With an estimated 60,000 Fixed Rate business Loans (FRBLs) sold, this is potentially a bigger problem for the banking industry than the widespread mis-selling of standalone interest rate hedging products where there are an estimated 40,000 products sold. FRBLs have also not been included in the FCA IRHP Review Scheme and banks that sold these products are assessing mis-selling complaints separately to those interest rate hedging products in the Review Scheme.
What is a Fixed Rate Business Loan?
FRBLs are a particular type of interest rate hedging product that has been sold by the main high street banks and building societies such as Royal Bank of Scotland, Lloyds, HSBC, Barclays, Santander, Clydesdale Bank, Yorkshire Bank, Halifax, Bank of Scotland, Nationwide and West Bromwich. Rather than having the hedging product standalone or separate from the Commercial Loan Facility, FRBLs were structured so that the hedge, or interest rate derivative, was hidden within the loan. FRBLs are also commonly referred to as “Hidden Swaps” or “Embedded Swaps”.
Due to the embedded nature of these hedging products, they are currently categorised as a Commercial Loan which means that they are an unregulated product. This is potentially one of the reasons why many FRBLs are not included within the FCA IRHP Review Scheme (s.166 review).
Obligations of the Adviser or Sales Person for Fixed Rate Business Loans
- In good time, the Bank provides the Customer with appropriate, comprehensive, fair, clear and not misleading information on the features, benefits and risks associated with the FRBL
- In good time, the Bank provides the Customer with appropriate, comprehensible, fair, clear and not misleading disclosure of potential break costs of the FRBL
- The Bank had due regard to the information needs of the Customer and provided comprehensible, fair, clear and not misleading information about the features, benefits and risks of relevant alternative interest rate hedging products.
- In relation to a non-advised sale, the Bank took reasonable steps to ensure that the Customer understands the nature of the risks involved and provides the Customer with relevant Risk Warning Notice or assessed whether entering into the FRBL was appropriate for the Customer by determining whether the Customer had the necessary knowledge and experience to understand the risks involved. The Bank obtained information regarding the Customers level of education, profession or former profession and the relevant past experience of interest rate hedging products.
How was this service mis-sold?
FRBLs were sold on the basis of protecting customers from future interest rate rises; however there were many associated risks that were not fully explained to the customers leading to the possible mis-selling of these products.
- Customers were not made fully aware of what the financial impact would be when interest rates fell
- There were high exit fees associated with any cancellation of the product by the customer, sometimes as high as 40% the original loan value.
The mis-selling of FRBLs shares many similarities with those of standalone IRHPs, such as:
- Failure to ensure the customer/s fully understood the risk
- Failure to fully inform the customer/s of the associated exit costs
- Allowing “over-hedging” to occur, i.e. when the amounts and/or duration did not marry up with the underlying loans
- Allowing non-advised sales processes to turn into advice being given to the customer/s
- Allowing the rewards/incentives to be a key driver in the above ‘failing’ sales practices.
Currently, there is no clear and definite redress programme for FRBLs or associated timeframes; however the FCA has outlined a basic ‘Principles of Redress’ for customers of ‘non-compliant’ sales. The redress awarded needs to put the customer back in the position they would have been in had the breach in the regulatory requirement not have taken place. The types of redress that can be expected are:
- Full redress—putting the customer back to the original position had the sale of the FRBL not taken place. The redress needs to include all payments made by the customer, any ‘break costs’ paid and an exit from the FRBL free together with 8% compensatory interest
- Partial redress – where the bank waives any ‘break’ cost paid in an early exit of a FRBL.