By Michael Northcott Thursday, 31 January 2013

City watchdog orders banks to review SME mis-selling

The FSA has ordered the four biggest high street banks in the UK to review all the interest rate hedging products that could have been mis-sold to SMEs in recent years.

The mis-selling saga is becoming a increasingly deep money-pit for the banks now, after the Financial Services Authority ordered them to review their interest rate swap hedging products and to provide redress to all SME customers affected. 

Barclays, Lloyds, HSBC and RBS have could find themselves liable for billions of pounds worth of additional payouts, after the FSA conducted its own review of 173 hedging products sold last year, and find that more than 90% of them broke regulations. It looks like they’ve finally caught up with a story that MT first covered nearly a year ago.

The product was supposed to protect borrowers from rising interest rates, but in numerous instances, banks made it a condition for receiving a loan that businesses had to take out the hedging product, too.  The issue became apparent when firms that had signed up to the hedging products before the financial crisis were then unable to enjoy the effect of the Bank of England cutting interest rates. 

Furthermore, contractual terms on the products also meant that the firms could not get out of the deal without paying exorbitant fees to their bank, and some of these deals the hedging arrangement lasted for several years longer than the loan agreements that they were ‘designed’ to support.

The FSA says that it expects Allied Irish Banks, Bank of Ireland, Clydesdale and Yorkshire, the Co-operative Bank and Santander to launch reviews of their own volition by mid-February.

The designated chief executive of the FSA, Martin Wheatley, said: ‘Where redress is due, businesses will be put back into the position they should have been without the mis-sale. 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.’

Understandably, the banks have already tried getting the FSA to implement a cut off date for mis-selling claims related to PPI to quell the bleeding. But with this new can of worms open, such a measure may only be papering over the cracks…and the FSA said ‘no’ anyway…

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