Mis-selling could cost jobs

Neville Martin, the Sheffield-based development manager at the FSB, claimed that many small businesses could fold because they had been mis-sold complex products which were designed to protect firms from the impact of interest rate movements.

Mr Martin said: “Whether businesses are sophisticated or otherwise, mis-selling is deception and organisations engaging in such practices should be made to compensate their victims in full.”

The Financial Services Authority has found “serious failings” in the sale of interest rate hedging products to some small and medium sized businesses (SMEs).

The FSA, headed by Adair Turner, pictured at right, said it had found a range of poor sales practices in connection with the sale of these products. The FSA ruled that, in some cases, there was poor disclosure of exit costs and a failure to ascertain the customers’ understanding of risk.

There were also cases of “over-hedging” – the amounts and duration did not match the underlying loans. The FSA also ruled that “rewards and incentives” were the drivers of these practices.

The FSA’s statement said: “We believe that this has resulted in a severe impact on a large number of these businesses. In order to provide as swift a solution to this problem as possible we have confirmed that we have reached agreement with Barclays, HSBC, Lloyds and RBS to provide appropriate redress where mis-selling has occurred.

“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.”

The FSA said that 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”.

Over the last 11 years, 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.

Amar Rashid, a Bradford-based partner at law firm Schofield Sweeney, is representing more than 20 Yorkshire clients who claim to have been mis-sold interest rate hedging products,

According to Mr Rashid, three small Yorkshire firms were forced to close, with the loss of around 10 jobs, because of costs linked to these products.

He said a number of clients had been unable to refinance their businesses because of the “break costs” – the amount paid if they wanted to stop using the product.

He added: “It became an albatross around the necks of small and medium-sized businesses. One client faced a break cost of £9m, when the underlying debt was just £15m – so they faced a bill of £24m in order to discharge the debt and to break away from the hedging agreement.”

A HSBC spokesman said the bank welcomed the clarity provided by the FSA announcement on the “way forward to resolving widespread concern surrounding the sale of interest rate protection products to certain small business customers”.

The spokesman added: “HSBC also welcomes the fact that the FSA agrees that interest rate protection products are appropriate tools to help small businesses to manage their interest rate risk. This is also the view of the UK Government in its recent White Paper on banking Reform.

“The period under review (2001-2011) has seen UK base rates vary between 0.5 per cent and 5.75 per cent. For a company borrowing money, taking out protection against volatile interest rates is sensible and prudent, which is why these products were and remain appropriate.”

A Barclays spokesman said the bank welcomed the clarity and certainty the independent FSA review process brought customers.

The spokesman added: “As part of the review process Barclays will be contacting all eligible customers, and where there is evidence of failures in the way these products were sold, we will work hard to make things right.

“We continue to believe that risk management products such as interest rate swaps remain an effective tool for some businesses wishing to hedge their exposure to interest rates, and can be an appropriate product when sold properly.”

An RBS spokesman added: “RBS has reached agreement with the FSA on an approach to the issues surrounding interest rate swap products for SMEs. We believe that an independent review process will help to bring the clarity and certainty that customers and other stakeholders need. In the case of a small number of less sophisticated customers, who entered into more complex swap products, we have agreed to move directly to redress.”

A spokesman for Lloyds said it had helped the FSA fully. Lloyds has also agreed to work with an independent third party to carry out a thorough assessment of sales of these products to certain customers. The spokesman said interest rate derivatives products had not been “widely sold” by Lloyds.