aviva gp finance mis-selling fixed rate loans interest rate swap break costs early repayment fees

Aviva mis-selling: Hidden swaps and break costs in fixed rate loans

Fixed Rate Loans have been mis-sold to many UK businesses and even to GPs. The customers are forced to suffer massive break costs (also called early redemption fees, exit fees or penalties) because lenders such as GPCF/Norwich Union/Aviva have hidden complex derivatives (with significant contingent liabilities) in a ‘loan wrapper’ but have not explained this to the customer.

Fixed Rate Loans mis-selling, to SMEs including GPs, has come to light due to massive break costs (also called early redemption charges (ERCs) early redemption fees, exit fees or penalties). These arise because insurers such as Aviva have hidden complex derivatives (with significant contingent liabilities) in a ‘loan wrapper’ but have not explained this to the customer. Norwich Union and Aviva (GPCF) have all sold Fixed Rate Loans.

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Mis-sold Aviva loans to SMEs and General Practitioners

The FCA launched an investigation into the mis-selling of complex financial derivatives to SMEs including GP practices and individual doctors. ERCs or break costs were the primary problem.

Many GP practices were approached by big lenders such as Aviva to finance surgery premises. The FCA’s investigation relates to fixed rate loans or mortgages packaged with hidden interest rate swaps within the loans. The FCA has concluded that some lenders such as RBS had “heavily targeted’ GPG practices and had potentially prevented “hundreds of millions of pounds” from
going back to the healthcare system.

Many general practitioners will lack sufficient knowledge and understanding of these complex financial products and furthermore, were unaware of the hidden interest rate swaps at the time of entering into the loan. Often the swaps together with break costs were not brought to the attention of the GP customer at the time and the GP would have relied upon the advice of the Aviva representative or an independent adviser.

Early Repayment Charges/Fees (ERC) & Break Costs

As a result, under these swaps, customers were forced to make substantial payments to lenders such as Aviva, to the detriment of their businesses. Doctors were and often are still unable to terminate these swaps without paying large (and previously undisclosed) breakage costs (or Early Repayment Fees) to the lenders.The break costs, described as “repayment fees” or “exit fees” are prohibitively expensive and in turn lead to difficulties for future practice planning such as bringing in new partners.

Insurers like Aviva (Norwich Union, previously GP Corporate Finance) the Fixed Rate Loan documentation will have a generic clause referring to Early Repayment Fees but which does not explain the method of calculation – perhaps because that method involves reference to Gilts-linked or Interest Rate Derivatives?

Aviva’s unexplained “early repayment fee”

The clause below is meant to explain to borrowers (often doctors who are financially and legally unsophisticated) what the ‘Early Repayment Fee’ is but it does not explain it at all nor warn that the costs could be substantial as they are linked to derivatives.

The Early Repayment Fee is an amount sufficient fully to indemnify us against any reduction in the rate of return that we expect to receive on our investment in the Loan as a direct or indirect result of the Early Repayment. The amount of indemnity will be ascertained in accordance with our usual method of calculation from time to time.

GPFC / Norwich Union / Aviva Standard Condition 10.2.2 ‘explaining’ an “Early Repayment Fee”

Those break costs could be several hundred thousand pounds if not millions – all dependant on the cost of breaking a hidden derivative. Most doctors thought this was clause was simply an ‘early redemption penalty’ which might cost a few to several thousand pounds like in a domestic mortgage because of the above vague wording with no warning the costs could be substantial. Some break costs amount to nearly 60% of the loan amount.

Can I repay my mortgage early?

Yes, you can repay your mortgage early, although there may be costs incurred in doing so. If your mortgage is on a variable rate of interest you can repay at any time without incurring an early repayment fee. If your mortgage is on a fixed rate of interest, it is likely an early repayment fee will be payable. Please contact us to request an illustrative repayment quotation.

GP Finance FAQs, Aviva

We have successfully obtained redress via High Court swaps mis-selling litigation and via the FCA agreed IRHP Review on behalf of SMEs ranging from family run businesses or local retail companies to listed PLCs and offshore companies.  We specialise in hidden derivatives litigation and have issued more court claims than any other law firm. Many hidden swaps cases settle via out of court settlements with banks and insurers doing this in order to prevent the setting of a case precedent which would cost much more.

What are ‘Hidden Swaps’ or embedded derivatives?

Embedded swaps – also known as hidden swaps – are fixed rate or tailored business loans that contain embedded complex financial derivative products.  With embedded swaps, unlike with standalone swaps, the derivative product (i.e. the swap) and the loan are marketed and sold as part of the same product. Major lenders, insureres, banks and building societies promoted these embedded swaps to their customers as ordinary business loans without explaining that these “loans” also contained complex financial derivative products, which bore significant risks to customers.  As a result, customers are now finding that they are unable to exit these “loans” without paying prohibitive (and previously undisclosed) breakage costs to their banks.

In my view, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.

Warren Buffet, Berkshire Hathaway annual report, 2002

I wasn’t aware of the hidden interest rate swap and excessive early repayment fee

If you are a GP, you may have been mis-sold the loan if:

  • your fixed rate loan was packaged with an interest rate swap of which you were unaware:
  • you were aware of the interest rate swap but you were given inadequate information, unsuitable advice and the risks of the same were not explained to you;
  • the options and penalties associated with refinancing were not explained to you; and/or
  • you were not provided simple numerical illustrations of early breakage/repayment costs.

Why use a Specialist Hidden Rate Swap Solicitor?

Derivatives are a complex subject matter which most generalist lawyers simply won’t be familiar with or understand to a level adequate enough to be able to recognise and formulate a mis-selling claim. Our specialist lawyers are degree level educated in banking and securities law and have professional experience in both financial services regulatory auditing and in litigation against banks.  This experience has been gained not only at other leading city law firms but at the legal and compliance departments of the banks themselves.

Our team will ensure your interest rate swap mis-selling claim achieves the best possible result in terms of putting you back in the position your business would have been in but for the hidden swap. This usually means a refund of all balancing payments and escaping or recovering the contingent liability (ie the break fee). We work to achieve our client’s interests by attempting to negotiate with the banks wherever proper and commercially sensible to do so. When the time comes to issue legal proceedings we know how best to do so. If a without prejudice settlement approach is unsuccessful we seek on behalf of our client both litigation funding and after the event insurance policies and prepare and issue a claim without delay.

Call us about your Fixed Rate Loan case 

If your business is a party to an interest rate swap which you feel was mis-sold we, as specialist interest rate swaps lawyers, are able to assist. Get in touch so we can assess your claim. We can subsequently provide urgent help, advice or representation to clients from our expert legal team of leading financial services mis-selling litigation solicitors and barristers. Just call or email us now for a free initial telephone consultation; our legal team are waiting to help.


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