We now live in the world of very low interest rates and some financial commentators think we may even enter the realms of negative bank interest rates. What will happen if a Bank Loan to a customer is also linked to an interest rate swap? The floor on the swap could typically be a zero-interest rate whilst importantly the Bank Loan could actually enter negative territory. This resulting mismatch between the Bank Loan and interest rate hedge could be a serious concern to PLC’s and SME Bank customers which have entered into such arrangements. The end result could be that the Bank customer ends up paying the Bank the difference between the negative interest rate and the interest rate floor. Arguably not what the customer bargained for! This could then lead to a flurry of claims by customers against the Banks for miss-selling of the loan and the accompanying interest rate hedging product.
We may all recall a very substantial number of mis-selling claims against the Banks arising from the 2007/2008 financial crash under quite different circumstances. At that time the Bank customers fixed their interest rates with the Banks as the customers sought protection in the event of rising not falling interest rates. However, the interest rates in late 2007/ 2008 fell dramatically whilst the customers were locked into much higher fixed rates with the Banks. This resulted in a substantial number of claims against the Banks for miss-selling of interest rate swaps.
Will we shortly see round 2 of interest rate miss-selling claims against the Banks? No one, of course, can predict the future of interest rates with certainty. Much depends on whether we will actually see a further fall in interest rates into negative territory. Only time will tell!