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Hedging your bets: Interest rate swaps - property's worst nightmare By: Steve Bloor, Managing Director, The IFR Group

Steve Bloor, MD, IFR Group

Approximately a third of the enquiries we get about interest rate swaps are from firms in the property sector, indicating that these businesses were aggressively targeted by banks. Why? It may have been due to the fact that banks were nervous about lending to the property sector, particularly around the time Lehman Brothers collapsed, which had wide-reaching ramifications on the property market.

When interest rates looked set to rise, many developers looking for financing were subject to banks making it a condition of their loan that they enter into a hedge arrangement to mitigate the risk of interest rates rising. The hedges were sold on the basis that interest rates could rise and property values and rental income could fall. This situation has left many in the property industry lumbered with financial products that were not properly assessed as suitable for their business.

Some companies are now arguing that they were not made aware of the implications of the rate going down, as the hedges were marketed as protection against rising interest rates. With interest rates slashed by the Bank of England since 2008, companies with a profitable underlying business may now be crippled by massive fees or faced with buying their way out of these hedges. Property owners and developers are now facing penalties of up to 23%1 of their loan in order to cancel out of these swaps. These kind of exorbitant fees are preventing companies restructuring their finances to become more stable, and driving them into administration.

So what should you do if you believe you have been mis-sold? The most immediate danger with a potential claim is the Statute of Limitations; if you don’t act quickly you might lose the legal right to claim. The bulk of these interest rate hedges were sold at least four years ago – generally you have six years from the date you entered into the swap to bring a claim, so it is crucial to act swiftly.

Could you make a claim directly to the bank without legal assistance? This is a complex situation and most of the time will involve highly technical negotiation or litigation. You would need to review the loan and swap documentation against the regulatory requirements in force at the time of the transaction to identify any breaches or issues, and would then need to prepare your claim against the bank.

If the bank rejects the claim, some small firms (nine employees or less) may have the option of claiming via the Ombudsman, but the claim must be for less than £150,000, which is at the lowest end of a spectrum where many of these claims will run into hundreds of thousands of pounds and leave no option but to go to court. For all other firms, which cannot use the Ombudsman, the only option is litigation and, again, while you could act as a litigant in person, this could be extremely difficult and time consuming.

Another option to pursue a claim may be to have the transaction reviewed by a specialist in financial services regulation. If you are concerned about challenging the bank when you are dependent on your relationship with them to continue funding, then a good financial disputes specialist will offer you the opportunity for a paper-based initial assessment, without involving your bank, to give you an idea of how viable your claim is.

There is a lot of political and regulatory activity in this area, and the FSA is due to issue a report in June following an initial review of swaps sold to SMEs. It will be interesting to see the results of the report and whether the FSA is going to force the banks to take a more realistic view of these arrangements and whether these products were appropriate for the businesses they were sold to.

1 Figures from CBRE, global real estate advisor

About the author

Steve Bloor is the managing director of the IFR Group, a specialist financial disputes company. He is a big fan of Killer Sudoku.



Features June 2012

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