30 SECOND GUIDE TO ...

INTEREST RATE SWAPS

Explain

THESE are complex financial instruments called derivatives sold to businesses alongside loans to protect them against spiralling repayments if interest rates rise.

What’s the problem?

These contracts were often expensive and complicated and left many firms with huge losses when interest rates fell to record lows in March 2009. Firms who wanted to switch to a better deal and escape their contract were hit with crippling ‘breakage’ fees. The contracts were hugely lucrative for banks.

So what’s happening about it?

After banks denied doing anything wrong, the City watchdog, the FCA, made them trawl through 30,000 cases to determine whether compensation is due. The process began in May last year, and 7,000 firms have accepted offers worth a combined £1.1bn. Hundreds are still waiting for compensation, despite the deadline falling last month.

So justice is being done?

Not according to campaigners, including Bully Banks, which represents 2,000 small firms. It claims that banks are being let off lightly, and that the payments so far have been ‘derisory’.

What does the FCA say?

It says it is confident that the independent reviewers appointed by the banks to assess cases are doing their job properly and ensuring a fair deal for firms.