Banks Forced to Compensate Vitctims of Mis-selling Scandal

February 5, 2013

Some of Britain’s biggest banks have come under fire for mis-selling interest rate swaps to small businesses. The mis-selling scandal is set to cost the banks billions of pounds, though latest developments mean that the banks will be handed a free pass on its largest claimants.

Interest rate swaps are meant to protect small businesses against rising interest rates; however, when the interest rates dropped dramatically, many businesses were left with colossal fees, whilst others faced huge penalties for refinancing their loans or cancelling their hedges.

The Financial Services Authority, the city regulator, has found that 90% of the interest rate swaps sold failed to meet regulatory requirements.

According to the FSA, the swaps were traditional variable interest rate loans, but the banks combined them with complex interest rate movement bets. They were sold aggressively to small and medium-sized businesses and the banks then sold them on via their investment divisions and made huge profits.

The FSA had previously demanded that Barclays, HSBC, Royal Bank of Scotland and Lloyds take a look at the sales they made to small businesses, many of whom have been left in serious financial difficulty, and compensate them for their losses.

However, it was announced last week that customers that took out hedging loans with a value of £10m will not be able to claim compensation. This is because the banks view those at this level as “sophisticated”, meaning they believe they should have been able to seek advice from accountants and lawyers before committing to anything. This cap means those with the largest claims are now left out in the cold and without redress.

Guto Bebb, MP, chairman of the all-party Parliamentary group for swap mis-selling, said of the move to not offer compensation to those with larger claims, “This shows why the banks are so confident that this scandal won’t cost them an arm and a leg. Just because a customer has a large hedge or ended up with one does not mean they necessarily understood the product.”

A FSA spokesman said about the decision, “We introduced the £10m notional hedge limit to bring businesses such as farms, B&Bs and small care homes into the review. Without this change they might otherwise have been excluded due to the size of their fixed assets and numbers of seasonal part time workers.”

The FSA are now looking at sales made by Allied Irish Bank (UK), Co-operative Bank, Bank of Ireland, Santander UK and Clydesdale and Yorkshire banks and will announce its findings later in the month.