At a minimum, this example highlights how the distinction between client and counter-party has been lost as banks have combined lending products (mortgages) with capital market products (interest rate swaps).
This example also raises a series of interesting questions. Did other universal banks in the UK offer this type of product? Were similar products offered and sold in the US? What disclosure is needed so that even a 19 year old has enough information to assess the riskiness of the product before they buy it?
One budding investor – Jessica Naraghi, 23, from Bolton – ended up with an amortising base rate collar swap even though she did not take out the loan it was meant to protect.
Her decision, aged 19, to say ‘yes’ to Royal Bank of Scotland’s Global Banking and Markets salesman over the telephone has cost Ms Naraghi £73,000 and left her £36,000 in the red.
Loan documents show that NatWest, owned by RBS, required Miss Naraghi to purchase the capital markets product as a condition of securing her £472,000 loan in June 2008. It said a precondition of any agreement was that the bank was “satisfied with the customer’s interest rate hedging arrangements”.
“I wanted to purchase a commercial property,” said Ms Naraghi, who was advised by her property owning father about the merits of buying commercial real estate to generate a profitable return. “They agreed to give me a large loan but it did not go through. But they activated the swap two days before.”
The swap taken out on June 4 capped her interest rate payments at 5.5pc but only allowed them to fall to 4.5pc and meant that she paid more interest as Bank base rates fell in 0.5pc. The £16,755 fee was paid upfront.
When Miss Naraghi complained, she said she was told to keep paying because failing to do so would harm her credit rating. Later, in June 2009, when she instructed a solicitors firm, NatWest insisted that RBS was “in no doubt that the correct paperwork has been obtained, the correct procedures followed and a clear instruction given by Miss Naraghi to proceed with the transaction”.
Ian Settle, NatWest’s commercial banking director in Bolton, added: “Miss Naraghi chose to enter into a hedging instrument prior to drawing on the loan and it was also our customer’s choice not to drawn down on the loan.”
Letters from RBS Global Banking and Markets, however, suggest the paperwork was not complete. The bank wrote in October 2008 requesting “the formal trade confirmation” that it sent in June be signed and returned.
The bank said if it did not receive the paperwork “we will assume that you have approved the terms of the transaction as set out in the formal confirmation, unless you notify us of any objections that you might have with the next five London business days.”
Ms Naraghi said: “I never saw the man from RBS and he never explained to me that if rate goes down I have to pay a lot of money. He was ringing me constantly to take the swap. He had me under pressure to take it. But I never signed anything. It was all verbally, on the phone.”
As the interest payments increased she called a stop last year and paid a break fee to terminate the agreement. “I refused to pay any more and they terminated the agreement and took another £36,000 from my account for termination of agreement. My account is now £36,000 overdrawn and they are intending to take legal action against me,” she said.
RBS said it was invesitgating the complaint. “RBS has strict policies in place to ensure that interest rate swaps are sold properly,” a spokesman said. “We regularly carry out audits of our businesses to ensure our policies and procedures are robust, meet the relevant regulatory guidelines, and are followed by staff.”