Thousands of independent hoteliers, restaurateurs and publicans around the country are seeing their finances stretched to the limit this Christmas, as they struggle to pay the bills on complex interest rate hedging products that many claim were mis-sold to them by banks.
Although the Financial Services Authority (FSA) launched a review into interest rate hedging products in June this year, there is growing concern that it and the 11 banks involved are not acting quickly enough to offer redress to businesses.
Banks began selling interest rate hedging products back in 2001 (for more on what these products do, see below) and the FSA estimates they have sold 28,000 since then, of varying degrees of complexity. Meanwhile campaign group Bully-Banks, which is formed of 850 small- and medium-sized businesses, all of whom claim to have been mis-sold an interest rate swap agreement by their banks, reckons that around 5,000 hospitality businesses could have been affected.
In some cases, products were designed so that banks covered the cost of increased payments in the event of interest rate rises while the customer had to pay the bank in the event that rates fell. Most customers bought the products before the Bank of England base rate dropped to 0.5% in March 2009. As a result, many have seen their payments to banks rise, even though interest rates themselves have fallen.
Daniel Fallows, a director at Seneca Banking Consultants, claims that most independent businesses ought never to have been sold the products in the first place, since they were "non-sophisticated" customers who need not necessarily have been sold complex investment products.
"I have got 40 of these cases and in many instances it is as clear as day that the bank put its own commercial gain before the suitability of the customer," he said.
Even if customers subsequently realised that the hedging products were not right for them, most struggle to raise the cash required to pay the fees to break out of the arrangement, which in some cases can amount to up to 20% of the original loan, according to Fallows.
While the FSA determined in June that there were "serious failings" in the sale of interest rate hedging products to some businesses and announced a review, that review has yet to see any businesses awarded compensation.
Announcing the review's launch, the FSA said that banks would provide redress for those customers that bought the most complex products, and also got banks to agree to stop marketing interest rate structured collars. Meanwhile it set up around 50 test cases as part of a pilot scheme, with the 11 banks involved, to help determine compensation structures and a timescale for reviewing cases.
That pilot process was originally scheduled to come to an end in October this year, but has since been extended until Christmas, with the wheels set to start turning on the full review in early 2013. That's too long in Fallows' estimation: "The FSA just hasn't gone far enough," he said. "The pilot scheme could take a long time. The banks seem to just be sitting on their hands now and are awaiting further guidance from the FSA. That is just not practical because some of our clients simply won't be here next year," he said.
That fear was echoed by Andy Green, a spokesman for Bully-Banks. "Since June there has not been one case resolved," he said. "We are told banks are solving the problem but the reality is they are being extremely tardy and as a result there are businesses hanging by their fingertips."
But Guto Bebb, the Conservative MP for Aberconwy who set up an all-party Parliamentary group to tackle the issue after several hotels in his constituency highlighted their problems with interest rate hedging products, said some delay was understandable.
"I do feel there is an argument in favour of some of the delays, not that it is justified in relation to the ways in which small businesses have been suffering, but to get the pilots right will ultimately save time. If the pilot is working to the satisfaction of both the businesses and the FSA, then the roll out will happen much quicker," he said.
The FSA also defended the delays. "We spent a lot of time post June to develop principles for a review to take place. All we had at the very start was a broad agreement that the banks would review their sales," said a spokesman.
"The important thing is getting the right process. We need to be confident that when we say to the banks you can go ahead and carry out these reviews that the right process is in place."
Time running out
In the meantime, the business owners who feel they were mis-sold interest rate hedging products are advised to seek legal advice, particularly those who were sold products in 2006 / 2007, where the sands of time are running out should business owners feel they want to pursue litigation.
That's because there is a six-year statute of limitations on taking legal action in cases of this type, according to Bebb. If a business were to wait until January to enter the FSA review but had its case rejected, it would likely be too late to take any other form of action, he warned.
"If they are coming up to that six-year point they need to take advice. Even though they should go into that FSA scheme, they need to protect their ability to take legal action," he said.
Complaints to the Financial Ombudsman Service (FOS) have also resulted in pay-outs. Two cases where the ombudsman initially found in favour of the banks have recently been overturned, resulting in redress worth hundreds of thousands of pounds. In one case, involving an unnamed hotelier known only as "Family W", the FOS has recommended that its bank, "Bank E", pays compensation reported to be in excess of £500,000.
Once the FSA-led review into these products starts moving in earnest, such pay-outs may well end up being more common.
"We think this has the potential to be bigger than the PPI scandal because of the issue of consequential loss," said Fallows. "It isn't going to be enough for the banks to simply pay back to clients the additional amounts of interest incurred. What about those clients that have gone into administration as a result of these hedging products?"
If your business has suffered as a result of taking out an interest rate hedging product and you would like to share your story, contact: email@example.com.
Case study - Peter Baister, Glenburn hotel, Windermere
Peter and Jackie Baister took on a £1.125m mortgage in 2008 with the Royal Bank of Scotland when they bought the Glenburn hotel in Windermere. The couple agreed to take a 10-year amortising rate swap to protect against rising interest rates. They noticed little out of the ordinary in the first year, because they had taken a year of interest only mortgage. But after that first year, they found themselves paying huge quarterly payments. Baister said that the £92,000 a year they were expecting to pay on the mortgage became more like £150,000 with the rate swap payments, which increased as interest rates fell. "They gave us a talk about these rate swaps and the different options open to us but to be quite honest it flew over our heads," he said. The upshot has been that plans to upgrade the hotel have been put on hold.
"It has had a devastating effect on the business. At this moment in time we are right on the brink. We need to put somewhere in the region of £40,000 into the business to get us through the winter," he said.
Peter has tried, unsuccessfully, to take his case to the Financial Ombudsman Service. He has not accepted the decision, after legal advice, and hopes to have his case reviewed under the FSA scheme when it begins.
RBS was unavailable to comment on the Baisters' case.
case study - anonymous hotelier
"Having spent some 30 years in the hotel corporate sector I decided to set up my own hotel company. In the late 1990s with the help of a major bank, the company purchased its first hotel and by 2007 had managed to establish a small regional company of some six properties," said a hotelier who did not wish to be named.
- In 2009 the company requested that the bank assist by consolidating its loans into one loan for all its properties. The company was approached by the bank's salesman and recommended that it take out an Interest Rate Swap Agreement. It was indicated that this would protect the company against any increase in Libor rates. "It seemed a very complicated deal at the time and nothing was mentioned as to what would happen if rates fell, any commission the bank and relationship manager would gain, or the costs of cancelling such an agreement," said the hotelier.
Although interest rates soon dropped to their lowest point, the company was still obliged to make higher interest payments. With the continued fall in sales within the industry, by 2011 the company was not able to continue trading and was forced by the bank to go into administration.
What is an interest rate hedging product?
The purpose of an interest rate hedging product is to enable the customer to manage fluctuations in interest rates. These products are typically separate to a loan.
There are four broad categories of interest rate hedging products sold:
1. Swaps, which enable customers to 'fix' their interest rate.
2. Caps, which place a limit on any interest rate rises.
3. Collars, which enable customers to limit interest rate fluctuations to within a simple range.
4. Structured collars, which enable customers to limit interest rate fluctuations to within a specified range, but involve arrangements where, if the reference interest rate falls below the bottom of the range, the interest rate payable by the customer may increase above the bottom of the range.
By Neil Gerrard
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