Rate swaps and the constuction industry
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Rate swaps and the constuction industry
Michelle Neary at Legal Plus discusses what interest rate swaps mean for those in the constuction industry.
From early 2000, an increase in the availability of asset finance within the construction and property industry led to hundreds of property investors and developers being mis sold a complex and inappropriate financial product by many UK high street banks.
This product is referred to by the banks as an interest rate swap or interest rate hedge.
Swaps or hedges are more commonly traded between lenders and larger, sophisticated organisations with experience and knowledge of such financial transactions.
Interest rate swaps were introduced to SMEs (small to medium sized businesses) as an alternative to a fixed rate loan.
In a swap, the bank and the customer agree a rate of interest.
If interest rates rise above that figure, the bank pays the difference.
If interest rates fall below the agreed rate, the customer must pay the difference to the bank.
Approximately 200,000 of these interest rate swaps are believed to have been sold in the last five to ten years by the likes of HSBC, Barclays and RBS, to name but a few.
It has become apparent over recent months that the property industry has been significantly affected.
Legal Plus, an expert in deciphering swap contracts and investigating banks' sales processes, have seen many instances where customers have approached their bank managers looking to fix the rate of interest on their loan or mortgage.
Michelle Neary, business development manager at Legal Plus says: '40% of our clients work within the property industry as investors, developers, builders and contractors.
'Many business owners have trusted their bank managers to recommend the most suitable products for their needs and have signed swap contracts thinking they were simply fixing their rate of interest.
In reality, they have entered into complex agreements ranging from between five and 25 years with high monthly payments and significant costs to exit the agreement'.
How have interest rate swaps affected the property industry?.
Legal Plus has come across numerous developers and investors with mis sold interest rate swaps and a pattern seems to be emerging whereby the swap has actually been a condition of the borrowing.
What many business owners aren't aware of is that the loan and the swap are two separate agreements.
While the loan is with the bank, the swap contract is actually with the bank's treasury department which is, in fact, a totally different entity.
So, for example, if your loan is with Barclays, your swap will be with Barclays Capital.
It is Barclays Capital who will pay the difference in a rise in interest rates to Barclays.
Whether interest rates go up or down, the bank is winning'.
What should I do if I think I have been mis sold an interest rate swap?.
If you believe you may have been sold an interest rate swap or hedge, your first step is to gather any paperwork you have relating to the swap.
The bank is obliged to provide you with a number of documents when discussing interest rate swaps, when entering in to swap contracts and during the term of the contract itself.
These documents include:.
- A client categorisation form.
- Your preliminary confirmation.
- The swap contract or facility letter.
- The swap confirmation.
- Your ISDA Master Agreement and Schedule.
- Swap payment statement/Reset notices.
If you are missing any of these documents you should contact your bank and request copies.
You should also request transcripts of telephone conversations you have had with your bank regarding the swap or hedge.
Your next step is to speak to someone with experience of interest rate swaps who can advise you on the strength of your case and the routes you can take.
Michelle Neary says: 'Interest rate swap claims are still in their infancy.
This, together with the complexity of swap contracts means it is imperative that you have an expert fighting your case against the banks'.
Legal Plus is urging anyone in the property and construction industry to look into their own financial dealings and to come forward if they believe they have a claim.
Miss Neary says: 'No matter what your circumstances, it is worth checking if you have a case.
Many businesses have collapsed due to the unexplained risks of these products and we are looking for justice'.
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