Following a two-month review of the sale of interest rate swaps by the banks, the FSA says it has found “serious failings” in the way the products were sold.
Interest rate swaps are designed to protect consumers against increases in interest rates. Since 2001, banks have sold around 28,000 interest rate swaps.
The products range in complexity from caps that fix an upper limit to the interest rate on a loan, to complex derivatives such as “structured collars” which fix interest rates within a band but introduce a degree of interest rate speculation.
The FSA reviewed sales files, customer complaints and taped conversations, and also talked to over 100 customers.
It found exit costs to cancel the product were poorly disclosed, banks failed to ascertain the customers’ understanding of risk, and non-advised sales straying into advice.
The regulator also found evidence of over-hedging where the amounts or duration of the product did not match the underlying loan, and the sale of these practices being driven by rewards and incentives.
The FSA says exact redress will vary for each customer, and not all businesses will be owed redress.
Redress could include a mixture of cancelling or replacing existing products and partial or full refunds of the costs of the products. Banks’ redress programmes will be assessed by an independent reviewer at each bank appointed under the FSA’s powers.
FSA conduct business unit managing director Martin Wheatley (pictured) says for many small businesses dealing with these products has been a difficult and distressing experience.
He says: “I am pleased Barclays, HSBC, Lloyds and RBS have agreed to do the right thing by their customers and offer redress or a review of past sales. These firms have responded to the need to provide a fair deal for customers by working with us, and I welcome this outcome.
“I am particularly pleased the chief executives Bob Diamond, Brian Robertson, Antonio Horta Osorio and Chris Sullivan have provided a personal assurance they will have responsibility for oversight of this work and will ensure complainants are treated fairly.
“They have also committed that, except in exceptional circumstances, they will not foreclose on or vary existing lending facilities without the customer’s prior consent.”
A statement from Lloyds says: “The group has assisted the FSA fully in relation to its review and has agreed to work with an independent third party to carry out a thorough assessment of sales of these products to certain customers.
“Interest rate derivative products are not products the group has sold widely. Given the limited exposure of the group to these products the financial impact of this remediation and the associated costs are not expected to be material to the group.”