break costs early repayment fees hidden fixed rate loan swap gilts banks insurance aviva norwich union gpcf lloyds nationwide west bromwich

Hidden Swaps in Fixed Rate Loans & TBLs

Fixed Rate Loans mis-selling has come to light due to massive break costs (also called early redemption fees or penalties). These arise because banks and insurers have hidden complex derivatives (with massive contingent liabilities) in a ‘loan wrapper’ but not explained this to the customer. Lloyds, Clydesdale, Yorkshire, Nationwide, West Bromwich, Norwich Union and Aviva (GPCF) have all sold Fixed Rate Loans.

Over 60,000 fixed rate or tailored business loans containing embedded derivatives or ‘hidden swaps’ have been sold to SMEs by major UK Banks and Building Societies such as RBS, Barclays, Lloyds, HSBC, Santander, Clydesdale, Yorkshire, Nationwide and West Bromwich. Some GPs have Fixed Rate Loans issued by General Practice Finance Corporation Ltd (GPFC) taken over by Norwich Union now Aviva which are loan wrappers for complex Interest Rate or Gilts-linked Derivatives.  

These ‘loan contracts’ are in fact regulated ‘contracts for difference’ and are open to legal challenge as they were thereby often mis-sold, for example, due to inadequate warning of break costs. We have litigated more cases than any other law firm in the UK and are settling cases constantly including cases involving ‘hidden swaps’.

“Data from Barclays, HSBC, Lloyds, National Australia Bank Group and RBS shows that more than 60,000 fixed rate loans with mark-to-market costs have been sold since 2001, [which is] significantly more than the 40,000 standalone IRHPs covered by our review.”

Martin Wheatley, Chief Executive of the Financial Conduct Authority

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Understanding Derivatives and Swaps

To understand what ‘hidden swaps’ are one must first understand standalone swaps. A standalone interest rate or gilts-linked swap is a type of complex financial derivative product. Banks often sold these to customers (such as SMEs) in the period 2005 to 2008 as a precondition of providing a business loan.

Interest rate swaps (and fixed rate loans) were promoted and sold by banks as a means of protecting customers against the impact of potential rises in interest rates on their loans.  However, banks failed to inform and advise their customers of the potential and significant contingent liability risks of these swaps.

Early Repayment Fees and Break Costs

As a result, under these swaps, customers were forced to make substantial payments to the banks, to the detriment of their businesses.  Furthermore, customers were and often are still unable to terminate these swaps without paying large (and previously undisclosed) breakage costs (or Early Repayment Fees) to their banks, building society or insurer lenders. With insurers like Aviva (Norwich Union, 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?

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 (which Warren Buffet, a sophisticated investor, has famously referred to as ‘weapons of mass financial destruction‘).

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.

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 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. The FCA are concerned at the conduct of the banks and building societies and have stated in a letter from Martin Wheatley, the FCA Chief Executive to the Financial Secretary to HM Treasury, the Rt Hon Greg Clark MP that:

“We have concerns that firms … may consider ’embedding’ all their IRHPs into commercial loans in future and thus avoid our regulatory oversight altogether.  This could include ’embedding’ some of the most complex IRHPs (e.g. Structured Collars), which the banks have agreed to stop marketing to retail customers.”  

Martin Wheatley, Chief Executive of the Financial Conduct Authority

View full source: 12 November 2013 Letter from FCA’s Martin Wheatley to HM Treasury.

‘Hidden Swaps’ Mis-selling by Banks & Building Societies

The sale of complex financial instruments such as caps, options, collars, swaps, structured collars, cancellable swaps and other OTC derivatives is classed as ‘designated investment business’ which is highly regulated.  In order to sell these products a financial institution must:

  1. sell via an authorised individual in their organisation who is licensed by the FCA; and
  2. who, together with the organisation, must comply with the Conduct of Business rules when advising on and selling these products.

The sales process of  Fixed Rate Loans or Tailored Business Loans (FRLs and TBLs) may fail to comply with the required sales process set out in the FCA’s Conduct of Business rules for the sale of contract for differences. In many of these sales the firms breached the relevant regulation and a legal duty of care by: (i) not explaining to their customers the possible detrimental effects of the embedded interest rate derivative and the associated risks together with (ii) failing to consider that the embedded derivative may well not be the most suitable product for the customer. As a consequence, if the customer never understood the risk and has suffered a loss then the agreement may be open to legal challenge to recover any loan repayments in excess of the variable rate and to recover any breakage costs (both of which may be very substantial sums of hundreds of thousands or millions of pounds).

‘Contract for Difference’ or a ‘Contract for Loan’?

Whilst the marketing and sale of loans is regulated, such lending regulation is light (comparative to derivatives regulation) and never contemplates the embedding, or hiding, of complex financial instruments such as derivatives within a commercial loan. Derivatives are contracts for difference usually entered into by large and sophisticated entities.  As contracts for difference, they carry serious and complex risk depending on fluctuations in the reference rate (eg interest rate) and as a result may be very costly to exit and to calculate that risk.  As a result the marketing and sale of derivatives is tightly regulated and the products have to be carefully explained when sold.  It appears that many UK financial institutions have sought to avoid the cost of compliance by asserting they are simply selling contracts for loans not contracts for differences.

