Banks to pay back SMEs mis-sold interest rate swaps

THE FINANCIAL Services Authority has announced that it found “serious failings” in the way in which banks sold interest-rate hedging products to SMEs.

The authority said that it felt the way in which interest-rate swaps were sold to SMEs “has resulted in a severe impact on a large number” of firms which were sold the products.

It has agreed a deal with the four major clearing banks – Barclays, HSBC, Lloyds and RBS – to “provide appropriate redress” to companies which had been mis-sold swaps.

The banks have also agreed to stop selling the most complex products, and to stop offering interest rate-structured collars to retail customers.

The FSA found that banks had engaged in a range of poor practices when selling interest-rate swaps, such as poor disclosure of exit costs, failing to gauge customers’ understanding of risk and “over-hedging” the amount of debt covered by the swaps.

The FSA said that not all busineses will be owed redress from interest rate swap sales, and the amounts paid to those that are will vary. However, it said that redress from banks could include cancelling or replacing existing products, alongside “partial or full” repayment of costs incurred.

Martin Wheatley, managing director of the FSA’s Conduct Business Unit, said: “For many small businesses this has been a difficult and distressing experience with many people’s livelihoods affected.  Our work has focused on ensuring a swift outcome for these businesses that form such an important part of the economy.  

“I am pleased that Barclays, HSBC, Lloyds and RBS have agreed to do the right thing by their customers and offer redress or a review of past sales.”

In a statement, Lloyds Banking Group said that interest-rate derivatives “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”.