The Financial Services Authority has ordered the big four banks to conduct a review into all interest rate hedging products they may have mis-sold to small businesses and to compensate the firms accordingly.
The announcement follows on from the regulator’s own review of 173 such sales last year, of which more than 90 per cent broke regulations and it accused the banks of selling small businesses “absurdly complex products”.
The products were typically sold to “protect” borrowers from rising rates but in many cases, lenders insisted that small business clients had to take out the hedging products as a pre-condition for receiving a loan.
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 per cent and many found they could not terminate the arrangement without paying huge fees to their lenders and in some cases, the product was for a larger amount or lasted many years longer than the loans they were supposed to be hedging.
Knowing that the review was coming, the banks have already set aside more than £700m against potential swap mis-selling claims, with Barclays making the largest provision so far of £450m.
However, with the FSA’s findings these provisions are likely to be increased, with the total bill expected to reach at least £1.5bn, though it is believed that the final cost could easily exceed £10bn.
The banks have been given six months to complete their reviews of mis-selling, though the Authority said that lenders with large numbers of customers could take up to 12 months.
The regulator said 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.