News & Insight

Barclays faces legal action

Oliver Jones

Barclays may have misled customers by selling complex financial products they didn't understand.

Barclays has joined a roster of other UK banks facing legal action, as customers come forward claiming they were mis-sold risky derivatives

The selling of complicated financial derivatives has come under increased scrutiny since the 2008 financial crisis, where the use of collateralised debt obligations – financial derivatives which disguised risk – contributed to the magnitude of the crisis, and forced a multi-trillion dollar worldwide bailout.

In this case, it appears Barclays may have misled husband and wife Ramesh and Rana Parmar, selling them complex interest rate swaps they didn’t understand.

An interest rate swap is an agreement between two parties (in this case, Barclays and the Parmars), to switch between interest rates in the future, the idea being to reduce the overall interest rate on the loan.

It’s the first case brought by private individuals to make it all the way to trial, and successful prosecution could open the floodgates to hundreds of similar cases.

What is Barclays alleged to have done?

When Barclays sold its products, it admitted that they exposed the Parmars to £77,000. But the prosecution alleges that real exposure was more likely to have been around £300,000 – and that Barclays would have calculated this in advance.

The bank is alleged to have then used around £300,000 of the Parmars’ credit limit to protect itself against breakage costs, while failing to notify the couple of “the potential magnitude of breakage costs involved in the swaps or of the utilisation of their credit limit”.

Breakage costs refer to the penalty a creditor may impose for paying a loan ahead of time – this is normally meant to discourage borrowers from paying off one loan with another.

Barclays in court

The trial, which was scheduled to start last Tuesday, is also unusual because the legal costs are likely to outweigh any award. The Parmars are claiming damages of up to £500,000 – hardly enough to rationalise a class-action lawsuit against one of the UK’s biggest banks.

The couple’s lawyer, M. Ali Akram, explains that “The reason the customers continue to fight this litigation is the family refuse to be bullied by this bank and wish to set a precedent to help other small businesses.”

Barclays is also set to return to court in January 2019, when former boss John Varley, senior executives and Barclays itself will be charged with conspiracy to commit fraud in 2008.