy a new hotel. The loan would decrease to £2.2m once an existing hotel owned by the family had been sold.
At around the same time a separate agreement was taken out for an interest rate swap for 15 years, with an initial two year discounted rate.
In 2009 the net effective pay rate of the swap increased from 4.38 per cent to 5.95 per cent. The family discussed cancelling the swap, at which point they were told the “break cost” would be around £542,000.
FOS ombudsman Tony Boorman (pictured) says the swap was a “one-sided deal” as the bank was allowed to terminate the deal if rates rose, and if rates fell the family would effectively be tied into the swap through high cancellation charges.
Boorman notes that key documents were sent by the bank and signed after the transaction took place. He says documents contradicted each other about whether advice was being given, but ruled in this case advice had been given and was unsuitable.
He says: “The swap assumed a 15-year life and in present circumstances imposes an almost insurmountable burden on the family, effectively eradicating any room for financial manoeuvre that it might otherwise have had.”
The second complaint relates to “Business H”, an offshoot of a media company which acted as a landlord for the media company’s offices. In February 2007 the business discussed a business loan of £356,000 on a capital and interest basis, to refinance existing debts of £275,000 and provide funds to renovate the building it owned.
The business was sold a base rate collar with a 20-year term which capped payments at 7.5 per cent with payments not falling below a “floor” of 6.75 per cent.
In 2009 the business enquired about breaking the collar, and was told “you would have to have five degrees in maths” to understand the break costs. The business was eventually told break costs for the floor part of the product alone would be between £35,500 and £48,000.
Boorman, who was also the ombudsman for the second case, says base rate collars were required on loans where the loan to value ration was over 70 per cent. But the collar was taken out despite a valuation of the property which pushed the LTV down to around 45 per cent.
Boorman judged the bank had given unsuitable advice.
In both cases, Boorman says the bank should work with the businesses to agree how an award should be calculated. Ahead of a final decision he says where the award would be above the £100,000 FOS award limit, he is minded to recommend that both banks settle any additional amounts in full.
Evolve Financial Planning director Jason Witcombe says: “There is nothing intrinsically wrong with exit penalties as long as they are very clearly explained. If at outset it is not easy to quantify what the exit penalty would be then that is clearly wrong.”