Do UK banks face another mis-selling scandal?

Are Britain's banks on the cusp of another mis-selling scandal?


In April, the big High Street banks were ordered to pay out billions of pound in compensation to borrowers whom they pushed into buying unnecessary payment protection insurance (PPI).

Now accusations are emerging that the banks adopted similar tactics against their business clients.

Loans to small and medium-sized businesses - so-called SMEs - are critical for the UK's economic recovery. So much so, that the government has set lending targets for the banks.

But in recent years some businesses have found that their loans came with an important string attached: banks told borrowers that they must "hedge" their interest rate risk.

Flipside

"This thing is round our neck and bringing us down," says publican Roy Myers.In 2005, he asked his bank, HSBC, for a mortgage to buy up the freehold on one of three pubs he runs in Redcar, in the north-east of England.

That was back in the halcyon days of the boom, when lenders were mainly worried about rising interest rates.

So the bank told him he would have to take out a hedge with its investment banking unit.

The hedge turned out to be a complicated financial contract known as an "interest rate swap" - something that is normally traded between financial institutions and much bigger corporations.

"We didn't understand it at the time," he says. "They said it was a precaution against interest rates rising. They never looked at the flipside."

As the economy entered recession in 2008-09, the Bank of England slashed interest rates from 5.75% to 0.5%, in order to help out borrowers like Roy.

“But with his interest rate fixed by the "hedge", he saw none of the benefit.

And when he asked HSBC to let him repay the remaining £770,000 of his loan, he was told he would have to pay £173,000 to cancel the swap.

From the bank's point of view, the size of the charge is understandable.

After all, the "hedge" requires Mr Myers to pay a much higher interest rate than the bank would be able to relend the money at in the current market.

But the pub-owner complains that his lender never properly explained the risk that he could end up stuck in the hedge, and therefore his loan.

HSBC declined to comment on his case, but told the BBC that it "provides clients with appropriate products according to their needs, knowledge and experience as well as a full explanation of the products and relevant risks".
'Strait-jacket'

Another borrower says that he actually did foresee the risk of being trapped liked this. But his bank (not HSBC) still wouldn't give him any other option.

The businessman - who does not wish to be named because he plans to take legal action against his lender - runs a string of care homes for the elderly.

He needed a loan last year to build new homes, and was told by his bank that he was required to take out a hedge with them.

"We'd never seen anything like it," he says. "It was all like gobbledegook.

bbc.co.uk