Britain’s leading banks are facing new allegations of mis-selling complex financial products to hundreds of small businesses despite them having little knowledge of what they were buying, a Sunday Telegraph investigation has revealed.All of the UK’s major banks, including Barclays and HSBC, as well as taxpayer-backed lenders Lloyds Banking Group and Royal Bank of Scotland, are facing legal action which could lead to billions of pounds of damages for small and medium-sized businesses...
Banks have been handed a free pass allowing them to get out of paying compensation on the biggest interest-rate swap mis-selling claims, The Independent has learnt. The controversial products were pushed aggressively by banks on to small and medium-sized companies when they were sold loans. They were sold as a way of protecting against rising interest rates. But they left firms facing huge bills that sent some to the wall during the financial crisis, when interest rates unexpectedly plummeted. Banks will now be allowed to throw out the biggest compensation claims. The Financial Services Authority ordered banks on Thursday to review all sales, after a survey found that more than 90 per cent included in the review breached at least one of its rules. But it has emerged that swaps of £10m and above will be excluded, exempting the banks from compensating companies that took them out. There was no mention of the figure in the watchdog’s press releases or in a detailed larger document. It was accessible only through study of a complicated flow chart. While the £10m figure looks substantial, experts said it was conceivable that some relatively small enterprises, and many medium-sized firms, could be excluded from the process as a result. City analysts suggest that banks’ compensation claims related to swaps mis-selling could reach £1.5bn – a large sum but only a fraction of the more than £10bn set aside to cover the mis-selling of payment protection insurance policies. Excluding the bigger claims will help keep the that figure down, amid mounting concerns about banks’ financial health. Rich Eldridge, head of finance at the law firm Manches, described the “cap” on the review as “startling”. Mr Eldridge, who contacted The Independent after spotting the get-out, clause said: “The FSA report just contains an oblique reference to customers who meet a balance-sheet and employee test being included in the review where their swap does not exceed £10m. In fact all swaps over £10m have been unexpectedly excluded, irrespective of balance-sheet or turnover figures.” Mr Eldridge continued: “Many people suspected the potential exposure of the banks was too large for taxpayer-owned banks. It seems the FSA has bowed to the pressure from the banks by agreeing to exclude the largest claims. “I have lost all faith in the process. A process in which the FSA bows to the strength of the banks will not deliver a fair result for borrowers. It is particularly concerning that the FSA has not been upfront about changing the review to exclude the larger claims.” As a result, shares in the banks have hardly moved. Barclays shares finished down just 2p at 300p following the announcement; Lloyds shares have lost only 0.62p to 51.64p, and HSBC has given up 4.5p to 719.6p. Royal Bank of Scotland, the only bank to warn of increased provisions as a result of the review, has lost 6.7p to 340.5p. That indicates the City is relatively relaxed about the review and the potential costs from it. Watchdogs are privately extremely concerned about the potential cost of legal claims relating to the Libor interest-rate fixing scandal. None of the big banks has yet made any provision to cover these. Critics have complained that, because the banks will be conducting the review, this leaves them in the position of being “judge and jury”, although the FSA will be closely watching how they carry it out. A spokesman for the FSA defended the imposition of the £10m cap and said it was aimed at bringing more firms into the review process. Under the Companies Act, a number of tests are set for a company to be considered “small”. They are having a turnover of less than £6.5m, a balance sheet of less than £3.26m and less than 50 employees. A breach of any two means a company is no longer defined as small. But critics said that could easily exclude many farms, which often employ more than 50 people, and whose land holdings push their balance sheet above £3.26m. As a result the FSA abandoned the tests and simply set a £10m cap. A spokesman for the regulator, soon to be replaced by the Financial Conduct Authority, said: “We introduced the £10m notional hedge limit to bring businesses such as farms, B&Bs and small care homes into the review. Without this change they might otherwise have been excluded due to the size of their fixed assets and numbers of seasonal [or] part-time workers.”
Q&A: Swap with a sting in its tail
Q. What is an interest rate swap?
A. It’s a financial product that was sold to a number of businesses alongside loans to protect them against rising interest rates.
