More banks to review sales of interest rate hedging products

Allied Irish Bank (UK), Bank of Ireland, National Australia Group's Clydesdale and Yorkshire Banks, the Co-operative Bank and Santander UK will now review sales in line with the approach announced by the Financial Services Authority (FSA) last month. Barclays, HSBC, Lloyds and RBS began reviewing sales at the end of January.

The banks will begin reviewing sales once they have amended their review processes to comply with the FSA scheme, the regulator said. Customers eligible to have sales reviewed will be contacted automatically by their banks, who have said that cases where customers are in financial difficulty would be prioritised.

IRHPs, or interest rate swaps, provide borrowers with protection against changes in interest rates by locking in net cash outflow to a fixed interest rate. The product is designed so that the swap provider, which is usually the bank that 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, while more complex 'structured collars' introduce a degree of interest rate speculation to the transaction. In all cases, customers risk having to make higher payments than anticipated if the market does not perform as expected.

Findings from a pilot investigation by the FSA into the banks' sales of the complex products were "broadly comparable" to its pilot study of sales by the larger banks, it said. Over 90% of the sales examined did not comply with "one or more regulatory requirements" and were "likely to result in redress being due to the customer", the regulator said. However, it acknowledged that the sales examined as part of the pilot investigation were typically more complex than the majority of sales made by the banks.

The FSA set out the principles banks should follow in their reviews in its January report (20-page / 425KB PDF). Customers should be "put back in the position they would have been in had the breach of regulatory requirements not occurred", according to the report. Potential redress could include cancelling the arrangement and refunding all payments, or transferring the customer to a more suitable product. However, no compensation will be given to customers if it is "reasonable to conclude that ... the customer would still have bought the same product, or the customer suffered no loss".

Banks have also been asked to consider customers' additional, or 'consequential', losses. These may include overdraft charges or the cost of additional borrowing needed to meet the repayments. For customers to be eligible for this type of compensation, the loss must have been caused by the regulatory breach and have been "reasonably foreseeable" at the time the breach occurred.