FCA Treasury Select Committee Submission SME Lending Contract For Difference Interpretation

FCA’s Position on Interest Rate Hedging Products, Stand Alone and Hidden or Embedded as Reflected in Their Submission to the Treasury Select Committee on SME Lending

Extract from FCA Letter to a member of NCSG 25th April 2014 relating to ‘Embedded Interest Rate Swaps’

The definition of a ‘contract for difference’ (CFD) as defined by Article 85 of the Regulated Activities Order 2001 (RAO) includes rights under a contract “the purpose of which is to secure a profit or avoid a loss by reference to fluctuations in … an index or other factor designated for that purpose in the contract”. Where interest rate contracts are purchased separately to a loan which a customer wishes to hedge, our view is that they are a form of CFD, as the purpose of the contract, from the customer’s viewpoint, is to avoid a loss by reference to interest rate fluctuations.,

Where an IRHP is referred to as “hidden” or “embedded”, this will generally mean that a customer has taken out a commercial loan but may be faced with the same repayment features and potentially significant break costs that a customer would have faced had they taken out a variable rate loan and a standalone IRHP. This is because the bank will have entered into a separate IRHP with a third party in order to manage the financial risk of entering into the loan. The terms of the loan will provide that the borrower will bear the bank’s break costs of terminating the IRHP early should the customer terminate the loan early.,

While the economic effect for the customer may be similar, our view is that the loan the customer has entered into is not a CFD because the purpose of the loan is not to secure a profit or avoid a loss by reference to fluctuations in interest rates. Rather, the purpose of the loan from the customer’s perspective is to borrow money on the specified terms in the loan, for example, relating to the interest rate payable on the loan.,

To confirm, as these products fall outside our remit, the FCA’s regulatory powers are much more limited. The Government has been clear in outlining this to MPs and to organisations representing customers, including Bully Banks. It is for Parliament to decide whether the FCA’s remit should be extended to cover these loans. However, even in the event that our remit was extended, we could not take action retrospectively

About Scott Simpson

Landlord/Property Developer sold a Fixed Rate Loan, 'Tailored Business Loan' by Yorkshire Bank. These Type of Business Loans Contained Hidden or Embedded Swaps With Huge Break Costs.