Q. Why has there been problems with them?
A. Swaps have been described as similar to insurance, but they are actually complicated derivative products which often carry a sting in the tail. They left many companies facing high costs when the recession hit and rates unexpectedly tumbled.
Q. Why is there a mis-selling review?
A. The sophistication of interest rate swaps meant many firms weren’t clear about what they were buying into and the potential risks.
Q. Why does the Financial Services Authority want to impose a cap on claims?
A. It argues that the larger firms should have been able to seek advice from lawyers and accountants, although it is a matter of debate as to whether a small provincial lawyer or accountant would have had any more knowledge of the way some of the more complex swaps work than the companies they were advising.
British banks left facing £1.5BILLION payout after watchdog finds 90% of small firms.
Britain's banks have been hit by another blow after it emerged today that 90 per cent of complex insurance products sold to small businesses were wrongly advertised.
A review of 173 interest rate swaps carried out by the Financial Services Authority found that many banks could be liable to repay much of the money they took in from the controversial derivatives.
Financial institutions now face a bill of up to £1.5billion to compensate firms which have struggled after being mis-sold insurance.
Scandal: Britain's biggest banks will have to pay out millions to the victims of mis-sold interest rate swaps
It is believed that as many as 40,000 interest rate swaps were wrongly marketed to small businesses starting from the end of 2001.
Interest rate swaps are complex derivatives sold as as a hedge against a rise in interest rates, and were often included as part of a business loan.
However, while they were marketed as low-cost protection against increases in interest, firms were rarely informed of the potential downside.
When interest rates were slashed in response to the financial crisis, businesses such as bed and breakfasts and takeaway shops were left with huge bills.
The affair is strikingly similar to the scandal over Payment Protection Insurance, which was wrongly sold to thousands of individual bank customers and left financial institutions paying out a total of £13billion in compensation.
Ever since the advent of the credit crunch and the financial crisis which has been blamed on banks' reckless lending policies, financial institutions have become wrapped up in a mounting succession of scandals.
May 2011: After a long-running regulatory battle over Payment Protection Insurance, the big banks admitted they had misled their customers into buying unnecessary coverage, and agreed to set aside up to £13billion to pay compensation to those affected.
June 2012: Barclays was fined after its traders were found to have manipulated the Libor benchmark lending rate. The investigation was soon widened to take in a number of other banks.
August 2012: Standard Chartered was accused of breaking sanctions banning trading with Iran, by hiding $250billion worth of transactions involving the pariah state. The bank was fined $340million by regulators in New York.
November 2012: It emerged that HSBC had enabled criminals' money laundering by allowing them to set up offshore accounts in Jersey. The bank admitted its controls over laundering were too lax and was hit by another huge fine.
Last summer, the FSA lifted the lid on the decade-long swaps scandal by criticising 'serious failings' among the UK's big four banks, Barclays, HSBC, Lloyds and RBS.
The authority said today that the banks have agreed to start reviewing their past insurance sales and providing compensation to businesses unfairly left out of pocket.
Barclays, RBS and HSBC have already set aside £630million in anticipation of future payouts.
The FSA today also provided guidelines for banks to differentiate between sophisticated enterprises which should have known what they were buying, and small firms which did not fully understand the products.
Officials have been reviewing sales of interest rate swaps by Allied Irish Bank, Bank of Ireland, Clydesdale and Yorkshire banks, Co-Operative Bank, and Santander UK.
It expects to confirm by February 14 that these banks can launch their own reviews into alleged mis-selling.
Martin Wheatley, who is set to head the Financial Conduct Authority, said he hoped the FSA's actions will ensure a fair and reasonable outcome for small and unsophisticated businesses.
He added: 'Small businesses will now see the result of the review as the banks look at their individual cases.
'Where redress is due, businesses will be put back into the position they should have been without the mis-sale.'
Federation of Small Businesses chairman John Walker said the findings were alarming, but added that they will also come as a relief to the thousands of small firms who have been waiting for clarity on the situation.
'Now the pressure is on the banks to contact its customers,' he said. 'They must do so quickly and decisively to draw a line under this matter and bring the situation to a close.'
Anthony Browne, chief executive of the British Bankers' Association, said: 'The announcement will give clarity to businesses and will enable the banks to put in place the steps needed to resolve each case for customers.
