Treasury investigates “swaps”

High Street banks are under investigation by the Treasury over the alleged mis-selling of complex capital markets derivatives to small businesses.

An  interest rate “swap” allows a  the customer to fix the base rate on a loan at a certain level to ensure a rise in interest rates will not lead to borrowing costs becoming too high. The swap compensates the customer if interest rates rise, but costs them if rates fall.

With interest rates falling to an historic low in 2009, however, many business owners now face bills of hundreds of thousands of pounds.

A recent Sunday Telegraph investigation has found that all of the UK’s major banks have sold such highly complex interest rate derivatives to small businesses, including a fish and chip shop, care homes, garden centres, farms and hotels.

Many businesses are complaining that the swaps were too complex and badly explained by the banks, being sold alongside and often as a condition of a loan.

The Financial Ombudsman Service, which investigates complaints, can only assess cases where less than £100,000 in damages is claimed. Larger claims would therefore need to be taken to court.

The Treasury’s investigation is therefore a welcome development for those small businesses involved.

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