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Barclays due in court over Libor swap mis-selling spat

Barclays will appear in the High Court on Monday accused of mis-selling £12m of interest rate hedging products - or swaps - after manipulating the Libor interest rate.

Guardian Care Homes, a Wolverhampton-based residential care home operator is suing the bank and wants to be fully compensated for its losses because it says the swap rates were based on Libor, Reuters reports.

In June, Barclays agreed to pay £270m in fines to US and UK authorities after admitting it manipulated Libor and other key interest rates.

Monday's hearing is set to be a landmark test case for thousands of small businesses who believe they were mis-sold such swaps. Guardian Care Homes originally issued proceedings in the High Court against Barclays in April.

At the preliminary hearing both parties will argue their respective sides of the case before the judge decides if it will go to trial. Barclays, which has already earmarked £450m to compensate customers mis-sold interest rate swaps, filed defence documents in August in which it said Guardian Care Homes was financially sophisticated enough to understand the agreement.

The Financial Services Authority estimates that since 2001, some 44,000 interest rate swaps were wrongly sold to UK companies since 2001. The swaps were designed to offer companies protection against rates rising by making their future repayments more predictable, but many borrowers had no idea they would pay much more if lending rates dropped and they would face big fees to extricate themselves from the arrangements.

In June, the UK’s four largest banks agreed to review their previous sales of swaps to small businesses and to compensate customers for mis-selling loan insurance following the FSA discovered "serious failings" in how they were sold.

But the FSA’s compensation scheme has been criticised for its lack of transparency and being too slow and for lacking transparency. The Federation of Small Businesses has urged the FSA to consider an alternative scheme that is entirely independent of banks.

Others, like Guardian Care Homes, which operates 27 homes for 1,000 elderly or vulnerable patients, can take banks directly through the courts.

The company says it faced a £12m loss after being sold two swaps in 2007 and 2008 against two loans it held with the bank jointly worth £ 70m.

The contracts had locked the firm in for two decades despite the loans of £41m and £29m only being taken out for 10 years and five years, respectively. To free itself, Guardian Care Homes would have to cough up £25m.

Published 26 October 2012


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