Another scandal rocked the financial sector yesterday as the City watchdog revealed some of Britain’s largest banks will have to refund or pay compensation to potentially thousands of small businesses.
Barclays, HSBC, Lloyds and Royal Bank of Scotland (RBS) have all agreed to compensate customers after the Financial Services Authority found ‘serious failings’ in the sale of complex financial products.
They were found to have mis-sold so-called interest rate swap arrangements (IRSAs), which some small businesses bought as protection – or to act as a hedge – against a rise in interest rates without fully grasping the downside risks
Banks sold about 28,000 interest rate protection products to customers since 2001, the FSA said.
Martin Wheatley, managing director of the FSA’s conduct business unit, said: ‘For many small businesses this has been a difficult and distressing experience with many people’s livelihoods affected.’
The claims echo the payment protection insurance (PPI) scandal that emerged last year, costing banks billions of pounds, and come in the week Barclays was fined £290million for manipulating the rates at which banks lend to each other.
As well as offering redress directly for those customers that bought the most complex products, the banks have also agreed to stop marketing certain IRSA products to retail customers, the FSA said.
The City regulator has spent the last two months reviewing the sale of IRSAs, talking to more than 100 customers who came forward.
It found poor sales tactics including failing to provide sufficient information on the hefty exit costs involved, failure to gauge the customers’ understanding of risk and found rewards and incentives were a driver of these practices.
The FSA added that not all businesses will be owed redress, but for those that are, the exact redress will vary from customer to customer.
This exercise will be scrutinised by an independent reviewer at each bank appointed under the FSA’s powers.
Mr Wheatley added that he had received personal reassurances from the bosses of the banks involved – including Bob Diamond at Barclays – that they will have responsibility for oversight of this work.
Mr Diamond is facing calls to resign over the interest-rate rigging scandal, and Lloyds, RBS and HSBC are all under investigation.
The British Bankers’ Association, the leading trade association for the UK banking and financial services sector with more than 200 member banks, said: ‘Our members have been working closely with the FSA while it carries out its thematic review into interest rate swaps and will continue to co-operate fully.’
In a statement, Lloyds, which set aside £3.6billion to cover the cost of PPI compensation, said it did not expect the costs of redressing customers who were missold IRSA products to be ‘material’.
It said: ‘Interest rate derivative products are not products the group has sold widely.
‘Given the limited exposure of the group to these products the financial impact of this remediation and the associated costs are not expected to be material to the group.’
But rates have since fallen to 0.5 per cent, which means customers’ monthly loan repayments under an IRSA are higher than they would have been without one.
Bully Banks, a pressure group set up by alleged victims of swap mis-selling, claims on its website: ‘In many cases the bank had simply never explained the possibility of this happening, and so customers were denied the opportunity of making an informed choice when entering into an IRSA.’
The group claims banks failed to explain the negative aspects of the IRSA because the products were sold by specialist teams who earned high levels of commission.
Some customers have paid high costs to extricate themselves from their IRSA deals.
A statement for RBS said: ‘In the case of a small number of less sophisticated customers who entered into more complex swap products we have agreed to move directly to redress.
‘We believe risk management products are an essential part of corporate banking and it is important we restore customer trust in this area.
‘We are committed to the fair and timely treatment of our customers and will work closely with the FSA to achieve that end.’
A debate in the House of Commons last week saw MPs from across the country offer examples of mis-selling for the interest rate swap products.
Aberconwy MP Guto Bebb claimed thousands of businesses lost large amounts of money after being mis-sold the complex products by their banks, and many were told that without signing up they risked being refused credit.
He said many business people did not understand the deals but trusted their bank manager.
In other cases, he said, businesses were offered only one product and the bank made no effort to provide a choice.
A survey by Bully Banks, which has been set up by alleged victims of swap mis-selling, found nearly three quarters of its members claim to have been forced to buy a swap by their lending bank as a condition of their loan.
Michael Brennan, of City law firm Bracewell Law, which has acted for IRSA customers, said the FSA’s announcement was ‘welcome news to the thousands of small businesses who were wrongly advised, and sometimes obliged, to needlessly take out these complex financial contracts’.
He added: ‘Over the life of their contract, these financial products turned out to be for the sole benefit of the banks and in the vast majority of cases were highly inappropriate for small and medium-sized enterprises.
‘Sold as protection against rising interest rates, they had the effect of keeping struggling businesses on artificially high rates, costing them thousands of pounds per month to service.
‘Furthermore, businesses were all too often unable to service these agreements due to the high breakage fees, the risk profile of which the banks never properly explained to them.
‘We are aware of many businesess that have been forced into severe financial distress, administration and liquidation, often at a huge emotional cost to the owners and managers, as they were unable to keep up with their payments.’