MPs call for independent review of swaps redress scheme

Britain’s financial regulator should set up an independent review of its compensation scheme for customers who were mis-sold complex hedging products to ensure it does not favour banks, a committee of MPs said.

Andrew Tyrie MP, Chairman, Treasury Select Committee.

The Financial Conduct Authority (FCA) agreed the terms of a scheme to compensate thousands of small companies that were mis-sold the products, know as interest rate swaps, in 2012, with nine banks including Royal Bank of Scotland, Lloyds Banking Group, Barclays and HSBC.

But the scheme quickly attracted criticism with more than a third of businesses excluded from the scheme because they were deemed to be “financially sophisticated” and many of the firms that were allowed into it offered alternative hedging products by banks rather than cash compensation.

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The products were meant to protect firms against rising interest rates, but when rates fell the companies had to pay extra charges, typically running to tens of thousands of pounds. They also faced hefty penalties to extricate themselves from the deals, which many said they were unaware of.

“It is far from clear that the FCA’s scheme has delivered fair and reasonable redress to all the businesses affected,” said Conservative MP Andrew Tyrie, who chairs parliament’s Treasury Committee, which monitors Britain’s finance ministry as well as the Bank of England and FCA.

“The FCA needs to do much more to demonstrate that this process is credible and has not unduly favoured the banks,” Mr Tyrie said in a report on conduct and competition in small business lending published on Tuesday.

The Committee said the FCA “should collect the information necessary to establish whether there are systemic failures in the review”. It said that process would benefit from independent oversight and the FCA should publish its findings.

“The Financial Services Act provides for the Treasury to require for this type of work to be done. But hopefully this won’t be necessary,” he added.

The committee also recommended that an investigation into the banking sector by Britain’s competition watchdog examines whether structural reform of the industry is needed to boost competition.

It also said the Competition and Markets Authority should assume responsibility for making an annual judgement on whether the regulator is fulfilling its duty to promote competition in the industry.

Lawmakers are keen for new banks to emerge to break the dominance of Barclays, HSBC, Lloyds and RBS, which provide nine out of every ten business loans.