This is a new area of law so whilst there is no precedent case law, LEXLAW, together with our counsel teams and hedging experts, consider that embedded derivatives contracts are likely to amount a regulated financial instrument. We note that National Australia Bank Group’s Clydesdale Bank and Yorkshire Bank are participants in the FCA agreed Interest Rate Hedging Product (IRHP) review scheme for those Tailored Business Loans that have embedded in them products more complex than a vanilla cap or vanilla swap (such as cancellable swaps, collars, structured collars or dual rate swaps). It is clear therefore that some limited comfort can be derived that the FCA must agree that simply labelling something a loan does not obviate the need to sell the embedded product according to regulation. Otherwise, why are so many TBLs in the FCA agreed review scheme?

Resolving a Mis-sold Fixed Rate or Tailored Business Loan:

If you have been mis-sold a hidden swap (or fixed rate or tailored business loan) there a number of possible solutions.  These include:

  • attempting to negotiate with the Lender (not usually successful)
  • complaining to the Lender (not usually successful)
  • opting-in to the Review of Past Sales of Interest Rate Hedging Products (IRHPs), commonly referred to as the “FCA Review” or “FSA Review” (no longer an option)
  • complaining about the Bank or Building Society to the Financial Ombudsman Service (FOS) (limited success and limited compensation)
  • preparing and serving a letter before action, issuing proceedings and litigating against the bank (the step that most often results in settlement)

The initial step may be to attempt to negotiate with the bank and to seek to reach an agreement although this is often very difficult to achieve without threatening and/or commencing legal action. Pre-action advice, information gathering and correspondence is managed by our specialist fixed rate loan solicitors who consider the facts of your case, the circumstances the fixed rate loan was sold in and the bank’s position.

We then prepare a detailed pre-action letter of claim to start off the negotiations. If negotiation will not resolve a mis-sold FRL then litigation will be considered. In the best outcome the contract can be rescinded which means that parties will be put in their original positions before they entered the contract.  

Our expert litigation lawyers will assess your case and position and using their specialist knowledge and experience will strategise the best to way to commence proceedings against the bank. Another consideration is complaining to the Financial Ombudsman Service, via which process it may be possible to obtain compensation of up to £150,000 (for complaints made after 1 January 2012). Our lawyers have experience dealing with the FOS and can assist clients as to the FOS’ rules and procedures. Where appropriate we can assist in making formal fully prepared and well presented complaints on clients’ behalf and can advise if litigation is a better option for redress, which in these cases it often is.

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.

Our Mis-sold TBL Lawyers get the best results

We endeavour to make the process as stress-free as possible for our clients and seek to eliminate the possibility of business or litigation failure. We know that each client’s case and business is unique, therefore we adopt a bespoke approach tailored to suit the client’s circumstances. We provide specialist senior legal advice from solicitors and barristers (including at QC level) at the outset when it absolutely matters in pursuing the best strategy to follow. We are regularly instructed by regional solicitors’ firms to give specialist litigation advice and support in swaps mis-selling cases. We assist by:

  • Issuing legal proceedings & drafting documents/pleadings to support the mis-selling claim;
  • Assisting you in preparation of evidence to support your mis-sold hidden swap case;
  • Appointing the right derivatives and hedging experts to ensure the best chance of success in litigation;
  • Appointing forensic accountants to assess and report on the refunds and consequential losses due;
  • Liaising with the bank and the Court and/or the Financial Ombudsmen Service;
  • Providing first class Court representation and advocacy; and
  • Developing (and aiding implementation of) strategies that allow the business to continue.

Please note: Claims Management Companies are regulated by the Ministry of Justice and are not law firms made up of solicitors and barristers. In these cases, they can only complain to the FOS. They cannot issue legal claims nor represent their clients at Court and may lack expertise in this area. You do not need a CMC to assist you and typically they will simply refer your case to a lawyer for a fee (from the lawyer). We do not accept referrals from CMCs.

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.

Our Media Appearances

As leading financial services litigation experts regularly fighting banks, building societies, bridging lenders and insurers we have advised, featured and commented to the media on numerous occasions. Some of our media citations and appearances appear on our Media Interest page.

Contact our specialist hidden swaps lawyers for a consultation: ☎ 020 7183 0529 or email [email protected]

Please note: As legal claims will be centred around breach of contract, claimants run the risk of their claim becoming time or statute-barred by virtue of s.5 of the Limitation Act 1980. This applies six years after the date of the hidden swap agreement. Therefore it is vital to instruct solicitors promptly. 


The Limitation Act 1980 sets out strict statutory deadlines within which you must bring litigation claims. Your legal rights will become irreversibly time-barred if you fail to take legal action (or defend a claim on time). Therefore, you should seek specific legal advice about your legal dispute at the very first opportunity so that you understand the time you have left. Failure to take advice or delay in taking action can be fatal to your prospects of success.

Please note that for regulatory reasons we do not offer any free advice.

Check Your Litigation Case ✔

We analyse your case prospects. We deliver strategic legal advice at your first fixed fee meeting. We get optimal legal results. Want our opinion on your case? Click below or call our lawyers in London on ☎ 02071830529