Care homes risk going out of business due to banks' interest rate mis-selling

A poor review process is failing to help care homes achieve compensation for mis-sold interest rate products, according to financial experts.

So far a meagre 10 cases out of 15,000 small and medium-sized businesses to undertake a review have been successful in achieving redress; this poor turnaround is having a profound effect on many care home owners, as confirmed by chief executive, Martin Green.

He comments: “The issue of mis-selling interest rate hedge products is a significant one for the care sector and many care providers have lost hundreds of thousands of pounds, and in some cases millions of pounds because of this practice.

“What we need now is the banking sector to admit their fault and to compensate care providers for their loss in the same way that this was done with PPI for individuals.

“I sincerely hope that the banking sector has learnt its lesson from PPI and will proactively reimburse providers rather than going through expensive and timely court proceedings which ultimately the banks will lose. Banking needs to do something proactive to rebuild the trust that has been lost by businesses, who have been abused by interest rate hedging schemes, that were not necessary and poorly sold.”

A Financial Services Authority review, in June 2012, found “serious failings in the sale of interest rate hedging products to small and medium sized businesses,” with a further review of Pilot cases reporting in January that “90 per cent did not comply with one or more of our regulatory requirements”.

Many businesses will be at risk of financial insolvency as a result, at the same time as going through the dilemma of being worried how banks may react if they proceed with attempts to recover their costs.

Chief executive of financial advisers , Adrian Maurice, is critical of a review process that has so far only seen pitiful return.

He offers this insight on the mis-selling of Interest Rate Hedging products (IRHP) by high street banks:

“Businesses are now beginning to receive notices from their banks that invite the business to participate in their bank’s review of the sale to the business of an IRHP. Many businesses are fearful of participating in the review for fear of upsetting their bank which has such a strong hold over their business and personal assets.

“It has become increasingly clear from late 2011 that the banks since 2001 have been guilty of abusing their position of trust with SMEs. Businesses that approached their banks for loans, invariably to expand their successful businesses, were sold inappropriate IRHPs that have resulted in significant additional costs to the businesses, even forcing some into insolvency.

“The failings of the regulator in letting this happen were summed up by Sir David Walker, who was leading a high-profile review into banks’ corporate governance, and is now head of Barclays. When giving evidence in 2012 to the Treasury Select Committee he stated:

‘The regulators should never have allowed access to the retail market for these complicated products and that goes much wider than the swap products.’”

One provider to feel the impact of these failings is Guardian Care Homes, which is currently in the process of suing Barclays for £70m, having accused the bank of misrepresenting interest rate swaps.

Mr Maurice continues, telling how clumsy banking practice led to this mess:

“Typically, from 2007 onwards, when a business sought to borrow money or refinance an existing facility, the bank’s relationship manager would indicate that the loan would be accepted, so the business moved forward with obtaining valuations (at a cost). Then a short time before the loan was to be formally sanctioned, the question of hedging against interest rate increases would be raised by the bank.

“Invariably, the IRHP would be portrayed as similar to an insurance policy but with no upfront cost. Where a more complete presentation was done of the available products, alternative products such as a cap would be omitted or an example given where the assumptions produced a high initial cost. The cost of terminating or breaking the IRHP would be glossed over and no numerical examples given. The presentation would always be given by someone brought in from the bank’s treasury or capital market department and wrapped in terminology that defied comprehension, even by the most accomplished of small business entrepreneurs.

“The SME would then be hounded to purchase the recommended product or the purchasing of it was made a condition of the loan. Trusting the recommendations and assurances of the relationship manager, the SME would take out the IRHP, eager to progress with his business project.

“Two things happened at this time: firstly, the bank made a significant profit, and secondly, the SME unknowingly acquired a contingent liability equivalent to the break cost of the swap.

“When interest rates fell in 2009, the cost of these products started to become more and more of a burden. In some cases, in particular structured collars, when the rate fell below a certain level (say 4.5 per cent) the SME would be obliged to pay a higher rate (say 5.75 per cent). Typically, the SME had not been informed that even if the loan was paid off the IRHP would still have to be paid. The SME at this point had nowhere to go, as the break cost to get out of the IRHP by this stage was 25–30 per cent of its notional value. The banks often then increased their lending margin and the SME could do nothing about it.

“With the break costs increasing and building up the contingent liability in a corresponding way, the next bit of bad news was that the loan to value ratio was now in breach of the loan covenant. This was because of the increased liability to the bank and the reduced market value of the SME’s property due to the recession and the revised basis on which the banks would value it. As a consequence of this breach, the bank would move the SME into ‘special measures’ which then enabled the bank to a) increase the bank charges because of the additional time required to ‘look after’ the business, and b) instruct a valuation or an independent business report by a selected firm of accountants at a substantial cost to the SME’s already weakened business.

“Often the business was forced into selling its assets to clear the loan (remembering that this was a time when the banks were desperately trying to reduce their property loan books) or staggered on in a stressful existence.

“Those businesses that were profitable enough to keep out of a breach situation were still forced to watch their overheads, reducing costs wherever possible. They certainly could not risk further expansion, even if they could find anyone to lend money to a business with an IRHP and the contingent break cost.”