Contracts For Difference – The Essence of the Embedded Interest Rate Swap – Fixed Rate Loan Mis-Selling Issue
Contracts For Difference
1. A Tailored Business Loan (TBL) relies on a Synthetic Derivative or an Over The Counter (OTC) Derivative of an Interest Rate Hedging Product (IRHP), which itself is a Derivative of a Money Market Instrument. The further away from the Money Market instrument a derivative gets, the less transparent it is.
Lacking Transparency = easier to fiddle.
2. By definition, these instruments are Contracts For Differences (CFDs)
3. CfDs are “designated investments.”
4. “Designated Investments” can only be sold to “Eligible Counterparties” & Professional Investors. Others customers can “elect” to be Professional Investors, BUT the implications in terms of reminders, annual renewals and information disclosure are ‘onerous.’
5. Have you elected to become a “Professional Investor?”
6. The banks will respond that they had FCA permission to sell these products both as ‘stand alone’ IRHP and embedded (TBLs).
This is the Concentration Camp Guard Defence – we were only following orders, BUT is THE reason we are in such difficulties: This is a ‘government approved’ RF!
The FSA “overlooked” that the basis of the TBL is a “Designated Investment” and hence illegal. The consequences of this “approval” is the potential insolvency of the UK “Banking Sector” – again!
7. Also, as an aside, there is a very good chance that the MTM ‘profit’ on embedded swaps/ IRHPs kept UK Banks from totally disappearing in 2008/ 09. This is one reason that the Senior Management of most of our UK High Street Banks are “Treasury” inclined and why they have not been replaced/ sacked/ prosecuted!
An admission of liability by the FCA would eviscerate UK Bank Management and Regulators, as well as bankrupting the sector.