'Where customers have suffered unfairly the banks have all agreed that they will put it right.
'Banks will be contacting those companies affected shortly, prioritising those with the greatest need. Any business which is currently facing financial distress and is seeking a suspension of payments should get in touch with their bank immediately.
Banks have been handed a free pass allowing them to get out of paying compensation on the biggest interest-rate swap mis-selling claims, The Independent has learnt. The controversial products were pushed aggressively by banks on to small and medium-sized companies when they were sold loans. They were sold as a way of protecting against rising interest rates. But they left firms facing huge bills that sent some to the wall during the financial crisis, when interest rates unexpectedly plummeted. Banks will now be allowed to throw out the biggest compensation claims. The Financial Services Authority ordered banks on Thursday to review all sales, after a survey found that more than 90 per cent included in the review breached at least one of its rules. But it has emerged that swaps of £10m and above will be excluded, exempting the banks from compensating companies that took them out. There was no mention of the figure in the watchdog’s press releases or in a detailed larger document. It was accessible only through study of a complicated flow chart. While the £10m figure looks substantial, experts said it was conceivable that some relatively small enterprises, and many medium-sized firms, could be excluded from the process as a result. City analysts suggest that banks’ compensation claims related to swaps mis-selling could reach £1.5bn – a large sum but only a fraction of the more than £10bn set aside to cover the mis-selling of payment protection insurance policies. Excluding the bigger claims will help keep the that figure down, amid mounting concerns about banks’ financial health. Rich Eldridge, head of finance at the law firm Manches, described the “cap” on the review as “startling”. Mr Eldridge, who contacted The Independent after spotting the get-out, clause said: “The FSA report just contains an oblique reference to customers who meet a balance-sheet and employee test being included in the review where their swap does not exceed £10m. In fact all swaps over £10m have been unexpectedly excluded, irrespective of balance-sheet or turnover figures.” Mr Eldridge continued: “Many people suspected the potential exposure of the banks was too large for taxpayer-owned banks. It seems the FSA has bowed to the pressure from the banks by agreeing to exclude the largest claims. “I have lost all faith in the process. A process in which the FSA bows to the strength of the banks will not deliver a fair result for borrowers. It is particularly concerning that the FSA has not been upfront about changing the review to exclude the larger claims.” As a result, shares in the banks have hardly moved. Barclays shares finished down just 2p at 300p following the announcement; Lloyds shares have lost only 0.62p to 51.64p, and HSBC has given up 4.5p to 719.6p. Royal Bank of Scotland, the only bank to warn of increased provisions as a result of the review, has lost 6.7p to 340.5p. That indicates the City is relatively relaxed about the review and the potential costs from it. Watchdogs are privately extremely concerned about the potential cost of legal claims relating to the Libor interest-rate fixing scandal. None of the big banks has yet made any provision to cover these. Critics have complained that, because the banks will be conducting the review, this leaves them in the position of being “judge and jury”, although the FSA will be closely watching how they carry it out. A spokesman for the FSA defended the imposition of the £10m cap and said it was aimed at bringing more firms into the review process. Under the Companies Act, a number of tests are set for a company to be considered “small”. They are having a turnover of less than £6.5m, a balance sheet of less than £3.26m and less than 50 employees. A breach of any two means a company is no longer defined as small. But critics said that could easily exclude many farms, which often employ more than 50 people, and whose land holdings push their balance sheet above £3.26m. As a result the FSA abandoned the tests and simply set a £10m cap. A spokesman for the regulator, soon to be replaced by the Financial Conduct Authority, said: “We introduced the £10m notional hedge limit to bring businesses such as farms, B&Bs and small care homes into the review. Without this change they might otherwise have been excluded due to the size of their fixed assets and numbers of seasonal [or] part-time workers.”
Q&A: Swap with a sting in its tail
Q. What is an interest rate swap?
A. It’s a financial product that was sold to a number of businesses alongside loans to protect them against rising interest rates.
Q. Why has there been problems with them?
A. Swaps have been described as similar to insurance, but they are actually complicated derivative products which often carry a sting in the tail. They left many companies facing high costs when the recession hit and rates unexpectedly tumbled.
