The four biggest banks will now review the 40,000 interest rate swap transactions made since 2001 in a bid to identify any unsophisticated customers who lost out because they did not understand the products they were buying. Analysts believe the bill could hit £2bn, on top of the £12bn the big institutions have already set aside to cover payment protection insurance compensation claims.
Swaps were sold to borrowing firms to protect them against rising interest rates. But when rates dropped, firms complained that they lost out by buying the protection and investigations found some small firms had been misled over the details of the product.
The Financial Services Authority studied 173 sales to unsophisticated customers and found more than 90 per cent of them had been missold.
This proportion cannot be applied to the 40,000 figure – the FSA specifically chose unusually complex cases from firms known to be at risk – but still shows a large number of cases where sales should not have gone ahead .
The new redress process plans to first filter out those who are deemed sophisticated – broadly large firms with a turnover of more than £6.5m, a balance sheet total of more than £3.26m and more than 50 employees, or firms which are a small subsidiary of a much larger group. Firms like farmers with a large value of land can now be classed as unsophisticated while special purpose vehicles set up by large property firms cannot fit in the eligible category.
After that, each sale will be assessed to see if it provided clear information, if the terms of the swap exceeded those of the underlying loan, and if the bank understood customer needs.
If the bank did not and the customer lost out as a result, the bank may have to compensate them or provide an alternative, more suitable product.
And if the bank has incomplete records, they may have to pay out – a problem when the sales date back 12 years but records only have to be kept for a minimum of seven.
Barclays has already set aside £450m to pay customers back, HSBC roughly £200m, RBS around £100m and Lloyds nothing. But analysts expect the total provisions to shoot up in the coming results season.
“We currently estimate that Barclays’ eventual cost will be circa £1bn,” said Investec’s Ian Gordon.
“We believe RBS and Lloyds will have just a few hundred million each to recognise by way of incremental charges – not material relative to charges of £5.3bn (Lloyds) and £1.7bn (RBS) – and counting – for PPI redress.”
That brings the total close to £2bn, with banks and the FSA not yet disclosing estimates of the final amount.
The FSA hopes most of the claims will be processed within six months, though for the banks most affected it could take a year. In light of the new guidelines the banks and their independent assessors – mainly the big four professional services firms – are retraining staff in the processes.
The banks all pledged to compensate affected customers swiftly.
“We are committed to doing the right thing by our customers, which means following the review we will provide redress as quickly as possible to those small business customers where detriment is identified,” said a Lloyds spokesperson.
“We look forward to engaging with eligible customers to commence the review and redress process,” said Barclays. “Where we have not met the expected standards, we will put things right. Barclays has already suspended swap payments for customers in scope of the FSA’s review who are in financial distress.”
Smaller banks including Santander, Co-Operative Bank and the Clydesdale and Yorkshire banks will be able to launch their reviews in the coming weeks.