Financing your business: SME interest rate derivatives recovery framework

Around 2005, banks began selling interest rate derivatives to their SME customers. Interest rate derivatives were touted to protect variable rate money loans from the risk of interest rate increases. Interest rate derivatives are complicated products that ultimately proved less suitable for SMEs. They were also often not properly matched to the underlying financing, as a result of which many business owners have encountered significant financial disadvantages that they did not foresee in advance. Chances are that there are a number of you, business owners, who are struggling with such derivatives.

Uniform recovery framework for interest rate derivatives

The AFM has found that in the past, banks have in many cases failed to adequately comply with legal requirements when advising non-professionals. They also failed to adequately inform SME business owners about the risks associated with derivatives. This prompted the Minister to establish a Derivatives Commission. That Commission presented a "Uniform Recovery Framework" on July 5, 2016. ABN AMRO, Deutsche Bank, ING, Rabobank, SNS and Van Lanschot have committed to the Recovery Framework. Based on it, all eligible files will be reassessed by these banks, whereby incurred damages will be compensated.

Please note that banks will approach those who took out a derivative between April 1, 2011 and April 1, 2014 themselves. However, SME customers who took out a derivative after January 1, 2005 and whose termination date was after April 1, 2011, but ended before that date due to premature settlement, must, within six months after publication of the Recovery Framework(i.e. before January 5, 2017), apply themselves.

The four steps of the Uniform Recovery Framework

The Recovery Framework then provides for four steps. The first step concerns so-called exotic products, the "structured interest rate derivatives. These will be converted to interest rate swaps or interest rate caps, for example. In the second step, imperfections of an interest rate derivative will be repaired. The third step provides for a leniency fee for derivatives with interest rate swaps and/or interest rate collars. Finally, the fourth step seeks to provide compensation to the customer for increases in the interest surcharge on a variable rate loan combined with an interest rate derivative.

By applying the Recovery Framework, the banks explicitly do not acknowledge liability. It is and remains a compensation scheme that is, incidentally, quite complicated. Not only in terms of overseeing its (im)possibilities in individual cases, but also in terms of answering the question of who does or does not qualify for application of the Recovery Framework. The alternative is to hold the bank liable itself and leave the Compensation Framework in place. Not an easy balancing act. Think carefully about the pros and cons of the recovery framework and whether it actually offers a better (and especially faster) solution than proceedings in which the bank is held liable.

Food for thought. Of course, we are happy to think with you.