Fixed Rate Loans
Has your business ever been sold a Fixed Rate Loan or Tailored Business Loan?
In the period from 2005 to 2015 thousands of Commercial Fixed Rate Loans were granted with hidden breakage costs. These types of loans are referred to as Hidden Swaps (or sometimes Embedded Swaps).
If you have, or had, one of these products, you may have been mis-sold and be able to claim back the interest you have overpaid. Even if you are no longer with the bank you can still make a claim.
For a £2 million loan over 5 years you could be owed £600,000! If you have paid high breakage fees, you may be able to get them back too. Here’s why.
Were potential breakage costs properly explained to you?
Did you know that fixed-rate business loans often contain breakage clauses which can mean breakage costs of up to 50% of the loan? When customers try to exit the loan, either for refinancing or changing to a cheaper rate, or because they are forced to do so by their bank, they are faced with these often hidden costs.
The breakage cost is calculated by reference to the prevailing interest rate as well as predictions about interest rate movements at the time of termination. Detailed explanations should have been given of their effect and the potential risk of very large break costs in the event that interest rates dropped.
Most people’s previous experience with fixed-rate lending was from residential or buy-to-let mortgages where breakage costs are pre-defined at a few percent of the loan. They had no reason to believe that these business loans were any different. Most say they would never have signed up to them if they had known they were so dangerous.
If detailed explanations about breakage costs were not given, and you would not have taken the loan if you had been given them, you have a case for mis-selling.
Did you receive misleading advice about interest rates?
Many customers report that their lender recommended they changed from a variable-rate loan to a fixed-rate loan. Many say they were told that interest rates were going to rise and advised to take the product. Bank employees were not allowed to give interest rate advice on these sales.
Employees were incentivised to sell these products to you because they received enormous commissions which were paid to them in full straight after the sale. If you received interest rate advice it improves your case for mis-selling.
This came about simply because of the banks’ short-term selfishness, greed and abuse of trust. The most disturbing aspect is that they saddled customers with huge breakage cost liabilities without their knowledge. The individual bank staff who made large bonuses by selling these unsuitable products clearly had no concern for the long-term effects on the SME customers.
How widespread is the problem, how many Fixed Rate Loans have been sold?
The Financial Conduct Authority (FCA) has confirmed that over 69,000 Fixed Rate Loans were sold to customers across the UK. Lenders gave them different names, e.g. Tailored Business Loans (Clydesdale/Yorkshire Bank, owned by National Australia Bank), Treasury Loans (Lloyds Bank), Sterling Fixed Rate Loans (Royal Bank of Scotland). Of course many other UK Banks sold them too (HBOS, NatWest, Barclays, Ulster, Allied Irish, Santander, Handelsbanken) as did several building societies including the Nationwide.
How have Fixed Rate Loans affected businesses?
Some businesses have been forced to pay enormous break fees which have crippled them. In some cases this has led to insolvency or bankruptcy. Others have been handcuffed by the threat of breakage costs they could not afford so have been stuck paying high fixed interest rates during a recession when their competitors enjoyed low variable rates. Many businesses have struggled to thrive and stagnated, because they have been unable to escape their completely inflexible loan.
Even if the inflexibility and high interest rates have only had a minimal impact on a business the fundamental problem of mis-selling is no different. Many of these loans have 10, 20 or even 30-year terms. If at any point during those long terms the business need to break the loan, the bomb they are carrying around in the form of breakage costs will go off.
Bully-Banks has a dedicated Hidden Swaps Team who are all victims themselves and understand the issue. They are working with Government, the Financial Conduct Authority (FCA), the Financial Ombudsman Service (FOS) and the banks, as well as supporting individual members with Hidden Swaps. Bully-Banks was a key participant in the recent Treasury Select Committee (TSC) on SME lending. Hidden Swaps was one of the top agenda items and preliminary data from our survey showed compelling evidence for widespread mis-selling.
Recently, the FCA Review and Redress Scheme for the mis-selling of standalone IRHPs to SMEs found that 96% of the sales were “non-compliant” i.e. did not meet the regulatory requirements and over 80% of the sales were substantially mis-sold and resulted in the “tear up” of the product. Thousands of customers are now receiving large redress payments. Bully-Banks aims to secure a similar Review and Redress Scheme for victims of Hidden Swaps mis-selling.
The existing FCA scheme was possible because IRHPs are regulated products, and as such their sale falls under the remit of the FCA. The FCA currently claims that Hidden Swaps are unregulated but Bully-Banks believes they are wrong, and are challenging their legal opinion. Regardless of the regulatory status of Hidden Swaps Bully-Banks believes that this is a ‘conduct issue’ which in itself should be the basis of a review.
Bully-Banks is also raising awareness of Hidden Swaps nationally and working with MPs with the aim of putting pressure on the Treasury and FCA to deal with this issue.
What is my chance of successfully making a claim and getting my money back for my mis-sold loan?
Bully-Banks is optimistic. We are aware of many cases of Hidden Swaps mis-selling which have been settled out of court and we also know that there are many FOS decisions in favour of customers. Some banks are starting to engage and settle with customers directly. Of course, each case is individual. It is up to you to educate yourself on these issues and put forward your best case.