Infantilism over Interest-Rate Swaps

Kerr-ching !

It is possible to envisage the mis-selling of an interest-rate swap - see below - which would be deserving of punitive action.  But has this really happened on the scale we are led to understand ?  I find it very hard to believe.

Interest-rate swaps are not "absurdly complex" products as has been stated - in combination with a floating-rate loan they result in a fixed-rate loan.  What sort of businessman borrows millions who cannot understand this ?  And a 'collar' is only a tad more difficult.

We read that some borrowers were told there would be no loan unless they took a swap.  This means, the bank in question was unwilling to offer a floating-rate loan.  But (for various reasons we could go into) they frequently have a practice of quoting on a floating-rate basis, and swapping it out when the loan is agreed.  The two-step process is a bit unnecessary, perhaps, but it's how things are often done (and not just for loans - it's quite usual in energy contracts, too).

So - a very simple product, sold in a somewhat redundant two-step way.  And yet we are told that 90% of the borrowers hadn't a clue what was going on - to the tune of £10 billion in compo !  Someone's surely avvin' a lucrative laugh: and we are allowing the Great British Businessman, Mr Diddums, to walk away from any responsibility for his own affairs.

So what would have to happen for genuine mis-selling to occur (which, to repeat myself, would certainly merit redress) ?  I suggest it would need to be one or more of the following:

•  the bank rep lied through his teeth, and stated that the swap was in fact a call-option ('cap', or 'ceiling'), and would only operate if interest-rates rose
• the bank rep asserted strongly and convincingly that interest-rates were definitely going to rise, and that a fixed rate was the best choice
• the bank rep stated that floating-rate loans were not available anywhere, from any lender
• it was self-evident the client was as thick as shit, or spoke no English whatever (see below)
• the loan was much bigger than the client needed 
• the strike-price on the swap was way off the money (in the bank's favour) at the time the deal was struck

If 90% of customers can demonstrate one or more of those, I shall be very surprised.  They will take the compo anyway, of course, and a new claims industry will be born, adding several points to GDP growth.

Footnote: these little cameos from the Telegraph make interesting reading.  I particularly found the case of the non-English-speaking Turkish patisserie owner instructive.  Taking the numbers cited at face value, Mr Bey must have borrowed several millions.  Quite a patisserie, I'd say.

ND