The Financial Services Authority has this morning issued a statement outlining the settlement it has reached with Barclays, HSBC, Lloyds and RBS in relation to their mis-selling of interest rate swaps to small and medium-sized businesses. The FSA press release is here and the further details about the settlement are here.
From the FSA press release:
“The banks will move to provide redress directly for those customers that bought the most complex products. They have also agreed to stop marketing interest rate structured collars to retail customers.
Interest rate hedging products can protect bank customers against the risk of interest rate movements and can be an appropriate product when properly sold in the right circumstances. During the period 2001 to date, banks sold around 28,000 interest rate protection products to customers.
These products range in complexity from comparatively simple “caps” that fixed an upper limit to the interest rate on a loan, through to the more complex derivatives such as “structured collars” which fixed interest rates within a band but introduced a degree of interest rate speculation.
Over the past two months the FSA has conducted a review of these sales. We have reviewed a significant amount of documentation from the firms (including sales files, customer complaints and taped conversations). We have also talked to over 100 customers who have come forward.
We have found a range of poor sales practices including:
• Poor disclosure of exit costs;
• Failure to ascertain the customers’ understanding of risk;
• Non advised sales straying into advice;
• “Over-hedging” (i.e. where the amounts and/or duration did not match the underlying loans); and
• Rewards and incentives being a driver of these practices.
Not all businesses will be owed redress, but for those that are, the exact redress will vary from customer to customer, but could include a mixture of cancelling or replacing existing products, together with partial or full refunds of the costs of those products. This exercise will be scrutinised by an independent reviewer at each bank appointed under the FSA’s powers.”
See also: “We cannot just rely on firms and consumers to do the right thing” - Martin Wheatley