In the UK, SMEs in industries as varied as law firms to electrical appliances stores feel increasingly aggrieved at what is beginning to look like a predatory practice perpetrated by some of the mainstream commercial banks.
What these firms all have in common is a commitment, agreed with their lender, to purchase an interest rate swap product, with a view to providing “cover” for their business activity. The products, sold as protection and a form of insurance, have time and again become huge and unanticipated liabilities in their own right. Now a growing chorus of resentment is turning into evidence of a more organised potential mis-selling scandal. Many businesses feel as though they were not provided with full information or a range of scenarios when their loans were accompanied by a “hedging” product supposedly designed to smooth out the peaks and troughs of interest rate liabilities.
They are telling us that the heavy downside costs they face as a result of the current Bank of England base rate situation are paradoxically pushing otherwise healthy businesses to the brink of bankruptcy. The stories of the way these products were sold, the paperwork that accompanied them and the terms and conditions attached come from too many different sources to be dismissed as coincidence or carelessness.
On the other side of the Atlantic, 3 state pension funds have examined their banks’ FX pricing practices and commenced legal actions as a result:
- October 2009. The State of California, on behalf of CalPERS and CalSTRS, alleges fraud on currency trades handled by their custodian State Street Bank. California is seeking $200 million in damages.
- October 2010. Washington State Investment Board reached a settlement withState Street Bank for $11.7 million to settle a pricing dispute over FX transactions.
- January 2011. Virginia’s Attorney General alleges that BNY Mellon defrauded several of Virginia’s pension funds by regularly overcharging for currency trades. The AG is seeking damages of $150 million.
This happens because of the structural impediments that exist in the FX market. Banks trade for themselves, meaning they do not act as your company’s agent but they take the other side of your company’s trades and have economic incentive to give you the worst possible rate that you will accept.
Banks have created and maintain opacity in the FX market in order to overcharge customers, both corporate and individuals, to increase profits. Banks simply charge customers as much as they can.
Source: www.fxtransparency.com; http://www.telegraph.co.uk/finance/rate-swap-scandal/9234204/Government-must-act-to-help-SMEs-on-the-brink.html
