Swaps litigation is shorthand for claims arising out of interest rate hedging products sold to businesses, usually alongside a loan. The products were complex, the customers frequently were not, and the losses were substantial.
What an interest rate swap is
A business borrows at a variable rate and is worried that rates will rise. The bank offers an instrument that exchanges the variable rate for a fixed one, or that caps how far the rate can move. In principle this is sensible risk management, and for a well-advised borrower it can be exactly the right product.
The difficulty is what happens when rates move the other way. A borrower who fixed at a high rate and then watched rates fall is left paying well above the market, sometimes for a decade or more. Worse, unwinding the arrangement early can trigger a break cost running to a substantial proportion of the original loan.
Many customers understood that they were protecting themselves against a rise. Far fewer understood the size of the liability they were taking on if rates fell instead.
Why these sales generated so much litigation
Claims in this area have tended to turn on a consistent set of complaints.
- Break costs were not explained. The single most common allegation. Customers say they were given no meaningful indication of what exiting early would cost.
- The product did not match the loan. Hedges running well beyond the term of the underlying borrowing, or for a larger amount than was ever drawn down.
- The hedge was a condition of the lending. Where a facility was made conditional on taking a hedging product, the question of whether the customer genuinely chose it becomes difficult for the bank.
- Advice was given while being described as information. Banks frequently maintained that they were merely presenting options. What was actually said in the meeting is often a very different matter, and the internal records tend to show it.
- Sophistication was assumed rather than assessed. A profitable trading business is not automatically a sophisticated purchaser of derivatives.
The Jersey position
Jersey is a separate jurisdiction with its own regulator and its own law. The regulatory review schemes that operated in the United Kingdom do not apply here, and a Jersey claimant cannot simply point to them.
That does not weaken the claim. It means the claim is framed in ordinary legal terms: misrepresentation, negligent misstatement, breach of a duty of care, and breach of contract, litigated before the Royal Court. Where the counterparty or the relevant conduct sits in more than one jurisdiction, which is common, the question of where the claim is best brought is itself worth careful thought at the outset.
Jersey’s three-year prescription period is materially shorter than the position in England, so timing needs to be assessed early.
Why swaps claims suit group treatment
Hedging products were not sold one at a time. They were sold from the same product sheets, using the same training, by the same teams, to customers in comparable positions.
That has three consequences for anyone considering a claim. The disclosure obtained by one claimant frequently assists the rest. A pattern across multiple sales is far more persuasive than a single account of a single meeting. And the expert evidence, which in these cases is where the real cost lies, can be shared rather than duplicated.
Our own experience bears this out. We recovered £40 million in a mis-selling action against a financial institution brought by a group of four. The class was small. The recovery was not. What made the difference was that the same conduct affected all four, and that the intelligence was pulled early and thoroughly rather than left to emerge through the ordinary course of proceedings.
What to do if you think you were mis-sold
- Locate the original loan agreement and the hedging documentation, including anything signed at the point of sale.
- Find any note, email or diary entry recording what you were told at the meeting. Contemporaneous notes carry disproportionate weight.
- Establish what you have paid under the instrument to date, and what you were quoted as a break cost if you ever asked.
- Take advice on prescription before anything else.
- Consider whether others were sold the same product on the same basis. If they were, the claim may be considerably more viable brought together.
Not every swap that turned out badly was mis-sold. Rates move, and a product that performed poorly is not by itself evidence of wrongdoing. The question is what the customer was told, what they were not told, and whether the product was ever suitable for the borrowing it was attached to.
If you would like to discuss a potential swaps or mis-selling claim, contact us or call +44 (0)1534 620500.