Q. Why is there a mis-selling review?
A. The sophistication of interest rate swaps meant many firms weren’t clear about what they were buying into and the potential risks.
Q. Why does the Financial Services Authority want to impose a cap on claims?
A. It argues that the larger firms should have been able to seek advice from lawyers and accountants, although it is a matter of debate as to whether a small provincial lawyer or accountant would have had any more knowledge of the way some of the more complex swaps work than the companies they were advising.
British banks left facing £1.5BILLION payout after watchdog finds 90% of small firms.
Britain's banks have been hit by another blow after it emerged today that 90 per cent of complex insurance products sold to small businesses were wrongly advertised.
A review of 173 interest rate swaps carried out by the Financial Services Authority found that many banks could be liable to repay much of the money they took in from the controversial derivatives.
Financial institutions now face a bill of up to £1.5billion to compensate firms which have struggled after being mis-sold insurance.
Scandal: Britain's biggest banks will have to pay out millions to the victims of mis-sold interest rate swaps
It is believed that as many as 40,000 interest rate swaps were wrongly marketed to small businesses starting from the end of 2001.
Interest rate swaps are complex derivatives sold as as a hedge against a rise in interest rates, and were often included as part of a business loan.
However, while they were marketed as low-cost protection against increases in interest, firms were rarely informed of the potential downside.
When interest rates were slashed in response to the financial crisis, businesses such as bed and breakfasts and takeaway shops were left with huge bills.
Ever since the advent of the credit crunch and the financial crisis which has been blamed on banks' reckless lending policies, financial institutions have become wrapped up in a mounting succession of scandals.
May 2011: After a long-running regulatory battle over Payment Protection Insurance, the big banks admitted they had misled their customers into buying unnecessary coverage, and agreed to set aside up to £13billion to pay compensation to those affected.
June 2012: Barclays was fined after its traders were found to have manipulated the Libor benchmark lending rate. The investigation was soon widened to take in a number of other banks.
August 2012: Standard Chartered was accused of breaking sanctions banning trading with Iran, by hiding $250billion worth of transactions involving the pariah state. The bank was fined $340million by regulators in New York.
November 2012: It emerged that HSBC had enabled criminals' money laundering by allowing them to set up offshore accounts in Jersey. The bank admitted its controls over laundering were too lax and was hit by another huge fine.
Last summer, the FSA lifted the lid on the decade-long swaps scandal by criticising 'serious failings' among the UK's big four banks, Barclays, HSBC, Lloyds and RBS.
The authority said today that the banks have agreed to start reviewing their past insurance sales and providing compensation to businesses unfairly left out of pocket.
Barclays, RBS and HSBC have already set aside £630million in anticipation of future payouts.
The FSA today also provided guidelines for banks to differentiate between sophisticated enterprises which should have known what they were buying, and small firms which did not fully understand the products.
Officials have been reviewing sales of interest rate swaps by Allied Irish Bank, Bank of Ireland, Clydesdale and Yorkshire banks, Co-Operative Bank, and Santander UK.
It expects to confirm by February 14 that these banks can launch their own reviews into alleged mis-selling.
Martin Wheatley, who is set to head the Financial Conduct Authority, said he hoped the FSA's actions will ensure a fair and reasonable outcome for small and unsophisticated businesses.
He added: 'Small businesses will now see the result of the review as the banks look at their individual cases.
'Where redress is due, businesses will be put back into the position they should have been without the mis-sale.'
Federation of Small Businesses chairman John Walker said the findings were alarming, but added that they will also come as a relief to the thousands of small firms who have been waiting for clarity on the situation.
'Now the pressure is on the banks to contact its customers,' he said. 'They must do so quickly and decisively to draw a line under this matter and bring the situation to a close.'
Anthony Browne, chief executive of the British Bankers' Association, said: 'The announcement will give clarity to businesses and will enable the banks to put in place the steps needed to resolve each case for customers.
'Where customers have suffered unfairly the banks have all agreed that they will put it right.
'Banks will be contacting those companies affected shortly, prioritising those with the greatest need. Any business which is currently facing financial distress and is seeking a suspension of payments should get in touch with their bank immediately.
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