Tailored Business Loans (Embedded Swaps)
The FSB is concerned members may have been sold inappropriate loans with embedded derivative products – known as ‘embedded swaps'. An ‘embedded swap' or ‘tailored business loan' is different from an ordinary swap as it looks like a normal fixed rate loan to the borrower but incurs disproportionately high break fees if interest rates fall. Around 60,000 of these products have been sold according to the financial regulator.
The issue with embedded swaps is when the break fees are not disclosed to the customer at time of sale, or they are hidden in technical or legal documents. Whether the customer can successfully seek redress through the courts will in part depend on their choice of either having an advised sale or a non-advised sale (where no personal recommendation is made and the customer is left to decide how they wish to proceed).
The FSB wants the outstanding question of regulating how these complex products are sold to be addressed and we are engaging relevant stakeholders to do this. The issue of mis-selling needs to be addressed on all fronts. The Financial Conduct Authority (FCA) regulator is requiring firms to change schemes where staff are incentivised to sell products that could be inappropriate to the customer. In addition to this, the FSB wants more to be done to ensure customers who choose an advised sale, are clear on what they are purchasing so that they are making a fully informed choice.
The FSB's efforts with Government are only effective because they are based on evidence from our membership. While many of these products will be legitimate we need to know about the ones that have been mis-sold. To date, our membership has told us they were:
• sold their loan by ‘commercial teams' within banks
• not told of the break costs by their bank, and were at that point, unaware of the expensive costs
• not aware they had tailored business loans until they tried to break, exit or move the loan
• concerned these products could damage both their business and personal credit performance
The FSB believes that some firms may benefit from advice and if you are a member, a free telephone consultation is available with Vedanta Hedging. Please email Nadia Patel or Abhishek Sachdev with your membership number to arrange your consultation.