Some of Britain’s biggest banks are facing a hefty compensation bill today after the City watchdog said it found “serious failings” in the sale of complex financial products to small businesses.
Barclays, HSBC, Lloyds and Royal Bank of Scotland have agreed to compensate customers where the mis-selling of so-called interest rate swap arrangements (IRSAs) has occurred, the Financial Services Authority (FSA) said.
IRSAs are complicated derivatives products that may have been sold as protection – or to act as a hedge – against a rise in interest rates without the customer fully grasping the downside risks.
Banks sold around 28,000 interest rate protection products to customers since 2001, the FSA added.
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 £290m (€361m) 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 customer 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.