Banks dealt new blow as mis-selling estimate rises

The Financial Services Authority has raised its estimate of the number of interest rate swap arrangements that were sold by more than 40 per cent.

The initial estimate was that 28,000 products were mis-sold.

The swap products were sold to small businesses as a protection against a rise in interest rates, but customers didn’t understand there were risks involved.

Barclays, HSBC and Royal Bank of Scotland have already set aside around £630m to cover the cost of potential mis-selling claims.

The FSA revealed in June that it found “serious failings” in the sale of the interest rate swap products to small businesses.

Banks are working with the
FSA to begin the compensation process and the major players have launched pilots where a sample number of cases are reviewed to assess if mis-selling took place and potential compensation.

They have around a month to report back to the FSA before a full-scale review of all cases begins.

The FSA said while it wanted compensation to be arranged as soon as possible, it is crucial banks use the right approach to review cases.

An FSA spokesman said: “The FSA is determined this process will happen as quickly as possible, but it is essential we get the right methodology in place first and that we are confident this will deliver the right outcome for customers.”

Barclays, HSBC, Lloyds and Royal Bank of Scotland have already agreed to compensate customers where the mis-selling occurred.

As well as offering compensation for customers who bought the most complex products, the banks have also agreed to stop marketing certain interest rate products to retail customers.

In its initial investigation, the FSA discovered poor sales tactics including failure to provide sufficient information on the hefty exit costs involved. They also failed to gauge the customers’ understanding of risk and found rewards and incentives were a driver of these practices.

The FSA stresses 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. It believes as many as 700 independent reviewers will need to appointed by the banks, with each case taking around one to three days to review.