Secret Swaps

Another, yes another banking scandal is emerging. After the PPI mis selling (or fraud to use a more accurate description) to individuals and after the sale of interest rate hedging products scandal to medium sized businesses scandal, it has now emerged that the banks were selling secret swaps to customers. What they did was this: they agreed fixed rate loans with customers which customers wanted to protect themselves from future interest rate rises. That is fair enough; a customer makes a decision on wanting a fixed and floating rate, and if the customer opts for a fixed rate that is what the customer expects to get, but expectation and reality are two different things in the world of banking.

The mechanics of what the banks have done in these cases is quite complicated, but once you cut through the jargon and complexity it amounts to this: if a customer wanted to close a fixed rate deal instead of paying what the customer expected to be 2% or 3% as a penalty, the customer found a demand to pay a penalty of between 25% and 50% of the loan. The demand was not governed by any contractual terms of which the customer was informed.

It is an extraordinary proposition: that a bank can add secret clauses into a loan and then enforce those secret swaps. IF that were true we might as well give up the concept of the rule of law and let the banks do exactly as they want; some might say we are virtually doing that now.

Of course these products were sold by the banks hard selling to customers who trusted their banks, and did not realise that they were subject to a specialist hard sell. The customers regarded their banks as business partners where both sides needed a healthy relationship of prosperity. The banks regarded their customers as marks, fit only to be defrauded.

It will be interesting to see how extensive this scandal really was. We may never know: some customers have been bankrupted and dead businesses tell no tales.

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