Hopefully most GP practices' borrowing arrangements do not involve an interest rate swap. But GPs who were persuaded by lenders or financial advisers that this was a good idea, as interest rates would rise, will be rueing the day.
In the past few weeks the national media has extensively covered problems with swap products as the prolonged period of low interest rates has left swap borrowers, many of whom signed up to these products during 2005 to 2008, much worse off than if they had a simple variable rate loan.
Hedging for loans
An interest rate swap, sometimes called a 'hedge', is entered into at the same time as a variable rate business loan to ensure certainty of repayments.
If interest rates rise, the product pays the difference over and above an agreed interest rate cap.
This safeguards against interest rate rises, but if rates fall, the borrower is obliged to make additional payments to the lender to bring them up to the level of the cap.
Because of their complex nature, swap products could only be sold in compliance with rules laid down by the Financial Services Authority (FSA) relating to suitability and providing clear information.
Examples of criticism from swap customers include: not explaining the downsides if rates fall, not identifying the exit charges if the swap is terminated early, making the swap a condition of the loan, the swap term being longer than the loan period, the swap being for a larger amount than the loan or not following the FSA's conduct of business rules.
On 24 June a story on the Telegraph website said: 'The first major survey of businesses that claim to have been mis-sold interest rate hedges found that 79% were told by their lender's derivatives expert that rates were going to increase.'
It also said that major banks, including Barclays, HSBC and Royal Bank of Scotland, had been accused of mis-selling interest rate hedging products to small business clients - claims that the banks deny.
Our firm has been advising a GP partnership that appointed three new partners in 2007. The incoming partners were obliged to buy into the partnership and, to do so, had to take out long-term loans - which they did at a variable interest rate.
They sought advice from a commercial lending bank which recommended an interest swap in the form of a standalone hedge running alongside their loans.
This set a notional fixed interest rate. If the interest rate payable on the variable loan went up, the hedge provider agreed to pay the new partners the difference between the variable rate and the notional rate fixed for the hedge product.
But if interest rates went down, then the doctors would pay less interest on their loans but would have to pay the difference between the notional interest rate and the rate they actually paid on their variable loan to the hedge provider. However, what would happen when interest rates fell was not explained properly to the GPs.
In early 2008, interest rates started to fall dramatically and the doctors were required by the hedge to start paying the extra notional interest; payments that they did not realise they had to make. With the sharp falls in interest rates, the doctors found that they were paying between £450 and £750 a month more in interest back to the hedge.
We are advising the GPs on bringing a mis-selling claim against the commercial lending bank in question.
Practices with a swap product may look to recover the additional interest payments made or re-negotiate their existing borrowing arrangements.
The Financial Ombudsman Service can assist businesses that turnover less than £2m a year and employ 10 people or less, but compensation is capped at £150,000.
If formal court proceedings are required practices could investigate the availability of 'no-win, no-fee' funding arrangements and 'after the event' insurance with their solicitor, to manage the risks associated with litigation.
- Helen Wallwork is a partner specialising in advising healthcare practices, and Jonathan Kitchin is an associate in the commercial disputes team at Foot Anstey LLP Solicitors, www.footanstey.com