Mis-selling scandal: banks let off the hook

Exclusive: FSA ‘bows to the banks’ with £1.5bn ceiling on payouts

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.

Suggested Topics
Start your day with The Independent, sign up for daily news emails
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs General

Ashdown Group: Account Payable Assistant - SW London

£20000 - £25000 per annum: Ashdown Group: Account Payable Assistant - SW Londo...

Recruitment Genius: Bathroom Showroom Customer Service / Sales Assistant

£14560 - £17680 per annum: Recruitment Genius: Even though their premises have...

Recruitment Genius: Finance Manager

£44000 - £48000 per annum: Recruitment Genius: Marketing company based in cent...

Recruitment Genius: IT Installation / Commissioning Engineer - North West

£22000 - £25000 per annum: Recruitment Genius: An IT Installation / Commission...

Day In a Page

Not even the 'putrid throat' could stop the Ross Poldark swoon-fest'

Not even the 'putrid throat' could stop the Ross Poldark swoon-fest'

How a costume drama became a Sunday night staple
Miliband promises no stamp duty for first-time buyers as he pushes Tories on housing

Miliband promises no stamp duty for first-time buyers

Labour leader pushes Tories on housing
Aviation history is littered with grand failures - from the the Bristol Brabazon to Concorde - but what went wrong with the SuperJumbo?

Aviation history is littered with grand failures

But what went wrong with the SuperJumbo?
Fear of Putin, Islamists and immigration is giving rise to a new generation of Soviet-style 'iron curtains' right across Europe

Fortress Europe?

Fear of Putin, Islamists and immigration is giving rise to a new generation of 'iron curtains'
Never mind what you're wearing, it's what you're reclining on

Never mind what you're wearing

It's what you're reclining on that matters
General Election 2015: Chuka Umunna on the benefits of immigration, humility – and his leader Ed Miliband

Chuka Umunna: A virus of racism runs through Ukip

The shadow business secretary on the benefits of immigration, humility – and his leader Ed Miliband
Yemen crisis: This exotic war will soon become Europe's problem

Yemen's exotic war will soon affect Europe

Terrorism and boatloads of desperate migrants will be the outcome of the Saudi air campaign, says Patrick Cockburn
Marginal Streets project aims to document voters in the run-up to the General Election

Marginal Streets project documents voters

Independent photographers Joseph Fox and Orlando Gili are uploading two portraits of constituents to their website for each day of the campaign
Game of Thrones: Visit the real-life kingdom of Westeros to see where violent history ends and telly tourism begins

The real-life kingdom of Westeros

Is there something a little uncomfortable about Game of Thrones shooting in Northern Ireland?
How to survive a social-media mauling, by the tough women of Twitter

How to survive a Twitter mauling

Mary Beard, Caroline Criado-Perez, Louise Mensch, Bunny La Roche and Courtney Barrasford reveal how to trounce the trolls
Gallipoli centenary: At dawn, the young remember the young who perished in one of the First World War's bloodiest battles

At dawn, the young remember the young

A century ago, soldiers of the Empire – many no more than boys – spilt on to Gallipoli’s beaches. On this 100th Anzac Day, there are personal, poetic tributes to their sacrifice
Dissent is slowly building against the billions spent on presidential campaigns – even among politicians themselves

Follow the money as never before

Dissent is slowly building against the billions spent on presidential campaigns – even among politicians themselves, reports Rupert Cornwell
Samuel West interview: The actor and director on austerity, unionisation, and not mentioning his famous parents

Samuel West interview

The actor and director on austerity, unionisation, and not mentioning his famous parents
General Election 2015: Imagine if the leading political parties were fashion labels

Imagine if the leading political parties were fashion labels

Fashion editor, Alexander Fury, on what the leaders' appearances tell us about them
Phumzile Mlambo-Ngcuka: Home can be the unsafest place for women

Phumzile Mlambo-Ngcuka: Home can be the unsafest place for women

The architect of the HeForShe movement and head of UN Women on the world's failure to combat domestic violence