Out-Law News 2 min. read
29 Jun 2012, 3:27 pm
The Financial Services Authority (FSA) said (5-page / 266KB PDF) that Barclays, HSBC, Lloyds and RBS had also agreed to provide "appropriate redress" to customers that bought the most complex products.
Around 28,000 products, ranging in complexity from simple 'caps' to more complex derivatives known as 'structured collars', have been sold since 2001, the FSA said. However, it said that not all of these customers would be owed redress as the product can be "appropriate" when "properly sold in the right circumstances".
Affected customers could have existing products cancelled or replaced and receive partial or full refunds, it said, and an independent reviewer at each bank appointed by the FSA would ensure the exercise was carried out correctly.
The regulator said that sales staff had failed to properly ascertain whether customers understood the risks associated with the product they were buying, and that some products had been "over-hedged", meaning that the amount or duration of the arrangement was disproportionate to the underlying loan. Customers had also not been notified that large exit fees could apply if they wanted to cancel the arrangements. It added that sales staff had been motivated by "rewards and incentives" to sell the products.
Swaps provide borrows with protection against changes in interest rate by locking in net cash outflow to a fixed interest rate. The product is designed so that the swap provider – usually a band which has also provided the underlying loan – covers the cost of increased payments if the interest rate rises while customers have to pay the bank if rates fall. Simple products merely fix an upper limit to the interest rate on a loan, however structured collars introduce a degree of interest rate speculation to the transaction. In all cases, customers run the risk of having to make higher payments than anticipated if the market does not perform as expected.
Martin Wheatley, managing director of the FSA's Conduct Business Unit, said that affected small businesses had had a "difficult and distressing experience".
"Our work has focused on ensuring a swift outcome for these businesses that form such an important part of the economy," he said. "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. These firms have responded to the need to provide a fair deal for customers by working with us, and I welcome this outcome."
Banks had also agreed not to foreclose on or vary the existing lending facilities of customers who had been affected without consent "except in exceptional circumstances", he added.
As part of its review the FSA said that it had conducted interviews with over 100 affected businesses that had come forward, as well as reviewing a "significant amount" of documentation from the banks.
RBS, one of the affected banks, said in a statement that it had agreed to "move directly to redress" the "small number of less sophisticated customers" that had purchased a product too complex for their needs.
"We believe risk management products are an essential part of corporate banking and it is important we restore customer trust in this area," it said. "We are committed to the fair and timely treatment of our customers and will work closely with the FSA to achieve that end."
