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Fear loans damaged thousands of SMEs

The sale of 60,000 unregulated hidden swap loans to small businesses may have been as damaging to the economy as the mis-selling of regulated swap-related loans.

UNHAPPY: Protests have been led on behalf of SMEs by John Glare, founder of the NAB Customer Support Group
UNHAPPY: Protests have been led on behalf of SMEs by John Glare, founder of the NAB Customer Support Group

A survey by campaign group Bully-Banks, which has over 2000 SME members across the UK, indicates a parallel mis-selling scandal, with 97% of businesses reporting an adverse effect from being sold a hidden swap loan and 63% saying the effects were "serious".

Half the loans in the sample were sold by National Australia Bank and a quarter by RBS.

The Financial Conduct Authority said yesterday that its review of regulated interest rate hedging products (IHRPs) - loans linked to swaps or derivatives intended to protect against rate rises - was in its final stages after almost two years.

But the government has yet to respond to warnings from the FCA that while 40,000 IHRPs were sold from 2001 onwards, banks also sold 60,000 hidden swap loans, where a derivative was embedded within an unregulated commercial loan.

Pay-outs from the regulated swap mis-selling review have now totalled £598m to 4,573 businesses out of the 30,000 SMEs covered, and the FCA says they should complete by the end of May.

However one Scottish customer of RBS, who did not want to be named, said his firm had applied to the review in July 2012, had a testimony hearing in June 2013, and had since heard nothing from the bank.

He said: "The majority of claimants like us still haven't heard anything and more importantly have not received a single penny of redress for primary losses, let alone consequential, which could take years to settle given the damage the banks have done."

The FCA commented: "Lloyds and RBS have already taken steps to resolve the gap between their actual and projected position at the end of March, and are back on track to hit the May target."

Hidden swaps are characterised by fixed interest loans for a fixed term with very high exit costs (in some cases up to 50% of the initial loan amount).

The Bully-Banks survey reveals that 29% of the hidden swap loans it sampled were sold by the Clydesdale and 21% by its sister bank the Yorkshire, with 24% sold by RBS and smaller numbers by Lloyds, Nationwide, HSBC and HBOS.

It found that in 79% of sales the bank had warned of higher interest rates ahead, in 85% the bank exerted pressure to opt for a fix rate, in 58% no alternative product was offered and in 44% the SME customer "either did not receive or does not recall receiving product literature describing the hidden swap".

In 97% of cases the potentially large breakage costs (25% of the loan in a third of sales) were neither properly explained nor illustrated - a key indicator of mis-selling.

Over two-thirds of SMEs said their main problem was the breakage cost, with 52% saying it had prevented them from rebanking and 48% unable to switch to a variable rate loan.

Respondents to the survey included property landlords (58%) followed by hospitality businesses (18%), then farming, retail, service industry, healthcare and manufacturing SMEs. Over three-quarters had a sub-£1m turnover.

In 78% of cases businesses have made a formal complaint to their bank but only 40% have complained to the Financial Ombudsman Service, deterred by the £150,000 ceiling on pay-outs.

FOS is known to have a pipeline of hidden swap cases awaiting final adjudication, while in at least one case known to The Herald a bank is using the ombudsman's £150,000 limit to exert pressure for a less favourable settlement, despite a provisional ruling against the bank.

The Treasury Select Committee is examining the hidden swaps issue as part of its SME banking inquiry Scottish LibDem MP John Thurso has lodged an early day motion calling for regulation and redress,

A year ago The Herald revealed Clydesdale's most widely-sold fixed rate tailored business loans were damaging SMEs but would fall outside the banking review.

The bank denied the loans contained hidden swaps, but FCA chief executive Martin Wheatley told a minister that such loans had "exactly the same repayment features and exactly the same (potentially large) break costs that the customer would have faced had he taken out a loan and a standalone IHRP".

Bully-Banks chairman Jeremy Roe said the government must now give the FCA "power to investigate the sale of hidden swaps with a view to establishing a scheme to review and provide redress to SMEs".

Earlier this week Barclays reached an out of court settlement with Guardian Care Homes over the alleged mis-sale of IHRPs, an action widened when Barclays admitted its role in the manipulation of Libor rates. Guardian had claimed the rates on its swap-related loan were never valid as they had been priced using a potentially rigged interest rate.

Some 10,000 larger businesses judged "sophisticated" are already excluded from the banks' review, leaving litigation as their only option, despite mis-selling being found in 96% of cases.

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