An exposé into interest rate swaps products caught my attention earlier this week.
Sky News reported it had uncovered evidence of products being sold by banks to guard against interest rate rises on loan repayments, but which require customers to pay fees to the bank when rates fall.
Sky explained that the products, known as swaps, worked on the basis that if rates rise the bank would cover the increase in repayments. But if rates fall, the customer has to pay the bank.
Former HBOS and Lloyds TSB employee James Ducker told Sky: “We were selling protection against rates increasing with a lack of consideration if rates fell.
“The bank was protected more than the customer and it was normal practice to emphasise the rewards and de-emphasise the risks.”
He said staff were under huge pressure to sell these products.
Ducker added: “If rates go up, the bank wins. If rates go down, the bank wins. Was it ever explained to the customer in that way? No.”
Sky also spoke to two customers who felt they had been misled by the banks about the risks of these products.
Money Marketing began to look into it. Two phone calls and a quick google search establish that Ducker is the man behind Benchmark Treasury Pricing, who on leaving Lloyds TSB and HBOS set up a company which among its services offers… interest rate swaps.
Ducker’s company also offers to help customers who have hedging disputes with banks, to assess whether they have a viable complaint.
Interest rate swaps are less insurance, which offers a payout in the event of loss, and more of a hedge, where customers bet on rates going either up or down.
Customers with interest rate swaps that are facing charges would have bought the products before interest rates sank to the unprecedented low of 0.5 per cent in March 2009.
In addition to the payments in the event of rates falling, if customers choose to cancel the contract, a ‘break cost’ is applied. In a low interest rate environment the break cost is higher.
The products are often sold to larger corporate firms who want to hedge their risk, but have also been sold to small and medium-sized enterprises.
Interest rate swaps are regulated by the FSA but are aimed at professional investors, meaning that different regulatory rules, for example on disclosure, apply compared to the rules when dealing with retail customers.
An FSA spokeswoman says: “In selling swaps banks are under an obligation to think about whether the sorts of products they are selling match the financial needs of those buying them, and provide product information in a comprehensible way.”
The Financial Ombudsman Service says it sees a very a small number of complaints about these products. Decisions in these cases are quite evenly split between instances where the product was suitable, but complaints are also upheld where consumers did not understand how the product worked.
In response to the Sky article, banks say that sales of these products are subject to robust reviews processes to ensure they are suitable. Multiple client meetings and product presentations can be involved, and banks say it is clear that this process comes across as a sales presentation, rather than advice.
Money Marketing understands the number of interest rate swaps actually sold to corporate customers is extremely low, although this is no excuse for poor advice.
A spokesman for Lloyds Banking Group says: “Interest rates are at a 300-year low, and no-one saw that coming. The market has gone against the position these customers have taken. And we understand that is a concern for our customers.
“This does not mean that the products were missold or that customers did not understand the products.”
Lloyds adds it does not incentivise staff to sell more complex products.
So a murky picture begins to emerge. Is this a case of one man engineering a story to serve his own purposes? Perhaps customers knew exactly what they were getting into but resent being caught out by the fall in interest rates? Or are there potentially real issues with the way these complicated products are being explained to the people buying them?
Natalie Holt is the regulation reporter at Money Marketing – you can follow her on Twitter here