Has Your Bank Sold You a Swop ?

Like most advisers we carry out regular review meetings with clients and their accountants. I expressed my concern to a company accountant that his client had been sold an “interest rate swop” by his bank. This effectively locked the company into fixed interest rates of 5.85% for the next 25 years on very sizeable borrowings.

Apparently the bank concerned had persuaded the client to sign up for this arrangement without legal advice and without reference to any of his advisers.

These arrangements, I have been informed fall outside of the Financial Services Act, therefore banks believe that they can sell these sophisticated arrangements with impunity.

Astonishingly these arrangements are common place and we understand business owners have been persuaded by their banks to enter into this type of swop arrangement.

It is worth noting therefore that recently Germany’s biggest bank, Deutsche Bank AG (DBK) has lost a case over interest-rate swaps in the first ruling by Germany’s highest court concerning sales of the products that have spurred lawsuits against lenders throughout Europe.

The bank must pay 541,074 Euros plus interest over the swap purchase. The judge stated that the bank didn’t adequately disclose the risks of the products.

“As an adviser to its customer, the bank must guard the customers’ interest alone,” and “But as a seller of the swap, a loss to the customer works to the banks’ advantage.”

The ruling will influence dozens of disputes the bank has with local German governments, community-owned utilities and companies that claim the lender sold swaps without adequately disclosing risks and fees for the products that were designed to lower interest payments. Cases over derivatives sales have spread throughout Europe and especially in Italy, France and England.

This case could open the flood gates for other firms to hit back at the banks as most banks have been involved in doing this, and not just in Germany.

However there are lessons to be learnt here. Many business owners tell me that they do not like to bother their accountants, as they are often very busy. All business owners should have an advisory team in order that they can get a prompt response to any tax, legal, financial planning and corporate planning advice. It is important that part of their advisory team should be to date with all current tax legislation (often accountants are far too busy with compliance work to keep up to date).

One view that has been expressed is the interesting question of what happens when banks specifically exclude that they act as an adviser. Recent judgments seems to confirm that bank must act in the interest of the client, irrespective of how sophisticated the client is. The indication is that this defeats the premise of caveat emptor.

If you are unsure of, or need help with any of the financial arrangements you have entered into, contact one of our Financial Planning Consultants. At Pareto Lawrence we offer both a tax planning service and corporate planning advice to business owners and private clients.

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