The Hidden Banking Scandal

In excess of 60,000 businesses may have been mis-sold unregulated products by their bank, described as “Fixed Rate Loans” or “Tailored Business Loans”. Many of these products incorporate a “Hidden” or “Embedded” Swap, which can result in substantial losses and ultimately prove financially crippling to a business.

In order to protect or “hedge” it’s own exposure to interest rate increases, the bank would have entered into a separate standalone product with a third party. These products are known as interest rate swaps, caps , collars or interest rate hedging products. By entering into such a product, the bank can ensure that it will stand to make money, even if interest rates increase above the fixed rate under the customers associated fixed rate loan/tailored business loan.

The main problem with hidden or embedded swaps generally arises when a customer seeks to terminate their fixed rate loan /tailored business loan. In that scenario a substantial breakage cost may be payable by the customer. The amount of that breakage cost will typically be very high if interest rates are low and, in extreme cases, could be up to or in excess of 50% of the amount borrowed.

Many customers were not warned about these potential breakage costs or were not warned of their potential size. Consequently, customers are being prevented from refinancing or selling their businesses due to the breakage costs embedded or hidden in their fixed rate loans/tailored business loans.

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