Farmers lose out from mis-sold interest rate products

Farmers could be among the hardest hit by alleged mis-selling of complex interest rate hedging products by Britain’s major banks, an expert has warned.

“Many thousands” of farmers and other small businesses could have been left with a range of complex financial products that they shouldn’t have been sold, James Dean from Legal plus said in an article in The Daily Telegraph.

Interest rate swaps (also known as interest rate hedges or derivatives) were first used in the early 1980s and were increasingly sold to businesses from the early 2000s. Sometimes they were offered alongside a loan facility, or even sold as a condition of borrowing, he said. They effectively allowed the customer to agree an interest rate with their bank and when rates increased the bank paid the difference, while when rates fell the customer paid the difference to the bank.

Many people were sold swap derivatives by banks that never properly explained how they worked, Mr Dean told Farmers Weekly. Of particular concern were the potential repayment costs incurred when rates fell – as they have done to an historic low – and the “extortionate” costs incurred to exit such agreements early.

“Some farmers were sold swaps that were perfectly adequate for their needs, but others were badly mis-sold and in some cases, typically in 2007-08, they were made a condition of the loan.”

Since the end of 2008 the banks had “cleaned up their act”, but the knock-on effects of existing agreements could be felt for some time, he said. Swap derivatives were entirely separate from loan agreements and would still need honouring even if the loan was paid off, he said.

“Typically the bank’s agricultural relationship manager might have sold the initial loan, say £1m for a new parlour, at an agreed rate of maybe 1.5-2% above base. They might then have referred the farmer to the bank’s global markets division to take out some form of interest rate protection and it’s likely to have been them that sold the swap product – the agricultural manager may have had very little to do with it, other than the referral.”

Bank response

The British Banking Association said most farmers were familiar with the concept of hedging against future price fluctuations, for instance in crops, and interest rate hedges and forward foreign exchange contracts were an extension of that principle.

“As with all insurance products and hedges, the intention is to provide a degree of certainty to help manage future risks, which of course may or may not materialise. Naturally, customers should seek suitable independent advice if they are not confident about the nature of the contract they are entering into.”

NFU response

NFU chief economist Phil Bicknell said that as yet, no members had raised the issue as a concern. “But that’s not to say that that farmers haven’t utilised these products or been impacted. The NFU will raise this issue with the main agricultural lenders and the British Banking Association.”

Bank support for agriculture had generally remained strong in recent years, with approval rates for all financial products relatively high among farming compared with other small and medium-sized enterprises, he added.

Where to get help

The Treasury is investigating a number of claims about alleged mis-selling of interest rate swaps.

The Financial Services Authority (0845 606 1234) is also aware of concerns, but the Financial Ombudsman can only investigate complaints where less than £100,000 in damages is claimed.

In many cases it will be down to individual businesses to take the matter up with their bank, although there are many legal firms offering services that will dispute the selling of swap products on behalf of their customer.

Have your say

Do you think you have been miss-sold a bank product? If so, why not join the debate on our forums, or email paul.spackman@rbi.co.uk in confidence.