Many firms, both large and small routinely use financial hedging, and when used appropriately, they can be a very effective risk management tool. However, Banks make staggering amounts of profits from hedging that are actually ‘hidden’ from their clients since there is often no initial ‘fee’ to be paid for the hedging. These ‘hidden’ profits are from the excessively large profit margins that Banks make on the day they sell the hedging instrument to the client. In fact, the ‘salespeople’ who work in the hedging departments could quite easily make over £250-£500k p.a. which is many multiples of what Relationship Managers typically earn. Too often Banks ‘advise’ clients to take on more complex hedging, or for a greater amount or term than required. Due to the recent febrile environment, Banks have struggled to make profits from traditional lending, thereby forcing them to rely on ever increasing profits from selling these hedging instruments and making excessive margins on these products. Just how widespread is this problem? “We understand tens, and possibly hundreds, of thousands of these products have been sold by High Street banks, mainly in the period 2006 to 2008,” says one lawyer who specializes in cases against Banks.
The worrying aspect of this is that until now there has not been any independent advice available to these firms. This led Abhishek Sachdev, who was an Associate Director at Lloyds Bank for 8 years, to set up his independent advisory firm, Vedanta Hedging. Vedanta Hedging is fully authorised by the FSA to advise clients on hedging. Mr.Sachdev has recently been interviewed by the BBC on the matter, given the growing number of accusations that are now emerging regarding Banks mis-selling to businesses.
Vedanta Hedging has invested in the same highly sophisticated market pricing software that the UK Banks have, meaning that they can price any hedging instrument in real-time. This allows them to negotiate better and potentially lower hedging terms for clients, saving them tens of thousands of pounds. In its short birth, Vedanta Hedging has already advised dozens of Hotel Groups, Nursing Home owners and Travel companies on the most appropriate hedging solution for their business (rather than just what the Bank may show the client) as well as helping them reduce the cost of their hedging. Vedanta works with clients either by negotiating directly with the Banks, or providing advice and pricing information to clients. Recently, the company saved a Nursing Home group over £40k on their hedging costs! Clearly the Banks do have to make a profit, but it shouldn’t be so excessive as is so often the case. Mr.Sachdev feels that there is very little awareness of being able to negotiate with Banks on hedging – so many businesses are too trusting of their Bank and Relationship Manager, and hence leave themselves open to be taken advantage of. The kind of clients that Vedanta can help are any businesses turning over between £1m – £500m, that have more than £1m of Bank borrowing, or purchase more than £1m of currency per annum.
Unfortunately, there are now many cases coming to light where Bank’s may have taken advantage of firms who did not understand these complex hedging products. The risks of these products were rarely discussed in detail, and now that interest rates have fallen to such low levels, firms are faced with crippling costs to exit these products. In fact, despite such low interest rates, many firms are shocked to discover that they are not able to benefit due to how some of these hedges work. Banks often insisted that clients enter into these hedging products, or they would not be able to receive their loans. A cynic may argue that it was the tremendous profitability of these products that drove this Banking behaviour, rather than a genuine concern by a Relationship Manager for his client’s risks.
Vedanta Hedging has been inundated with stories of hedging that clients feel may have been ‘mis-sold’ to them. Vedanta carefully reviews all aspects of the advice and sales process versus the FSA rules, and also use their special pricing software to expose just how much profit the Bank made at the time of selling the hedge. The aim is to try to use this specialist advice to negotiate with Banks, rather than involving solicitors which can sour the Banking relationship.
Saturday 21 January 2012