Hedging products which don’t hedge, but actually increase risk, have unfortunately always been around. The lure of ‘beating the market’ and securing a better rate is attractive to many FDs. The article Brexit boom in currency hedges sparks fears of mis-selling on 23rd July 2019 focuses specifically on brokers selling unsuitable derivatives to unassuming small and medium sized businesses (‘SMEs’) – but they are also sold by banks to much larger businesses too. The fact that these businesses are classified as ‘professional’ does not mean their understanding is necessarily sufficient – but it does give the product seller some protection from accusations of ‘mis-selling’.
The changes which arose from the FCA review of interest rate mis-selling in 2013 have resulted in product sellers tightening up their documentation, emphasising that they cannot offer advice and instead encouraging users to take independent advice before entering these products. We encourage Boards to ensure they are fully informed of the hedging instruments being deployed in their companies and that they ensure treasury policies prohibit any product which is speculative. Read our article here.
An easy rule of thumb with hedging is that if you are beating the market, then you are injecting risk elsewhere. In derivatives, there is no such thing as a free lunch.
For more information please contact Jackie Bowie, Group CEO at Chatham, at email@example.com.