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The mis-selling of swaps linked to LIBOR

Sinels will be looking in due course at the realities of suing banks, particularly banks offshore, for mis-selling their parents’ products to a captive market from a legal perspective. Sinels has successfully recovered tens of millions of pounds from a variety of banks over a thirty year period. This article will look at the factual matrix relative to mis-selling of swaps which enabled us to do just that on behalf of a number of clients.

Banks sold swaps to captive audiences, often by telling a client that the swap was a prerequisite for receiving a loan or even extending existing loan facilities. The alleged advantages included flexibility and protection from interest rate volatility.

The ones we have seen did not have those advantages.

In reality, what the client was getting was very different from what he or she thought they were getting; it was a one way bet for the bank and a lose-lose situation for the client.

The mis-selling of swaps has decimated numerous businesses all over the United Kingdom, particularly sizeable family ventures. Any that fell outside the much-criticised government review scheme because of their size were left to litigate rather than receive any form of compensation. Many simply could not afford to take action because they had been mis-sold swaps which depleted their resources and they went under. Why was this?

Interest rate swaps were often worded to enable the banks and not the customers, to get out of them, in effect, when they wanted to.

A swap transposed real interest rates for fixed ones. So far, so good. But what did this mean in practice? They became, in effect, betting slips with huge potential and in due course actual liability.

In 2008, when many of these products were mis-sold, this is what the traders’ screens looked like in terms of a future forecast for interest rates:

Of course the clients did not know this, so strangely they were sold the maximum possible terms that the bank could induce them to buy, in some cases anything up to 30 years. It is quite obvious from comparing the above graph with the terms and conditions applied to clients that the Banks knew that they stood to make an enormous profit over a lengthy period.

What all of this meant was that when the interest rates fell, break costs (the amount that the client had to pay to get out) of the swap rose. It must not be forgotten that the Banks often did not have anything to pay to get out the bet because in many of their contracts they could terminate almost at will on a variety of dates.

Once interest rates fell then the Banks made money and the clients lost money. Those break costs, which of course were calculated by the bank, formed bizarre percentages of the actual loans received.

On one £5m swap we saw break costs totalling £2,417,395. On another £20m swap we saw break costs were £5,642,000. On that latter swap industry experts calculated the difference between what was sold and what should have been sold as being a £12,035,131 cost to client.

The real gravamen of this, and the reason for it, was that when borrowings were possible at, say, 2½% over base and base was ½%, the client was paying 5-6% and had become toxic to new lenders as they could not replace the old lending for twenty or thirty years, notwithstanding the fact that one of the blandishments inducing sale in the first place was that it was sold as a flexible solution.

In other cases with which we have dealt, the bank said to its client which now could not afford the increase in rate of borrowing that it was in default so it would add 4% or 5% to the base rate leading to an effective rate of interest of 9½% fixed over 30 years.

This is not the time to comment on how far up the food chain all the artificial depression of LIBOR went, but as LIBOR went down break costs and bank profitability on swaps went up.

Attached is a real report to one of our clients redacted only to protect the guilty.

The information we gathered led to some spectacular results for clients of the law firm, proving the value of methodical data collection, analysis, and the judicial use of witness testimony and impartial industry expertise.

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