Downside of rate-swap deals not explained properly
AN INTEREST Rate Swap Agreement is a financial device companies use to exchange interest rate payments with each other.
Swaps are useful when one company wants to receive a payment with a variable interest rate, while the other wants to receive a fixed-rate payment.
Each group has its own priorities and requirements, so these exchanges can work to the advantage of both parties.
Companies borrowing money before the recession were sold the products as part of loan agreements.
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The fixed rates they were sold proved to be a bad deal because Bank of England base rates have remained at an extremely low level for years, while they have continued to pay a much higher fixed rate.
Firms say the potential downside of IRSAs was not properly explained to them and they had little choice but to take one out when they were borrowing money. The FSA ruling effectively says banks sold IRSAs in the interest of high, quick profits, not the interest of customers.