Warren Buffett famously described them as "time bombs" and "financial weapons of mass destruction", but – their impact on the global financial system aside – print has remained largely insulated from the murky world of derivatives. Until now.
In publicly pointing the finger at Barclays over the collapse of its web division, Alderson Print Group brought the latest banking scandal, that of mis-sold interest rate swap agreements (IRSA), home to the industry. While the Surrey-based company is thus far the only printer to have gone on record about its experience with IRSAs, you can bet your mortgage on others being in the same boat.
Those allegedly targeted by the banks in the decade leading up to the recession – and the subsequent collapse in interest rates that left those with IRSAs exposed to both higher monthly payments and massive contingent liabilities – were SMEs taking out loans to support some form of investment (most likely linked to property).
According to Bully Banks, a campaign group of SME business owners who claim to have been mis-sold IRSAs by their banks, the average turnover of businesses mis-sold swaps was £1.7m at the time of entering the agreement, while 72% had a turnover below £1m. Bully Banks says the banks specifically targeted "SME owners with substantial assets available as security", which if true would have put print in their sights.
At the time of writing, APG was on the verge of making up to 90 redundancies at its web division, ABP Web, ahead of the division’s impending administration. The blame rests with Barclays, according to the company, which claims it was mis-sold two separate IRSAs linked to term loans it took out in 2006 and 2008. Barclays has denied the company’s claims regarding the chain of events leading up to ABP Web’s collapse, but it has not denied having sold or ‘mis-sold’ an IRSA to the group.
According to APG chief executive Amanda Syson, the firm’s problems were compounded in 2010 when "Barclays decided it would make sense to consolidate the two interest rate swaps into one". Following this transaction, and for separate reasons, the company began exploring its options regarding switching lenders, only to find that its new IRSA had a much higher breakage fee at around three quarters of a million pounds. As with many SMEs in their position, APG claims that the bank gave them the option to enter into the IRSA but didn’t talk them through the full consequences.
This cuts to the heart of the matter as far as the Financial Services Authority (FSA) redress scheme is concerned, in that many businesses who took out IRSAs did so without being warned of the potential downside, should interest rates fall rather than rise (as the banks were telling SME owners they would). At this point, an interest rate swap is no longer a hedging product to protect against rising interest rates, but rather a potentially costly bet that interest rates will rise and not fall. Convincing business owners to take out IRSAs to protect against rising interest rates created a lucrative market in these derivatives. Banks could profit on this by selling the corresponding position to clients who were betting that rates would fall.
The question left for the members of Bully Banks and anyone else who feels they were mis-sold an IRSA is: where do we go from here? All the major high-street lenders have signed up to the FSA redress scheme and accepted that IRSAs where mis-sold; however, compensation remains elusive and most SME owners are still locked into their IRSAs, while the banks dither over settlements and continue to demand that payments be kept up.
Syson argues that the only companies receiving any form of compensation are those that have been willing to (or are financially capable of) taking on the banks in court. Even then she claims the majority of settlements are reached outside of court. "We believe that a lot of cases that have gone to court have been sorted out on the steps, which is restricting case law and preventing more claims from being brought more quickly."
The consensus seems to be that the banks will continue to fight IRSA claimants and resist making any settlements for as long as possible. This is despite their having signed up to the FSA redress scheme and in several cases publicly set aside large sums of money to deal with the anticipated IRSA mis-selling claims.
Barclays has already set aside a £450m pot to handle claims while HSBC and RBS have estimated their costs at $200m (£126m) and £50m respectively – although lawyers representing claimants believe that the cost to banks could far exceed even Barclays’ estimate.
In the meantime, Syson’s advice to printers is simple. "If you’re already locked into a swap then take some advice from an independent banking consultant," she says. "If people think they’ve been mis-sold then ultimately they need to make their own decisions. The FSA has said the banks won’t take any action against complainants, but obviously that has not been our experience and there are people far worse off than us – people who have lost their businesses. Just how many companies have gone down the pan before they even made it to court?"
How many indeed – and how many more will?