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
Mosul dam was retaken with the help of the US
voicesRobert Fisk: Barack Obama is following the jihadists’ script
Arts and Entertainment
Loaded weapon: drugs have surprise side effects for Scarlett Johansson in Luc Besson’s ‘Lucy’
filmReview: Lucy, Luc Besson's complex thriller
peoplePamela Anderson rejects ice bucket challenge because of ALS experiments on animals
Arts and Entertainment
tvExecutive says content is not 'without any purpose'
Have you tried new the Independent Digital Edition apps?
ebooksAn evocation of the conflict through the eyes of those who lived through it
Life and Style
techCould new invention save millions in healthcare bills?
A cleaner prepares the red carpet for the opening night during the 59th International Cannes Film Festival May 17, 2006 in Cannes, France.
newsPowerful vacuum cleaners to be banned under EU regulations
sportLeague Managers' Association had described Malky Mackay texts as 'friendly banter'
A polar bear’s diet is rich in seal blubber and half of its own body weight is composed of fat
peopleCareer spanned 70 years, including work with Holocaust survivors
Flocking round: Beyoncé, Madame Tussauds' latest waxwork, looking fierce in the park
travelIn a digital age when we have more access than ever to the stars, why are waxworks still pulling in crowds?
London is the most expensive city in Europe for cultural activities such as ballet
Arts and Entertainment
Jeremy Clarkson has rejected criticisms of his language, according to BBC director of television Danny Cohen
Travel Shop
the manor
Up to 70% off luxury travel
on city breaks Find out more
Up to 70% off luxury travel
on chic beach resorts Find out more
sardina foodie
Up to 70% off luxury travel
on country retreats Find out more
Have you tried new the Independent Digital Edition apps?
Independent Dating

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

iJobs Job Widget
iJobs General

Nursery Nurse

£40 per day: Randstad Education Manchester: Nursery Nurse needed in salfordI a...

Nursery Nurse

£25 per day: Randstad Education Manchester: Level 3 Nursery nurse needed in th...

Supply Teaching jobs in Thetford

£21588 - £31566 per annum: Randstad Education Cambridge: Randstad Education ar...

KS1 teachers needed in Peterborough

£110 - £125 per annum: Randstad Education Cambridge: Randstad Education are ur...

Day In a Page

Air strikes? Talk of God? Obama is following the jihadists’ script

Air strikes? Talk of God? Obama is following the jihadists’ script

The President came the nearest he has come yet to rivalling George W Bush’s gormless reaction to 9/11 , says Robert Fisk
Ebola outbreak: Billy Graham’s son declares righteous war on the virus

Billy Graham’s son declares righteous war on Ebola

A Christian charity’s efforts to save missionaries trapped in Africa by the crisis have been justifiably praised. But doubts remain about its evangelical motives
Jeremy Clarkson 'does not see a problem' with his racist language on Top Gear, says BBC

Not even Jeremy Clarkson is bigger than the BBC, says TV boss

Corporation’s head of television confirms ‘Top Gear’ host was warned about racist language
Nick Clegg the movie: Channel 4 to air Coalition drama showing Lib Dem leader's rise

Nick Clegg the movie

Channel 4 to air Coalition drama showing Lib Dem leader's rise
Philip Larkin: Misogynist, racist, miserable? Or caring, playful man who lived for others?

Philip Larkin: What will survive of him?

Larkin's reputation has taken a knocking. But a new book by James Booth argues that the poet was affectionate, witty, entertaining and kind, as hitherto unseen letters, sketches and 'selfies' reveal
Madame Tussauds has shown off its Beyoncé waxwork in Regent's Park - but why is the tourist attraction still pulling in the crowds?

Waxing lyrical

Madame Tussauds has shown off its Beyoncé waxwork in Regent's Park - but why is the tourist attraction still pulling in the crowds?
Texas forensic astronomer finally pinpoints the exact birth of impressionism

Revealed (to the minute)

The precise time when impressionism was born
From slow-roasted to sugar-cured: how to make the most of the British tomato season

Make the most of British tomatoes

The British crop is at its tastiest and most abundant. Sudi Pigott shares her favourite recipes
10 best men's skincare products

Face it: 10 best men's skincare products

Oscar Quine cleanses, tones and moisturises to find skin-savers blokes will be proud to display on the bathroom shelf
Malky Mackay allegations: Malky Mackay, Iain Moody and another grim day for English football

Mackay, Moody and another grim day for English football

The latest shocking claims do nothing to dispel the image that some in the game on these shores exist in a time warp, laments Sam Wallace
La Liga analysis: Will Barcelona's hopes go out of the window?

Will Barcelona's hopes go out of the window?

Pete Jenson starts his preview of the Spanish season, which begins on Saturday, by explaining how Fifa’s transfer ban will affect the Catalans
Middle East crisis: We know all too much about the cruelty of Isis – but all too little about who they are

We know all too much about the cruelty of Isis – but all too little about who they are

Now Obama has seen the next US reporter to be threatened with beheading, will he blink, asks Robert Fisk
Neanderthals lived alongside humans for centuries, latest study shows

Final resting place of our Neanderthal neighbours revealed

Bones dated to 40,000 years ago show species may have died out in Belgium species co-existed
Scottish independence: The new Scots who hold fate of the UK in their hands

The new Scots who hold fate of the UK in their hands

Scotland’s immigrants are as passionate about the future of their adopted nation as anyone else
Britain's ugliest buildings: Which monstrosities should be nominated for the Dead Prize?

Blight club: Britain's ugliest buildings

Following the architect Cameron Sinclair's introduction of the Dead Prize, an award for ugly buildings, John Rentoul reflects on some of the biggest blots on the UK landscape