U.K. officials are examining the sale of complex hedging products to small business by HSBC, Barclays and two other major banks.
LONDON (CNNMoney)
Following an investigation, HSBC (HBC), Barclays (BCS), Royal Bank of Scotland and Lloyds have agreed to examine the sale of thousands of complex interest rate hedging products to small businesses that neither fully understood them nor needed them, and provide compensation.
"Small businesses will now see the result of the review as the banks look at their individual cases," chief banking regulator Martin Wheatley said in a statement. "Where redress is due, businesses will be put back into the position they should have been without the mis-sale."
The interest rate swap scandal is the latest example of unethical or illegal behavior by the banking industry. Banks have paid out billions of pounds in compensation, settlements or fines related to the mis-selling payment protection insurance, manipulating Libor benchmark interest rates and breaching money-laundering rules.
Bank of England Governor Mervyn King warned in November that U.K. banks may have to raise more capital because they weren't recognizing fully the cost of past misconduct, among other risks.
Related: British banks may need more capital
The Financial Services Authority (FSA) found serious failings in the sale of interest rate swaps, which were supposed to limit the buyer's exposure to the rising costs of servicing loans by capping or fixing interest rates, or keeping them in an agreed-upon range.
When rates fell, many companies were left with higher costs or punitive penalties for exiting the products, in some cases pushing them into bankruptcy.
A review of 173 cases found that over 90% of the sales did not comply with at least one regulatory requirement, the FSA said in a statement.
Bank staff, under pressure to hit targets, did not disclose exit costs fully, failed to make sure customers understood what they were buying and offered inappropriate advice, the FSA found.
The four banks have already set aside over $1 billion and the cost may rise. The FSA estimates that some 40,000 interest-rate protection products have been sold to small firms.
Related: UK lawmakers urge tougher banking reform
The FSA is currently reviewing sales by six other banks -- Santander, Allied Irish Bank, Bank of Ireland, Co-Operative Bank and Clydesdale and Yorkshire banks -- and hopes to reach agreement with them on compensating customers by the middle of February.
To claim compensation, small and unsophisticated firms -- such as bed-and-breakfast businesses -- will have to show that the rate-hedging breaks' costs weren't clearly stated or the product was inappropriate for the size of the loan. Subsidiaries of multinational companies will not be eligible for compensation.
"The announcement today will give clarity to businesses and will enable the banks to put in place the steps needed to resolve each case for customers," banking lobby group BBA said in a statement. "Where customers have suffered unfairly the banks have all agreed that they will put it right."
First Published: January 31, 2013: 9:34 AM ET
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