Just when it seemed the reputation of the banks could sink no lower following the revelations of manipulation of the interbank lending rate at Barclays, the extent of the scandalous imposition of interest rate swap agreements (IRSAs) on small and medium-sized businesses is revealed by the Financial Services Authority.
Interest rate swaps were supposed to be a hedge against rising interest rates for business customers taking out bank loans. Thousands of these businesses were obliged by their bank to sign up to an IRSA as a condition of a loan only to find that, far from protecting them, it made them liable for escalating costs they couldn't afford. This is because most of the loans were taken out between 2005 and 2008, when the Bank of England base rate was around 5%. Interest rates were cut in a bid to help borrowers but the plunge to the historic low of 0.5% meant a rise in the rate swap repayments on many products which had not been explained, while anyone with a swap lost the benefit of low rates. Worse, when they tried to extricate themselves by paying off the loan, they faced impossibly high break fees. As The Herald has revealed, IRSAs could have added billions to business interest costs while those who sold them could earn up to £1m a year.
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