Short Guide: ‘Hidden’ or ‘Embedded’ Swaps

Financial Institutions in the UK promoted interest rate swaps and fixed-rate loans as protective measures against potential increases in interest rates for customers. However, more often than not, such financial institutions neglected to adequately inform and advise customers about the substantial contingent liability risks associated with these swaps.

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.

Hidden or Embedded Swaps

Hidden swaps or embedded swaps refer to derivative instruments embedded within financial contracts, such as loans or bonds, where the presence and nature of the swap may not be immediately apparent. These swaps are embedded as additional features within the financial instrument and can expose the unwary customer to fluctuations in interest rates or other financial variables. For example, in a loan agreement, there might be a hidden interest rate swap where the borrower agrees to pay a variable interest rate but has the option to convert to a fixed rate at a later date. Similarly, embedded swaps can be found in bonds, leases, or other financial contracts, impacting the cash flows and risks associated with these instruments.

The challenge with hidden swaps is that their complexity and potential impact on financial outcomes may not be fully understood by the average customer with limited to no experience of complex financial instruments. Transparent disclosure and thorough understanding of contractual terms are crucial to identifying and managing hidden or embedded swaps to avoid unexpected financial consequences such as massive break costs and creditworthiness and credit limit utilisation which lenders ought to have fully explained.

A Step-by-Step Guide

If you believe you have been mis-sold a fixed rate loan by a bank, there are several steps you can take to address the situation and seek redress. Keep in mind that it’s essential to act promptly, as there may be time limits for making a claim. Here’s a guide to the steps you can take:

Step 1 – Gather Documentation:

Collect all relevant documentation related to your loan, including the loan agreement, correspondence with the bank, and any records of conversations or advice provided. This will serve as crucial evidence in your case. It is important to retain a copy of all correspondence with the Lender as this evidence may tip the scales of justice in your favour.

Step 2 – Understand the Terms of the Loan:

The next step is to thoroughly review the terms and conditions of your loan. Pay close attention to any hidden or undisclosed terms, such as breakage costs (redemption/exit fees) and assess whether the lender provided clear and accurate information about these terms. Examine the agreement for language related to hedging or risk management. Phrases like “interest rate protection” or “hedging against market fluctuations” may suggest the presence of hidden swaps.

Step 3 – Examine Interest Rate Provisions:

Scrutinise the sections related to interest rates. Look for terms that allow for changes in interest rates, conversion options, or any complex provisions that could indicate the presence of an embedded swap. Determine whether there are options within the agreement that allow the lender to convert from a variable interest rate to a fixed rate or vice versa. Such options may indicate the existence of an embedded swap.

Step 4 – Contact the Lender:

Reach out to the Lender to express your concerns and formally make a complaint. Provide a clear and detailed explanation of why you believe you were sold a hidden or embedded swap. Request a response in writing. Most lenders have a formal complaints procedure that you can follow for raising and escalating complaints.

Step 5 – Seek Financial Ombudsman Service (FOS) Assistance:

If the response is unsatisfactory or if they do not respond within a reasonable time frame, you can escalate the matter by lodging a complaint to the Financial Ombudsman Service (FOS). The FOS is an independent body that helps resolve disputes between financial institutions and consumers.

Step 6 – Seek Legal Advice:

If you are concerned or harbour suspicions about the presence of hidden swaps, consider seeking expert legal advice. Legal professionals specialising in financial law can assist in interpreting complex contractual terms and assessing potential liabilities. If you suspect a ‘Hidden’ or ‘Embedded’ Swap, our Expert Solicitors will be able to help you determine if you have fallen prey to such derivative products. We can assess the merits of your case and guide you on potential legal action.

Step 7 – Initiate Legal Action:

If you have been advised that you have a strong case, you may choose to pursue legal action against the lender. Remember that seeking professional legal advice early in the process is crucial. At Lexlaw, we can assess the specifics of your case, guide you on the best course of action, and help you navigate the complexities of hidden or embedded swap claims. We know how to litigate and we know how to win. We litigate with authority and our reputation is well-known within UK legal circles.

Time is of the essence, as strict time limits apply for making a claim or complaint. The typical time limit for bringing a mis-selling claim is six years from the date of the alleged misconduct or, alternatively, three years from the date the claimant became aware (or should have become aware) of the issue. Lexlaw Solicitors can provide timely legal advice to safeguard your rights and prevent your claim from becoming ‘time-barred.’ Contact us today for a comprehensive review of your situation and let us guide you through the complexities of mis-sold fixed rate loans, uncovering the tactics banks may employ to hide potential risks.

Book an Initial Consultation with Our Financial Services Litigation Lawyers 

Our Financial Services Litigation team of Solicitors and Barristers in London are highly experienced in mis-selling litigation and specialise in representing SMEs, high net worth individuals and companies in high value bridging finance mis-selling disputes. Our high profile and high value cases regularly appear in the national and international media. We have successfully managed and settled mis-selling court litigation against all major UK banks and regulated financial advisers.