The Great Interest Rate Hedging Issue

We are all aware that the base rate of interest remains at an all time low of 0.5%, lending should therefore be more affordable than ever for the majority of businesses.

So why have so many banks locked their customers into Hedging Products which mean the customer is paying so much more?

Hedging is about limiting risk (think – you may ‘hedge your bets’), yet in so many cases it has seen costs spiral.

If you mention the word ‘PPI’ then most people will immediately link it to claims for unfair sales of insurance policies. Hedging is different but there are similarities.

When looking at the affordability of finance it is always sensible to budget above what you are paying, as with anything you should allow for a contingency. Many people understand the difference between a fixed rate mortgage and a variable rate mortgage, after all the difference is quite simple and easy to understand.

A fixed rate means the same repayments, a variable rate leaves you open to paying more if interest rates rise. The risk is that you take a fixed rate and base rate falls, therefore you pay more, conversely with a variable rate you would pay less. The risk is the reverse happens, the decision is yours and you go with what is affordable and makes you feel secure.

So What is the Issue with Hedging?

With a fixed or variable (aka floating) rate there is no issue, it is simple to understand and the risks associated with each are fairly simple to quantify.

The issue the FSA has with hedging is that in many cases it was a condition of business borrowing and that the product sold was too complicated for the businesses to whom they were sold.

Being hugely simplistic, the structure of these hedges, the potential costs, the costs of exiting them and the customer’s general understanding was understated. The FSA have decided that for ‘sophisticated’ customers these types of hedges were perfectly acceptable, but for ‘non sophisticated’ customers they were potentially miss-sold.

The FSA defines a ‘sophisticated’ customer as having two of the following characteristics –

  1. Turnover above £6.5m
  2. A Balance Sheet of more than £3.26m
  3. More than 50 employees

So What Happens Now?

The major UK banks have agreed to undertake a review of these hedges where they were sold to ‘non sophisticated’ businesses.

If you think you have a case, or simply want us to check then please get in touch on 0844 682 1462

We recently worked on a case where the customer had paid £81k in hedging costs over 4 years, bear in mind the business turned over £1m p/a and you can see the impact. We are presently liaising with the lender in question to obtain a full refund.

We can help you, we have experience, and if you want us to help then please get in touch, quote the code ‘HEDGE12’ and we will come back to you within 24 hours.

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