By Simon Miller
The four major British banks have agree to pay compensation for the mis-selling of interest rate hedges to small businesses.
Barclays, HSBC, Lloyds and RBS have agreed to compensate small-to-medium business customers that were mis-sold the most complex interest rate hedging products and to stop marketing interest rate structured collars to retail customers following an agreement with the Financial Services Authority (FSA).
The regulator believes that potentially thousands of companies could have lost out in costs that they were never warned.
From 2001 to date, banks sold around 28,000 interest rate protection products to customers from simple 'caps' that fixed an upper limit to the interest rate on the loan to the more complex products such as 'structured collars' that fix interest rates within a band but with a degree of interest rate speculation.
Over the past two months the FSA conducted a review of these sales and found a
range of poor sales practices including:
o Poor disclosure of exit costs;
o Failure to ascertain the customers’ understanding of risk;
o Non advised sales straying into advice;
o “Over-hedging” (i.e. where the amounts and/or duration did not match the underlying loans); and
o Rewards and incentives being a driver of these practices.
The FSA pointed out that not all businesses will be owed redress, but for those that are, the exact redress will vary from customer to customer, but could include a mixture of cancelling or replacing existing products, together with partial or full refunds of the costs of those products.
This exercise will be scrutinised by an independent reviewer at each bank appointed under the FSA’s powers.
Martin Wheatley, managing director of the Conduct Business Unit, said:
“For many small businesses this has been a difficult and distressing experience with many people’s livelihoods affected. Our work has focused on ensuring a swift outcome for these businesses that form such an important part of the economy.
He added that he was particularly pleased that the banks' CEOs - Bob Diamond, Brian Robertson, Antonio Horta Osorio and Chris Sullivan - had provided a personal assurance that they would have responsibility for oversight of this work and will ensure that complainants are treated fairly.
"They have also committed that, except in exceptional circumstances, they will not foreclose on or vary existing lending facilities without the customer’s prior consent," Wheatley added.