What are interest rate hedging products?

Interest rate hedging products are typically separate to a loan and, if so, are regulated by the FCA. These products were frequently marketed to customers who had a loan with the bank. There are broadly four types of products that have been sold to customers.

• Swaps – enabling the customer to ‘fix’ their interest rate
• Caps – placing a limit on any interest rate rise
• Collars – enabling the customer to limit interest rate fluctuations to within a simple range; and
• Structured collars – enabling a customer to limit interest rate fluctuations to within a specified range, but involves arrangements where, if the reference interest rate falls below the bottom of the range, the interest rate payable by the customer may increase above the bottom of the range.

Interest rate hedges include a variety of different products sold to customers to help protect them against interest rate risk. In principle, interest rate hedging products can meet customers’ needs, as they provide greater certainty over future loan repayments. However, these products can also be very complex and therefore susceptible to mis-selling.