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'Toxic' insurance puts hundreds of Sussex businesses at risk
Hundreds of small firms across Sussex are facing financial ruin after buying toxic insurance from their high street bank.
Many business owners are preparing legal challenges after interest rate swaps left them heavily out of pocket.
But lawyers have warned some traders may go under before they have the chance to claim back their lost cash.
Companies affected in Sussex include pubs, vets and haulage firms.
Between 2005 and 2008, thousands of business bosses across the country were told they could have a loan if they also took out a swap – a form of insurance designed to protect them from a rise in interest rates.
However, when rates plummeted during the financial crisis, the charges on the deals soared to tens of thousands of pounds a month.
And when the horrified traders tried to quit the deals they were stung with eye-watering exit costs.
Leading lenders Barclays, HSBC, Lloyds and RBS agreed to review the sales in June after the Financial Services Authority (FSA) said it had found “serious failings” in the way the instruments were sold.
Seven smaller banks have also agreed to review their sales.
But Mike Lloyd from Hove, who lost his brewery business, Sarumdale, after buying an interest rate swap, said he feared many Sussex firms could be forced into administration before a decision is reached.
He said: “In 2006 we were an expanding business looking to acquire new sites. When Barclays said it wanted protect us against interest rate increases, it seemed a sensible thing to do. But when interest rates fell, it was disastrous. It was costing us hundreds of thousands of pounds a year. We felt completely on our own.”
Mr Lloyd’s brewery began to fall behind with its payments and soon he started breaking up the business he had spent 20 years building.
In June, just five working days after Barclays agreed an emergency loan to save Sarumdale, the bank called in the administrators and the brewery finally went under.
Mr Lloyd said: “It was horrendous. We got a telephone call and the administrators were there in ten minutes.”
Another case involves the owner of a small property company in Mid Sussex, which took three interest rate swaps in 2005, 2006 and 2007.
When rates were slashed during the financial crisis, his bank charges soared until the total costs exceeded £1 million.
With his business facing possible closure, the property owner is now preparing legal action to recover his cash.
Richard Hopkins, a business lawyer at Brighton-based practice Mazars LLP, said the scandal had been “a nightmare” for small firms in Sussex.
He said many traders were reluctant to come forward and admit to their problems but he believed the number of Sussex businesses affected was “in the hundreds”.
He said: “Many business owners believed they were talking to an adviser from the bank but instead they were talking to a salesman.
“They were buying something they didn’t need and the exit costs were not explained.”
Karim Mohamed, a partner at Mayo Wynne Baxter, said: “We know companies that have already gone under. Time is of the essence.”
Aspokesman for the British Bankers Association said: “Swaps can provide some certainty about what businesses will pay for long-term borrowing and this can help with budgeting and forecasting.
But, as with all products or services, they may not suit everyone so any customer should seek independent advice.”