Holding Bank Shares? Think again.

Another week, another  bank rip-off…

The Payment Protection Insurance (PPI) mis-selling scandal has only just come to a head. Banks are facing compensation claims of as much as £6bn from customers duped into buying insurance they didn’t need.

And now big UK banks will be all over the papers again – this time for mis-selling another sort of insurance, this time to small businesses.

Here’s how it works…

You’re a small business and you take out a loan with a bank. And just like with PPI, the bank wants to hit you with some “insurance”. Making interest on a loan isn’t enough for these guys. They want to optimise !!!

With a small business, banks cannot sell critical illness or redundancy insurance. So they have to be a little more imaginative.

The idea went a little like this: “Hey, that loan you’re taking… Now you’d be a fool not to want to protect your business against interest rate moves. Look, we’ll put together an interest rate swap contract. Basically, if rates move against you, this contract will pay out…”

But what many business owners didn’t realise was that if interest rates moved down (which of course they did) then they’d be on the hook for potentially hundreds and thousands of pounds.

And you can bet the banks were keen on shifting these policies. This from the Sunday Telegraph:

“The case of Adcocks (a small electronics retailer) highlights just how much of an edge the banks had. Following 12 months of what Mr Adcock describes as “encouragement” from his local Barclays relationship manager, the company in February 2007 took out an interest rate hedge on its £970,000 of borrowings from the bank. Unbeknownst to Mr Adcock, on the day he signed the agreement, Barclays Capital, the bank’s investment banking arm that structured the deal, is likely to have booked a profit of as much as £100,000 from the sale of the hedge.”

Here’s the full article

These interest rates swaps have driven some businesses into administration. The banks have been siphoning cash straight out of business accounts as a result of ‘adverse moves’ in the interest swap.

Professor Michael Dempster of the University of Cambridge’s Centre for Financial Research said: “I liken it to going to bet on a horse race having fixed the result. You’re not guaranteed to win, but you have a heck of an edge on the punters.”

All this could mean more huge claims against the banks. Prof. Dempster said “I think this could be at least the same size as PPI.”

So it’s clearly another savage blow for the UK’s retail banks. If you aren’t already out of the banking sector, then these sorts of shenanigans ought to make you think twice about holding bank shares.

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