Mis-sold swaps may cost UK banks billions
British banks face another round of compensation claims that could total billions of pounds after a study found they had widely mis-sold complex interest-rate hedging products to small businesses.
The interest-rate swaps are the latest in a series of costly banking scandals that include insurance on loans and mortgages that was also mis-sold, rigged global benchmark rates and breaches of anti-money laundering rules.
Britain's financial watchdog said on Thursday it found that in the 173 interest-rate swap test cases it examined, more than 90 percent did not comply with at least one or more regulatory requirements.
A significant proportion will result in compensation being due, the Financial Services Authority (FSA) said.
Martin Berkeley, a senior consultant at Vedanta Hedging, which advises on interest-rate hedging products, said the final bill for banks on these products could be as high as 10 billion pounds ($16 billion).
So far, the four biggest banks have set relatively small sums aside for compensation. Barclays has taken the highest provision at 450 million pounds, HSBC has set aside about 150 million pounds, RBS 50 million pounds and Lloyds has said the cost won't be material.
They have already set aside 12 billion pounds to compensate customers mis-sold payment protection insurance (PPI) and industry sources have told Reuters they expect that number to double.
The rate-swap products were designed to protect firms against rising interest rates, but when rates fell they had to pay huge bills. Companies also faced hefty penalties to get out of the deals, which many said they were not told about.
Berkeley said the scandal had a worse impact on victims than mis-selling of payment protection insurance to individuals.
"The difference between this and PPI is that people lost their homes and businesses. These products were toxic."
The FSA said Barclays, HSBC, Lloyds and RBS will review sales of the products. Customers will be contacted by their banks and need not involve other advisers.
Banks are keen to keep claims managements companies out of the process, having blamed them for inflating the cost of compensating customers mis-sold insurance on loans and mortgages.
The FSA has estimated that over 40,000 interest-rate swap products were sold to small firms.
A report by Reuters last year, citing bank emails and phone conversation details, exposed a picture of an aggressive sales culture where staff under pressure to hit targets fell short of their obligation under FSA rules to provide "clear, fair and not misleading" information about their products.
The FSA's study, launched last year after it had found "serious failings" in the way the products were sold, was set up to allow the regulator to assess the banks' proposals for reviewing sales and to ensure customers got the right outcome.
The FSA said on Thursday it had tweaked the criteria under which firms are entitled claim to focus on small companies who were unlikely to understand the risks associated with the products.
Companies such as bed-and-breakfast businesses, which previously were unable to claim because they hired a large number of seasonal workers, can be included whereas small units of multi-national companies cannot.
The FSA assessed evidence provided by banks, customers and independent advisors. It has also reviewed sales of the products by smaller banks including Santander UK and the Co-Operative Bank and will publish findings in relation to them by February 14.
The products range in complexity from caps that fix an upper limit to the interest rate on a loan, through to complex derivatives known as "structured collars" that fix interest rates with a bank but introduce a degree of interest-rate speculation. Banks have already agreed to stop marketing "structured collars" to retail customers.
(Editing by Erica Billingham)