Barclays, HSBC, Lloyds and Royal Bank of Scotland agree to compensate thousands of business customers after the Financial Services Authority finds they mis-sold specialist insurance on loans.
The problems centre on the sale of interest rate swap arrangements (IRSAs), which may have been sold as protection – or to act as a hedge – against a rise in interest rates without the customer fully grasping the downside risks.
Banks sold around 28,000 interest rate protection products to customers since 2001, the FSA added.
Martin Wheatley, managing director of the FSA’s conduct business unit, said: “For many small businesses this has been a difficult and distressing experience with many people’s livelihoods affected.”
The claims echo the payment protection insurance (PPI) scandal that emerged last year, costing banks billions of pounds, and come in the week Barclays was fined £290m for manipulating the rates at which banks lend to each other.
As well as offering redress directly for those customers that bought the most complex products, the banks have also agreed to stop marketing certain IRSA products to retail customers, the FSA said.
The City regulator has spent the last two months reviewing the sale of IRSAs, talking to more than 100 customers who came forward.
It found poor sales tactics including failing to provide sufficient information on the hefty exit costs involved, failure to gauge the customers’ understanding of risks and found rewards and incentives were a driver of these practices.
The FSA added that not all businesses will be owed redress, but for those that are, the exact redress will vary from customer to customer. This exercise will be scrutinised by an independent reviewer at each bank appointed under the FSA’s powers.
Mr Wheatley added that he had received personal reassurances from the bosses of the banks involved – including Bob Diamond at Barclays – that they will have responsibility for oversight of this work.
The British Bankers’ Association, the leading trade association for the UK banking and financial services sector with more than 200 member banks, said: “Our members have been working closely with the FSA while it carries out its thematic review into interest rate swaps and will continue to co-operate fully.”
In a statement, Lloyds, which set aside £3.6bn to cover the cost of PPI compensation, said it did not expect the costs of redressing customers who were missold IRSA products to be “material”.
It said: “Interest rate derivative products are not products the group has sold widely.
“Given the limited exposure of the group to these products the financial impact of this remediation and the associated costs are not expected to be material to the group.”
The British Bankers’ Association, the leading trade association for the UK banking and financial services sector with more than 200 member banks, said: “Our members have been working closely with the FSA while it carries out its thematic review into interest rate swaps and will continue to co-operate fully.”