Greg Wright: Battered bankers back in the ring over rate hedging

The shareholder spring, which saw investors rebel against a host of big corporate names in a wide range of sectors, was helping to shift the spotlight away from financial services.

Then, the Libor scandal erupted and the banking sector is back in the doghouse.

Last week, Bob Diamond blamed a “series of unfortunate events” for his shock departure from Barclays as he fended off calls to give up his multi-million-pound bonuses.

Mr Diamond said he felt “physically ill” when he discovered traders had fiddled the key Libor rate but denied he was “personally culpable”.

He was hauled before the Treasury Select Committee after Barclays was fined £290m by UK and United States regulators for fixing the Libor rate which affects loans and mortgages everywhere.

Now the banking sector is attracting more negative headlines, and this time it’s entrepreneurs at Britain’s small and medium-sized firms (SMEs), the lifeblood of our economy, who have suffered. The Financial Services Authority (FSA) has found serious failings in the sale of interest rate hedging products to some SMEs. A deal has been reached with Barclays, HSBC, Lloyds and RBS to provide “appropriate redress” where mis-selling has occurred.

The FSA uncovered evidence that there had been “poor disclosure” about the exit costs for these products – in other words firms weren’t always warned about how much they would have to pay if they wanted to walk away. To critics of the banking sector, it sounds like the same old story. The FSA found that poor sales practices had been driven by “rewards and incentives”.

As Martin Wheatley, the managing director of the FSA’s Conduct Business Unit, observed:

“For many small businesses this has been a difficult and distressing experience with many people’s livelihoods affected.”

Many of the banks’ corporate clients are angry and want to receive compensation immediately.

The Federation of Small Businesses has even claimed that the scandal could cost 80,000 jobs, because the costs associated with the mis-sold products could drag some companies down.

Over the last few days, I’ve been contacted by a number of Yorkshire-based firms who claim to have struggled after being mis-sold interest rate hedging products, which were supposed to protect them from the uncertainty caused by interest rate movements.

One Hull-based businessman, who asked to remain anonymous, told me: “It was great to see the FSA report and it certainly gives a glimmer of light at the end of the tunnel, however it was nowhere near specific enough and still leaves many SMEs in the dark.

“Because of the scandal over the fixing of Libor, this problem seems to have paled into insignificance. Unless some clear guidelines and timescales are put into place by the FSA and the banks, I feel it may be too late for many SME who are already teetering on the brink of collapse due to the significant effects these mis-sold products have had on their businesses.”

Marcus Pullen, of Leeds-based law firm Lee & Priestley, said yesterday: “Customers have been given woefully inadequate information and many did not fully understand what they were signing up to.

“Our clients have told us that they were not made fully aware of the risks associated with the products and some of our clients have paid out thousands, tens of thousands, and in some cases hundreds of thousands of pounds in payments, and are still tied into the products for many years to come.

“We welcome the FSA decision; however the pressing issue now is that those affected should be able to access financial redress in the most straightforward way possible.

“Those customers who were sold more complex products, such as structured collars, should be contacted by their banks. However, customers who were sold the more simple caps products will not be contacted and they must initiate the complaint themselves.”

The banks have welcomed the FSA announcement, and pointed out that, for many companies borrowing money, taking out protection against volatile interest rates is a prudent move. This is particularly true today, with interest rates at their lowest level for 300 years.

The ball is now firmly in the banks’ court. If they can act quickly, they can take the first steps towards restoring their battered reputations. If they don’t, we can expect to hear further rumblings of discontent from small business owners, and the threat of lengthy legal proceedings. Supporters of the banking sector can’t wait for the damaging revelations to end.