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Charities have been mis-sold interest rate swaps, says financial consultant1

Finance | Vibeka Mair | 15 Aug 2012

A high-street bank is concerned about negative PR on mis-selling interest rate swaps to charities, says Steve Bloor, managing director at the IFR Group.

Bloor told civilsociety.co.uk that he has heard that charities have been affected by mis-selling - and one bank has expressed concern to him about negative press around this.

The UK’s biggest banks face a huge compensation bill after the Financial Services Authority found what it called “serious failings” in the sale of interest rate swaps to small businesses.  Some estimates put the potential mis-selling bill at £1.4bn.

An interest rate swap is a product meant to protect businesses against fluctuations in interest rates – many of these were sold by banks to SMEs in particular during the last decade, resulting in the business having to pay thousands of pounds a month under the swaps as interest rates have plummeted.

Following the completion of an investigation by the FSA which found evidence of a number of poor sales practices, 11 banks have now agreed to review swaps sold to around 28,000 businesses since 2001.

Commenting on charities affected by mis-selling, Bloor says: “The charity sector has had a hard enough time already over recent years – there will be public outrage if it’s revealed that charities are spending hard-earned funds on financial products that are no help to them at all.”

Charity accounts seen by civilsociety.co.uk indicate that some charities entered into interest rate swaps during the last decade – though there is no evidence that these particular products were ‘mis-sold’.

Also, the Charity Commission released guidance on interest rate swaps and similar instruments for trustees, just before the scandal broke.

The FSA has released guidance to provide clarity for small businesses on the products they’ve been sold and whether they are eligible for a review for compensation, but according to Bloor, this has caused further confusion:

“This ‘guidance’ is vague and misleading and leaves the banks with all the power,” he said. “For example, we are told that banks must appoint an independent reviewer to oversee the review, but each bank proposes who this will be and which organisation they’re from, so you have to ask how the FSA will ensure that cases are dealt with consistently between banks.

“Also, the FSA tells us businesses that have been mis-sold swaps will be entitled to ‘fair and reasonable redress’, but the FSA don’t give any clues as to what this includes."

He continued: “The FSA has left it to the banks to determine whether or not businesses are covered by the review and have indicated that, if businesses feel they have been incorrectly classified by the banks, they can appeal to the Financial Ombudsman. But this is blatantly misleading as the Ombudsman can only consider cases from businesses with less than ten employees and turnover of under around £1.6m, so a significant number of businesses won’t be eligible to appeal.

"It seems the FSA has left more power than is healthy in the hands of the banks. It’s like leaving the fox to look after the chickens – it can only end badly.”

The IFR Group is urging businesses concerned that they’ve been mis-sold products not to sit back and wait for the banks to complete the review but to seek advice now, as many firms are coming up to the end of the six-year period during which they can legally make a claim.