By Andrew Crocombe, Commercial Litigation Solicitor, Henmans LLP
The last few weeks have been not been good for the banking industry. The recent £59.5m fine levied against Barclays by the Financial Services Authority (FSA) for manipulating LIBOR (London Inter-Bank Offer Rate) is the largest fine ever imposed by the FSA and resulted in Bob Diamond losing his job.
Also, the mis-selling by banks of products designed to reduce a borrower’s exposure to fluctuating interest rates has also hit the headlines with the FSA now considering a full-scale investigation into whether these complex financial products have been mis-sold.
Whilst these two headline stories are not directly connected, there is a clear link between them which is likely to cause Barclays, and possibly the banking industry generally, a significant headache. The reason is that the interest rate ‘derivative’ products were often offered to businesses whose borrowing costs were linked to an interest rate based on LIBOR plus a margin (the bank’s profit).
The main ‘derivative’ products, interest rate caps, interest rate swaps and interest rate collars were predominantly sold between 2005 and 2008. They were sold against an expectation of fluctuating and, often, increasing interest rates. However, when interest rates started falling borrowers found that they were tied in to products which were not suitable and where there were heavy financial penalties attached to any exit. The downside of these products had often not been explained and the products have proven unsuitable for a large number of the businesses who were sold them. In many cases, banks made it a condition of lending that these products were taken out.
The mis-selling of these products alone would entitle a borrower to seek damages from the bank. However, the manipulation of LIBOR by Barclays now potentially opens up a further claim that the manipulation of LIBOR by Barclays renders their interest rate agreements void — in other words the interest rate products are not enforceable by Barclays at all because of their manipulation of LIBOR. If successful, this could allow affected businesses to seek much larger awards in damages from Barclays. Given that other banks are under scrutiny as to whether they too have manipulated the LIBOR rate, it is possible that these claims will have a much wider impact.
Individuals or small businesses that are affected (a small business is defined as having a turnover of less than €2 million or fewer than 10 employees) can seek a remedy through the Financial Ombudsman Service which has the power to award compensation up to £150,000. Larger businesses or anyone with a loss in excess of £150,000 would have to bring their claim in the court.
If you have taken out one of these interest rate ‘derivative’ products and believe that your bank may have mis-sold the product then you should obtain legal advice.
Henmans is one of the largest law firms in the Thames Valley; its lawyers specialise in and have considerable experience making claims and advising small to medium businesses on a wide range of commercial disputes and have specific experience of successfully acting for clients against banks for the mis-selling of interest rate derivate products.