UK banks face big bills for mis-selling derivatives to small businesses

PUBLISHED : Friday, 01 February, 2013, 12:00am
UPDATED : Friday, 01 February, 2013, 5:23am

Four of Britain's biggest banks, including HSBC, have agreed to compensate what could potentially be thousands of small businesses that were improperly sold interest rate derivatives, after a probe by the country's financial regulator.

The Financial Services Authority said it found serious failings in reviews of products sold by HSBC, Barclays, Royal Bank of Scotland and Lloyds Banking. The FSA looked at 173 sales to "non-sophisticated" customers and found that more than 90 per cent did not comply with the rules.

"The products that they sold were just absurdly complex," FSA managing director Martin Wheatley said on BBC Radio 4 yesterday. If small businesses can show that "the break costs weren't clearly stated or understated or there was a mismatch with the size of the loan", then there would be a case for compensation, he said.

The banks sold 28,000 of the products since 2001, the FSA said. A significant portion of the 173 cases reviewed by the regulator is likely to result in compensation.

The claims against lenders may turn into another costly scandal for British banks still paying back customers wrongly sold insurance on personal loans.

British banks have reserved more than £9 billion (HK$110 billion) to settle claims on payment protection insurance, which was meant to cover payments on credit cards and mortgages in case of illness or unemployment.

Banks offered derivatives to small business and individual customers to meet concerns that they might not be able to service loans if interest rates rose.

A Lloyds spokesman said: "We will provide redress as quickly as possible to those small-business customers where detriment is identified."

Products included caps, where customers paid a premium to keep borrowing costs below a predefined maximum; swaps, where customers locked in a fixed rate; and more complex combinations of these products, among them collars, which kept payments within a fixed range.

When interest rates fell, the market value of many swap and collar products plunged, leaving customers out of pocket.

Wheatley said: "This review is firmly focused on whether there were failings in the sales process and whether redress is due."