£10bn bill faces banks over mis-selling of interest rate hedging contracts

DTZ estimated the total cost to British and overseas banks was between £5bn and £10bn, which will pile further pressure on lenders already under fire for rate fixing and misleading selling practices.

Such hedging contracts were designed to protect UK borrowers against rising interest rates but ended up by costing them huge bills when rates fell. The punitive costs – which included big penalties to get out of the deals – prevented many commercial property companies from striking much-needed refinancing deals in the wake of the financial crisis as real estate values plunged.

Such compensation deals will help unblock “one of the biggest impediments so far to successful refinancing and restructuring of debt across the commercial property industry”, said DTZ global head of research Hans Vrensen.

Though mis-selling claims typically involve smaller companies unaware of the risks in using such financial derivatives, bigger companies also suffered, said Mayad Rassam of financial consultancy Vedanta Hedging.

“We are advising a number of large international property firms, some with notional swaps in the hundreds of millions, who believe they did not fully understand the complexity of what was provided to them,” he said.

DTZ used data from Vedanta Hedging and London law firm Collyer Bristow to compile its analysis.

Stephen Rosen, partner at Collyer Bristow, said: “Many of the cases we have worked on show significant mismatches between the swap and loan terms.” DTZ said that it estimates the potential for “significant concessions and swap redress” to investors.

British banks have paid out £500,000 to compensate smaller companies for mis-sold interest rate swaps and the figure is set to rise rapidly in the coming months following a series of test cases over the last year, the Financial Conduct Authority said last week.