Mis-selling UK property swaps to cost banks 5-10 billion pounds
LONDON, Sept 9
LONDON, Sept 9 (Reuters) - Banks face a ten billion-pound ($15.6 billion) bill to settle claims they mis-sold interest rate hedging contracts to real estate firms, research from property consultant DTZ showed on Monday.
DTZ estimated the total cost to British and overseas banks was between five and ten billion pounds, which will pile further pressure on lenders already under fire for rate fixing and misleading selling practices.
Such hedging contracts were designed to protect UK borrowers against rising interest rates but ended up by costing them huge bills when rates fell.
The punitive costs - which included big penalties to get out of the deals - prevented many commercial property companies from striking much-needed refinancing deals in the wake of the financial crisis as real estate values plunged.
Such compensation deals will help unblock "one of the biggest impediments so far to successful refinancing and restructuring of debt across the commercial property industry", said DTZ global head of research Hans Vrensen.
Though mis-selling claims typically involve smaller companies unaware of the risks in using such financial derivatives, bigger companies also suffered, said Mayad Rassam of financial consultancy Vedanta Hedging.
"We are advising a number of large international property firms, some with notional swaps in the hundreds of millions, who believe they did not fully understand the complexity of what was provided to them," he said.
DTZ's research covers sterling-denominated loans by British and overseas lenders to real estate borrowers of all sizes and includes cash payments and concessions.
British banks have paid out 500,000 pounds to compensate smaller companies for mis-sold interest rate swaps and the figure is set to rise rapidly in coming months following a series of test cases over the last year, the Financial Conduct Authority said last week. ($1 = 0.6398 British pounds) (Additional reporting by Matt Scuffham; Editing by Sophie Walker)