Zombie warning over businesses mis-sold swaps

Meet the team:

Share this post: linkedin Twitter facebookshare Email
Posted in:Banking and Finance, Corporate and Commercial|February 19, 2013 | Join the mailing list

• Businesses struggling with interest-rate swaps unable to grow and some are going under
• Some 10,000 North West firms may have been mis-sold the swaps
• Berg representing 50 businesses on interest-rate swaps

The North West risks creating a legion of zombie businesses unless those mis-sold controversial interest-rate swaps tackle their situation quickly, Manchester law firm Berg has warned.

Although the Financial Services Authority last month finally published the findings of a pilot report into the complex products – which hedged against a rise in interest rates – it could take a year or more for companies using the FSA scheme
to get appropriate compensation.

It remains unclear how compensation under the FSA scheme will be calculated and many will fall outside the criteria, for example if they have swaps in excess of £10million.

In the meantime, many businesses will be turned into ‘zombies’, still trading but without the cash to grow and invest, according to Berg. Some North West firms will even be put out of business altogether.

Berg, which is advising 50 businesses on interest-rate swaps, estimates about 10,000 North West businesses may have been mis-sold the products, which hedged against the risk of rising interest rates yet imposed massive charges when rates
were lowered by the Bank of England following the recession in 2008.

Many of the sectors hardest-hit by the impact of interest-rate swaps, such as leisure, care homes and property, are ones on which the North West’s economy relies.

Alison Loveday, managing partner at Berg, said: "It took the Financial Services Authority seven months to complete a pilot study into 170 businesses and with thousands of businesses affected, we cannot see that there is going to be any quick

"It is important that businesses protect their legal positon, otherwise by the time their claim is assessed under the FSA scheme they may find that the compensation offered is unacceptable. But by then the limitation date for commencing legal
proceedings may have passed.

"In the meantime, some businesses are being forced to operate as zombie firms – kept alive by banks but without the cash to grow or invest. Clearly this is very bad for the companies concerned but we shouldn’t underestimate the impact on
the wider economy, too.

"It is clear that businesses need help. We take a pragmatic view. This is not about bashing banks but liberating firms so they can help kick-start the North West economy. We adopt a holistic approach and assess the needs of a business as
a whole, whether by identifying a need for assistance with the FSA scheme, litigation, restructuring, refinancing or insolvency advice. For some businesses, all of these services will be appropriate."

Four of the UK’s five major business banks – HSBC, Barclays, Santander and RBS – have already set aside hundreds of millions of pounds to deal with compensation arising from mis-sold interest-rate swaps. Berg expects that pot to near £1.5billion
by mid-2013 as provisions are increased and Lloyds TSB announces what it has set aside.

Berg has offices in Manchester and London.

To discuss how we can provide further advice in connection with these issues, please contact Alison Loveday, Partner and Head of our Employment team, by email to alisonl@berg.co.uk or alternatively you can call
Alison on 0161 833 9211.

The information and opinions contained in this article are not intended to be comprehensive or to provide legal advice. No responsibility for article’s accuracy or correctness is assumed by Berg or any of its partners or employees.
Professional legal advice should be obtained before taking, or refraining from taking, any action as a result of the contents of this article.

Join our mailing list

More from berg


"I have been hugely impressed by the common sense approach taken by the entire team as well as by their hard work, good humour and superb advice."

Keith Black, Regatta

“I am genuinely impressed by berg [...] largely due to Alison who is probably the best lawyer I have worked with. Edward helped us deal with the complications that arose in our lives following the destruction of our business. He was helpful, and provided wise advice in a compassionate way..."

Sebastian Parsons, Litigation & Restructuring client