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Derivatives Law Solicitors Birmingham

There are various forms of these products.

What are they :

Sophisticated instruments by means of which parties minimise their exposure to movements in interest rates.

How do they operate :

They represent 2 bargains – one made between the bank and yourself and one made between the bank and another institution/counterparty. They are, effectively, 2 bets in which the risks of an adverse interest rate movement is insured against by both parties.

They are contracts and the terms of the contract can be complex and at times may not be fully understood.

The contracts are often made in standard form and are said to be subject to the terms of the master agreement, known as the ISDA agreement. This is the International Swaps and Derivatives Agreement and contains all the material provisions. Whether such terms have been explained and/or whether they have been seen before the contract is concluded is very much dependent on the circumstances of each individual case.

What are the common complaints :

Complaints are more frequently arising in relation to agreements that were entered into in the period 2006 – 2008 and the consequences of these agreements started to be felt when interest rates started to be reduced.

Before the decline in interest rates, there was a noticeably more proactive approach adopted by the major lending institutions to ensuring that customers “hedged” the loans they had taken from the banks. In some instances the taking out of such products was mandatory as a part of the loan and in others instances, these products were promoted as being of benefit to the customers.

The complaints are arising now, with the reduction in base rates and which has meant that customers are having to make up the difference between the 0.5% and the floor (or the minimum) that had been agreed with the lending institution.

In simple terms, if the “hedge” had not been taken out the interest to be paid would have been calculated by reference to the margin over the base rate that had been agreed between the lending institution and the borrower.

Customers of lending institutions want to explore if there is a possibility for them to extricate themselves from the hedge agreements entered into and avoid having to make up the shortfall as a result interest rates falling and they wish to avoid having to pay the large break costs that are demanded by the lending institutions.

Ordinarily, if you wish to terminate a contract which provides for an early termination, then you can do so provided that you accept the consequences of such termination : payment of the break costs.

It is also important to see if there is a legal basis for setting aside the transactions which would avoid the need for the payment of the break costs.

The common complaints encountered, are thing such as :

a)      I did not understand what I was being asked to enter into and these are sophisticated and complicated instruments which we have never encountered previously;

b)      I have never seen the ISDA agreement or had its terms explained to me and nor have I ever signed one of these;

c)      I did not need the hedge to be put in place but I was placed under pressure for it to be put in place;

d)      I was told that I could terminate the hedging agreement at any time;

e)      I was told that the hedging arrangement was portable and could be continued even if I moved to another lender whereas in fact it could not and if the customer wished to move away, he would either have to get the new lender to take over the hedge or pay the break costs;

f)      I was told by the lender that in their view, interest rates were going to rise and I would be best advised to put the hedge in place before rates increased as it would be more expensive to do so later;

g)    I was asked to put in place a hedge for a sum larger than the loan that I was taking out and which ignored the fact that I was going to be repaying the capital and interest, such that the actual amount for which there would have been an interest rate exposure, was being reduced or

h)      The lender failed to advise me fully about the nature of the transaction and the risks associated with it.

The above are, but examples and the circumstances of each individual or company will be different.

There are different rules that apply by reference to whether the borrower was an individual or a company and one also need to look the time at which the financial transaction was completed, to determine what the obligations were that were imposed on the lender.

Whether the hedge was appropriate or not, will depend on the individual circumstances of the borrower at the time as they were known and understood.

What are the avenues to be explored  :

There are a number of ways in which the matter can be addressed :

  • By utilising the lender’s own internal review and complaint process;
  • By complaint to The Financial Ombudsman Service;
  • By engaging your own advisors to take the matter up with the lender with the objective of arriving at a settlement or
  • As a last resort, if all else fails and the facts and circumstances justify it, by the issue of proceedings.

Issuing of proceedings and taking them to a final conclusion is expensive both in terms of time and money and involves a critical review of all of the evidence. The aim is to provide an appraisal of the merits and prospects of success of any action that may be commenced.

For a view to be expressed, a number of disciplines may need to be called upon to include an expert in the field of derivatives who can, armed with the information that is available, express an opinion on whether the product that was sold to you was appropriate to your circumstances or not.

We would in addition, once the experts report is to hand, seek the advice of Leading Counsel as to the merits and prospects as well so that you have from the outset have an informed view

What we can do?

Review your particular circumstances with a view to advising you on whether or not you would have a prima facie case to make a legitimate complaint against your lender.

See what further information we need and where best to obtain it.

Advise you on whether you would have a sustainable cause of complaint against the lender and if so, what would be the appropriate and most cost effective way to obtain the redress that is most appropriate.

Advise you on the options that would be available to you and the costs associated with such options.

In appropriate circumstances, it may be possible to put in place legal expenses insurance to cover the costs of the opponent, should the matter proceed to a trial and should you not be successful in the claim.

In appropriate circumstances, we may be prepared to undertake work on the basis of a conditional fee agreement, the terms of which we shall need to discuss with you and advise you upon.

If you have legal expenses insurance, then this may provide help and assistance with meeting the costs of the initial investigative work and possibly also the taking of further steps in the matter. You should see if there are any policies that you have and which have contained, within them, cover for legal expenses.

If in our opinion we do not believe that there is a sustainable cause of complaint, then we will tell you so at the earliest available opportunity.

Key Contacts

Chris Hill - 0121 452 4961 or by email (New Win)

 

Useful websites :

The Financial Services Authority

The Financial Ombudsman

Vicarage Court Solicitors Limited is authorised and regulated by the Solicitor's Regulation Authority under SRA number 532923 and registered in England & Wales under company number 6176902.