Bloomberg News

Rate Swaps a Hedge Too Far for U.K. Fish Fryers, Dentists

April 24, 2012

Tetbury high street, Tetbury, U.K. Photographer: Matt Cardy/Getty Images

Tetbury high street, Tetbury, U.K. Photographer: Matt Cardy/Getty Images

David MacGregor, owner of the Winking Willy’s fish and chip shop in the British seaside resort of Scarborough, never wanted to make a complex bet on interest rates when he took out a loan with HSBC Holdings Plc. (HSBA)

“I fry fish and chips,” he said in a phone interview. “I don’t know anything about international derivatives.”

MacGregor sued the lender after taking the advice of his bank manager in 2007 and buying a so-called collar agreement, a swap to protect against rising rates, according to court papers. The move turned costly when interest rates fell and the price for MacGregor to keep up his end of the swap went from 169 pounds ($273) a month to 3,000 pounds a month by March 2009, on top of loan repayments of about 7,000 pounds.

If he hadn’t reached an out-of-court settlement with HSBC after a trial last year, MacGregor said he would have lost his business. Hundreds of other firms, ranging from dentists to elderly care homes, have also sued, claiming banks sold them interest-rate swaps they didn’t understand or need. About 40 lawmakers held a closed-door meeting in Westminster yesterday to discuss what action should be taken over the derivatives.

The claims against lenders including London-based HSBC, Barclays Plc (BARC), Lloyds Banking Group Plc (LLOY) and Royal Bank of Scotland Group Plc (RBS) may turn into another costly scandal for U.K. banks still paying back customers wrongly sold payment- protection insurance on personal loans. Sixteen financial firms paid 1.9 billion pounds ($3 billion) on PPI claims in 2011, according to the U.K. Financial Services Authority, which carried out a six-year probe into the banks’ conduct.

Hundreds of Cases

Guto Bebb, the Member of Parliament for Aberconwy in Wales who organized the lawmaker meeting, said in a phone interview he knows of several hundred cases involving the swaps.

“Those people have not been aware of the fact that they were buying a risky product which would result in them having to pay penalties,” Bebb said.

The Treasury Select Committee, the parliamentary body that examines financial matters, should hold a public hearing on the improper sale of interest-rate swaps, he said.

HSBC declined to comment on the suit involving Winking Willy’s specifically.

“We strive to meet our customers’ needs and believe we have extensive processes to ensure our customers are provided with appropriate products,” the bank said in an e-mailed statement.

Rate swaps are contracts that convert floating-rate debt into fixed-rate debt, or vice versa. They are supposed to keep payments within a specific range. When interest rates fall, for example, customers might pay less interest on a loan to balance out the higher cost of the swap.

FSA Interest

“Interest-rate hedges and forward foreign-exchange contracts are useful tools,” the British Bankers’ Association said. “Customers should seek suitable independent advice if they are not confident about the nature of the contract they are entering into.”

The FSA is examining the claims and has asked the banks to provide detailed information about how the products were sold. It will take action “if we find widespread evidence of breaches or mis-selling,” Joseph Eyre, an agency spokesman, said in an e-mail.

“The banks were very quick to extol the benefits of fixing” interest rates, said Max Hotham, an attorney at Enyo Law whose clients include a dentist and shop owners. “What they didn’t do is explain what would happen if base rates fell.”

The Bank of England has kept its benchmark interest rate at a record low of 0.5 percent since March 2009.

20-Year Swaps

Some banks also sold 20-year swaps paired with five-year loans, or swaps covering 2 million pounds of debt when only 1 million pounds were borrowed, Hotham said. He estimates there could be as many as 5,000 claims against banks over interest- rate derivatives, totaling as much as 2.5 billion pounds.

“Barclays is satisfied that it provides sufficient information to enable a client to make an informed, commercial decision about the products it offers,” the bank said in an e- mailed statement. A very high percentage of complaints made to the Financial Ombudsman Service, which settles disputes between companies and consumers, were decided in the bank’s favor, it said. The bank’s record on ombudsman complaints couldn’t immediately be verified.

While disputed swaps contracts haven’t yet attracted much attention in the U.K., they have sparked controversy in the U.S. and across continental Europe.

Milan to Alabama

Municipal governments from Milan in Italy to Jefferson County, Alabama, bought swaps from firms such as JPMorgan Chase & Co. and Deutsche Bank AG. Such derivatives have cost Italian taxpayers more than $1.5 billion, according to the country’s central bank, and U.S. taxpayers about $4 billion by 2010, according to data compiled by Bloomberg.

Lloyds said in a statement it hadn’t sold a large number of swaps, as most customers preferred fixed-rate loans. The bank reviews each sale to see if the product is suitable and customers are given information about the risks and benefits of the securities, it said.

In one of the biggest swaps lawsuits yet filed in the U.K., the owners of Guardian Care Homes Ltd. sued Barclays for about 12 million pounds in a Bristol Court yesterday over swaps sold on two loans in 2007 and 2008.

Gary Hartland, a director at the company that looks after 900 elderly residents, said the bank pressured him into a hedging agreement he didn’t want.

“They said it was a condition of the loan and a must- have,” Hartland said in a phone interview.

12 Million Pounds

The swaps, billed as a money-saver, have so far cost the company about 12 million pounds, Hartland claims. Under the contract, he will have to keep making payments for at least 10 years after both loans have been paid off. Guardian wants its money back and for the swaps to end without having to pay a break fee.

Barclays said it couldn’t comment on the case because of client confidentiality.

Hartland’s lawyer Sinead O’Callaghan, a partner at Cooke Young & Keidan, said the banks had so far settled all claims, except MacGregor’s suit against HSBC, before trial because they are keen to avoid a ruling against their conduct.

“It is quite clear that the banks know they have a major vulnerability and are struggling to design strategies to deal with these claims,” she said in an e-mailed statement.

To contact the reporter on this story: Kit Chellel in London at cchellel@bloomberg.net

To contact the editor responsible for this story: Anthony Aarons at aaarons@bloomberg.net


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