Interest rate swaps on business loans
This note summarises the issue of ‘mis-sold’ business loans, where firms entered into complex interest rate 'hedges' that subsequently proved to be very costly to them in the changed conditions following the financial crisis.
Business loans, made primarily to smnall businesses, with attached interest rate 'protection' or 'hedges' proved to be very expensive compared to the rest of the market. This is largely due to the unexpectedly steep fall in interest rates following the financial crisis. Small businesses complained that they were sold complex products which they did not fully understand, or worse, that they were forced to agree to the interest rate conditions in order to get a loan at all.
A redress scheme was organised by the Financial Services Authority in agreement with the main lenders. Although it was criticised as being too lengthy and complex for many small firms, it has resulted in compensation payments in excess of £2million. It is now largely ended.