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Guest Blog - What's the latest on Interest Rate Hedging Products?

Guest Blog - What's the latest on Interest Rate Hedging Products?

Many readers will be aware of the recent developments in relation to interest rate hedging products, often called interest rate swaps, caps and collars or various derivations of these products (another form of these products are ‘fixed rate loans’ which have embedded hedging which I will discuss further below and were excluded from the review). In January 2013 the then Financial Services Authority (FSA), now Financial Conduct Authority (FCA) announced its findings in relation to the sales of these products by the banks to small and medium sized businesses. The report related to the investigation of 173 cases and found that mis-selling of these complex products to SME borrowers occurred in over 90% of the cases that were investigated. Common sales failings were poor disclosure of breakage costs, failure to ascertain the level of risk that the borrower was willing to undertake, non advised sales straying into advice, examples of ‘over-hedging’ (where the term or value of the product exceeded the term or value of the borrowing) and significant rewards for staff of the banks being the drivers of these processes. Following the review, a redress scheme was set up which has been managed by the banks themselves, overseen by independent reviewers approved by the FCA.

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