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Vedanta Hedging Interviewed by Sky News on Interest Rate Swap Mis-Selling

Abhishek Sachdev, Managing Director of hedging advice firm Vedanta Hedging says, “Bank clients were not given a true picture of the downsides and the risks. They had an unbalanced view of the product. In the worst cases hedges were bigger and longer than the loans. Banks even encouraged hedging on overdrafts, which is ridiculous.” He says he has examined 100 cases in last 6 months involving every major bank. He said, “In terms of scale, tens of thousands of businesses have been sold these products. Its small businesses you are hearing about now, but large businesses also had these products including FTSE 250 companies who don’t want to be named due to reputational issues. This could cost the banks much more than PPI.” Mr. Sachdev, who is FSA Authorised, adds that “Hedging is a useful tool when used as part of a careful, considered risk management strategy. However, banks take advantage of clients who do not understand pricing and underlying complexities of these products.

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There’s growing evidence that large number of firms are lining up to take legal action against the banks: small and medium-sized businesses, farmers, hoteliers, pub owners and property investors. What could be the next big banking scandal is brewing, and the stakes are vast.

The allegation is that banks mis-sold businesses interest rate protection, a product called “Swaps.” They were supposed to protect companies from upward trends in interest rates, but claimants say they were not made aware of significant costs attached if rates fell. It’s been described as a “casino product, sold as protection.”

While the banks profited from these agreements, thousands of companies have found themselves facing huge fees associated with the Swaps and enormous breakage costs if they want to get out of the deal. Many have gone bankrupt. Some have already taken legal action.

Last time I blogged on this subject in December, a couple who owned chip shop in Leeds was taking on HSBC. Many companies got in touch wanting to know the result. It was settled out of court; the secretive deal estimated at around £200,000 in the chippy’s favour.

But since then another case I was following involving amounts around the 15 million mark was also settled out of court. This time it was Lloyds that finally submitted to a care home company called Wingate Associates. The company said it was satisfied with the deal but is now turning its attention to a product sold by another bank. It is filing papers against Barclays for claims to the tune of £36 million.

When we first investigated this issue last August we spoke to a former Hbos and Lloyds TSB employee James Ducker who claimed banks flouted sales guidelines putting profits before customers’ interests.

Mr Ducker told Sky News: “We were selling protection against rates increasing with a lack of consideration for what would happen 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.”

It wasn’t until after the Daily Telegraph reported on Swaps this weekend that the Treasury offered to examine the issue, stating: “We will review this issue closely, alongside the FSA and the Financial Ombudsman Service, to ensure that businesses have been sold these products in a clear and understandable way.”

In the meantime momentum is building for more legal challenges. James Dean, Managing Director of advisory service Legal Plus in Bolton, says Swaps cases are beginning to flood in. He has reviewed over 200 cases in the last six months. Mr Dean told me he’d seen “every variable of what is often a very dirty, nasty product.”

So far it’s only the smaller legal firms taking on the banks, “Larger solicitors tend to claim a conflict of interest,” one Swaps customer told me.

Abhishek Sachdev, Managing Director of hedging advice firm Vedanta Hedging says, “Bank clients were not given a true picture of the downsides and the risks. They had an unbalanced view of the product. In the worst cases hedges were bigger and longer than the loans. Banks even encouraged hedging on overdrafts, which is ridiculous.”

He says he has examined 100 cases in last 6 months involving every major bank. He said, “In terms of scale, tens of thousands of businesses have been sold these products. Its small businesses you are hearing about now, but large businesses also had these products including FTSE 250 companies who don’t want to be named due to reputational issues. This could cost the banks much more than PPI.” Mr Sachdev, who is FSA Authorised, adds that “Hedging is a useful tool when used as part of a careful, considered risk management strategy. However, banks take advantage of clients who do not understand pricing and underlying complexities of these products.”

The banks continue to insist that clients were given sufficient information about the products to make an informed decision. Lloyds Bank wouldn’t comment on the settlement with Wingate but in a statement told me: “Interest Rate swap products are regulated and all swap trades are independently reviewed by the risk team to assess whether the product is suitable and appropriate for the customer and each customer is given a product profile, setting out the risks and benefits associated with the product before they buy.”

Sky News Blog
15 March 2012

Nadia Patel

Nadia has a degree in Business Management and a Diploma for Financial Advisers (Level 4). She has ten years of experience in financial services. This includes FSA regulated adviser roles in HSBC, Halifax and Nationwide. As senior manager at Vedanta Nadia is responsible for managing the office, client contact and marketing for the business.

Nadia Patel

Nadia has a degree in Business Management and a Diploma for Financial Advisers (Level 4). She has ten years of experience in financial services. This includes FSA regulated adviser roles in HSBC, Halifax and Nationwide. As senior manager at Vedanta Nadia is responsible for managing the office, client contact and marketing for the business.