Vedanta Hedging provided the initial material to the Telegraph, which has led directly to their national campaign on this issue of interest rate swap mis-selling to SMEs.
In the latest article (see below for link), Harry Wilson writes how Barclays have been offering to replace a structured collar with a simple swap. The FSA is concerned that the Bank is pre-judging the outcome of the Independent Review.
As we have stated right from the 29th June (when we were interviewed live on Sky News to discuss the FSA initial findings) there is a long way to go in providing appropriate redress to SMEs.
Very few people understand the complexities of this issue. We have consistently said that this is not just about the structured / complex hedging products that the Banks have held their hands up to, and agreed to review.
By replacing a complex structured collar with say a simple fixed rate loan, or a simple interest rate swap, the Bank may feel that it is keeping the FSA happy, since it is removing the complex product the SME had previously.
However, if the Bank replaces the structured collar with an interest rate swap that was available at the time, the actual current cash-flow cost of that replacement swap will be very similar for the SME, at around a fixed rate of 5.00 – 6.00%. This means that the break cost will also be very similar (assuming the same length of the swap and other parameters remain constant).
Hence, the SME may have a simpler product at the end of the review, but if the cash-flow impact and break cost are largely the same as they were previously, the SME may not feel like they have actually achieved anything! If the Bank did not explain the risks of falling interest rates when selling a structured collar, it is unlikely to have done so for a simple interest rate swap either.
Callable swaps (where the Bank can cancel early), Extendible Swaps, Collars (as opposed to structured collars) and simple Swaps were also very common products to SMEs, and they all involve substantial risks if not explained to the SME in a careful manner as set out by the FSA.
That is why it is essential that to be able to achieve truly effective redress, an SME must obtain professional legal advice (from a credible solicitor firm as opposed to a firm just trying to jump on the bandwagon) and obtain the professional advice from an FSA Authorised Hedging Consultancy that understands the intricate nature of these products.
Link to Telegraph article