View the article online at http://citywire.co.uk/money/article/a655098
Big four banks prepare for fresh mis-selling payouts
The compensation bill for mis-selling interest rate swaps to business customers is expected to hit £1 billion.
Britain’s big four banks mis-sold over 90% of products to small businesses designed to help hedge interest rates, according to a damning review by the City regulator.
The banks will now review individual sales and provide redress to companies, the Financial Services Authority said, in statement that knocked banking shares this morning.
The FSA, which in June last year first announced the need for small firms to be compensated, emphasised that redress would be judged on the basis of each individual sale. One banking analyst, Ian Gordon of Investec, estimated that this could cost the banks around £1 billion.
The review focuses on ‘non-sophisticated’ customers who were unlikely to have understood the risks associated with these products, which are designed to help against the risk of interest rate movements.
The hedges range in complexity from simple caps that fix an upper rate on a loan to more complex products, such as ‘structured collars’ which fix interest rates within a band but introduce a degree of interest rate speculation.
Since 2001 the four banks have sold 28,000 interest rate protection products to customers, with a sample 173 sales to ‘non-sophisticated’ customers scrutinised for the preliminary review reported today.
The FSA is expanding the category of business customers deemed not sophisticated enough to understand the risks of hedging products. It admitted its initial approach of excluding owners of substantial businesses meant farmers and bed and breakfast owners, for example, were wrongly labelled financially sophisticated.
A trade body representing small businesses expressed concerns about how the banks will compensate firms. ‘We are concerned that the FSA has not mandated that all payments are suspended when a firm enters into the scheme – we would like the banks to do this for their customers,’ said John Walker, chairman of the Federation of Small Businesses. ‘There is also a lack of clarity on what full redress looks like, with banks determining what constitutes consequential losses, and how an appeals process will work.‘
The FSA is also reviewing sales practises by five other banks – Allied Irish, Bank of Ireland, Clydesdale and Yorkshire, Co-operative and Santander – and will provide an update in two weeks.
Today’s statement from the FSA comes after MPs yesterday accused the FSA of being too close to the big banks. Cross-party members of the Parliamentary Commission on Banking Standards said the regulator was not effective at regulating those at the top.
Banks are still embroiled in other scandals including the alleged rigging of Libor rates and the mis-selling of payment protection insurance (PPI).
Royal Bank of Scotland (RBS.L) shares were hit the hardest this morning, dropping 2.3% to 338p. Barclays (BARC.L) followed, down 1.5% to 297p, while Lloyds (LLOY.L) and HSBC (HSBA.L) dropped less than 0.5% to 50p and 721p respectively.
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