nottheaverageactuary

Actuarial news and views from Cape Town and beyond

The need for TCF: Interest rate swap scandal

1 Comment

The article http://www.theactuary.com/features/2015/06/an-ethical-question examines the need to evaluate the rate scandal ethically.

Last year the interest rate swap scandal was broken by the Telegraph. Banks pretended to offer a service to protect customers from interest rate hikes, all while making it difficult for them to exercise their financial freedoms.  A host of big banks mis-selling their customers an option to fix their interest rates at higher price than the swap market and introducing exorbitant break costs for when customers opted to break out of the agreement. They thus made profits from the higher price they charged on the swaps but also left these consumers in a very difficult position when interest rates dropped below the rate they had fixed in the agreement, thus preventing them to take advantage of the change in rates.

These businesses did not have the access to the swap markets to verify the swap rates nor were they notified of the costs of breaking such agreement. A classic case of financial institutions preying on those with less access or understanding than them. The banks are now being made to compensate those they deceived.

These kind of practices are clear reasons why there is a need for regulation to keep financial institutions for misusing their knowledge and resources to put their customers in unfavourable positions.

Perhaps it’s just the bankers showing us why they have such a bad rep, but it is important that the ethics of financial institutions are continuously checked!

To learn more about the interest rate swap visit:

http://www.telegraph.co.uk/finance/rate-swap-scandal/9363046/QandA-rate-swap-scandal.html

Advertisements

One thought on “The need for TCF: Interest rate swap scandal

  1. Thanks for the insight Taki and for the second link; it explained everything succinctly in a Q&A form and in everyday English, so it was easy to read.

    So I looked up what’s happened after the scandal broke out. It turns out that the banks have paid out £1.8bn in redress to about 11,000 customers who were improperly sold swaps. But the politicians have argued that the compensation is taking too long, without taking into account the losses that businesses made from using the swaps. More info is available here: http://www.telegraph.co.uk/finance/rate-swap-scandal/11578123/WEEKEND-New-legal-challenge-to-banks-swaps-redress-scheme.html

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s