Banks found guilty of mis-selling to SMEs, too

In a whirlwind week of revelations about the financial sector, the FSA has described 'serious failings' in the sale of products to small businesses.

by Michael Northcott
Last Updated: 19 Aug 2013

If you thought the financial sector couldn’t possibly attract more criticism than it already has this week, think again. The FSA announced today that banks have been mis-selling interest rate hedging products to SMEs, generating revenue at the expense of their own customers. The repercussions are pretty vague though, as the FSA explains that Barclays, HSBC, Lloyds and RBS have agreed to provide ‘appropriate redress’ where the mis-selling took place. At least we know who some of the culprits are…

Interestingly, the statement seems to suggest those came off worse were the ones who bought ‘the most complex products’, and the banks have been instructed to sort those instances out first. The banks must be feeling the heat this morning (especially as the focus shifts from Barclays onto the other big boys over Libor manipulation), because they have all agreed immediately to stop selling these interest rate hedges to SMEs, and they have also hinted at compensating their customers.

The point of the interest rate hedge is to protect businesses from rising interest rates – the hedge investments would cover that expense if it happened. But the problem for SMEs arose when they discovered that falling interest rates meant ever-rising charges and that it was extremely expensive to get out of.

Apparently, around 28,000 businesses bought these hedging products, but the response from banks was almost callous: Lloyds said the compensation costs would be immaterial, and apparently HSBC was pleased that the regulator had provided ‘clarity’ on the issue. Something tells us SMEs could have done with some clarity in the first place, and, well, the banks just aren’t all that bothered about it…

This mis-selling scandal has been brewing for some time however, and is only one piece in a growing jigsaw of scandalous practices amongst financial institutions. Just today, Barclays chief executive Bob Diamond refused to resign over revelations that his staff have spent years manipulating commercial lending rates to improve their trading position. The bank faces £290m and potentially a string of criminal investigations over it, but Diamond sees fit to hang on in there…

Thankfully, a lot of the small businesses affected will be compensated but as ever, when signing on the dotted line, caveat emptor remains good advice. 

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