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Banks to begin small business hedge mis-selling review Banks to pay for 'swap' mis-selling, FSA demands
(about 4 hours later)
The big four High Street banks have been ordered to begin reviewing all interest rate hedging products they may have mis-sold to small businesses. Four banks will now compensate tens of thousands of small businesses who were mis-sold complex insurance deals, says the Financial Services Authority.
The Financial Services Authority (FSA) said Barclays, Lloyds, HSBC and RBS href="http://www.fsa.gov.uk/library/communication/pr/2013/010.shtml" >would seek to identify and provide redress to all customers affected. In a pilot study, the FSA found that 90% of deals sold to "unsophisticated" customers broke at least one rule.
The FSA's announcement follows its own review of 173 such sales last year, of which more than 90% broke regulations. Some 40,000 "interest rate hedging products" (IRHPs) have been sold to small businesses since 2001.
The products were typically sold to "protect" borrowers from rising rates. Last summer, the FSA said several banks were guilty of mis-selling and decided that compensation should be paid.
In many cases, banks insisted that small business clients, such as care home providers, veterinary surgeons and pub landlords, had to take out the hedging products as a pre-condition for receiving a loan. The FSA says the four banks involved - Barclays, HSBC, Lloyds and the Royal Bank of Scotland - will have to work out how much their customers lost.
Businesses that bought the products before the 2008 financial crisis were then unable to benefit from the Bank of England's decision to cut interest rates to a historically low 0.5%. Many found they could not terminate the arrangement without paying enormous fees to their lenders. The idea behind the deals was to swap variable interest rates on customers' loans for fixed rates, insuring businesses if interest rates rose.
In some cases, the product was for a larger amount or lasted many years longer than the loans they were supposed to be hedging. But in recent years, interest rates have fallen to record low levels, leaving many businesses paying an excessive interest rate on their loans, which many did not understand would happen when they took out their loans.
The FSA said that it hoped that five other lenders - Allied Irish Banks, Bank of Ireland, Clydesdale and Yorkshire, the Co-operative Bank and Santander - would launch their own reviews by 14 February. In some cases, there were also expensive fees to get out of the deals.
The banks will contact customers directly, and the FSA said there was no need for customers to engage a financial adviser. It is not yet clear how many businesses are likely to receive compensation.
Poor practices "It depends whether a business would have bought that product anyway," says Martin Wheatley, the incoming chief executive of the new Financial Conduct Authority (FCA), which will replace the FSA later this year.
The regulator said that of the sample of hedging products it had itself reviewed, a significant proportion would result in redress. "In such cases, it's a case of 'caveat emptor' ['let the buyer beware'], but in other cases, the contract should be ripped up," he told the BBC.
However, it cautioned that its review had covered some of the more complex products sold and might therefore overstate the proportion of all products that were mis-sold. Who will get compensation?
"Where redress is due, businesses will be put back into the position they should have been without the mis-sale," said Martin Wheatley, the designated chief executive of the Financial Conduct Authority, which is due to take over responsibilities from the FSA this year as part of a reorganisation of banking supervision in the UK. Following a pilot study, the FSA has also revised the criteria for who can claim compensation.
"But it is important to remember that this review is firmly focused on the particular circumstances of each sale. These will determine whether there were failings in the sales process and, if so, whether redress is due." It was concerned that some companies, which might not have understood the complexity of the products they were being sold, might have been excluded.
The FSA's review, concluded last summer, found a range of poor practices including: For example, a bed and breakfast business may, on paper, look like a large operation, purely because it employs a large number of seasonal staff.
  • lack of clarity about the costs of stopping a product
    •
  • failure to check whether a customer understood the risk
    •
  • selling based on personal rewards rather than on the businesses needs.
    •
But it still may not have been sophisticated enough to fully understand the hedging policies it was sold.
The Federation of Small Businesses (FSB) has welcomed the decision to broaden the compensation criteria, but it is still concerned that payments to the banks have not been automatically suspended.
It is also worried that there is no clear way for businesses to appeal if they are refused compensation by their banks.
"With the pilot showing such a significant level of mis-selling, we are concerned that the FSA has not mandated that all payments are suspended when a firm enters into the scheme," said John Walker, the FSB's national chairman.
Principles of redress
The FSA has also established how compensation should be calculated.
It says redress "should aim to put customers back in the position they would have been in, had the breach of regulatory requirements not occurred".
For full compensation, customers will have to show that they would not have bought an IRHP, had the sales rules not been broken.
If they would have bought a different kind of product from the one recommended, they might be offered partial compensation, depending on the losses they suffered.
But if the business suffered no loss, or if they would have bought the product anyway, had it not been improperly sold to them, they will be offered no compensation.
The British Bankers' Association (BBA), which represents all of the UK's banks, says that where customers have been treated unfairly, they will be compensated.
"Banks will be contacting those companies affected shortly, prioritising those with the greatest need," said BBA chief executive Anthony Browne.
"Any business which is currently facing financial distress and is seeking a suspension of payments should get in touch with their bank immediately."
"Consequential" losses
Some small business have complained of making huge losses beyond the money they were paying out on their loans.
Some said they had ended up having to sack staff, or sell assets, in order to save money to make the loan repayments.
These costs, known as "consequential losses," might also include overdraft charges or additional borrowing costs.
The banks will have to ask whether these losses were directly caused by their rule breaches and whether such losses were foreseeable at the time.
But John Walker, of the FSB, was sceptical about the process.
"There is a lack of clarity on what full redress looks like, with banks determining what constitutes consequential losses and how an appeals process will work," he said.
The FSA review only covers mis-selling by the first four banks identified.
A report on a further six banks will follow in the next few weeks.
Are you a small business? Have you been mis-sold an interest rate hedging product? Please send us your comments using the form below.Are you a small business? Have you been mis-sold an interest rate hedging product? Please send us your comments using the form below.