Regulator considering whether banks mis-sold interest rate swaps to small businesses

In a written answer to Labour MP Jim Cunningham Mark Hoban, the financial secretary to the Treasury said that the regulator was currently carrying out a review to help it establish whether the banks had failed to meet their regulatory obligations in relation to the products.

"As part of this, the FSA are considering additional information from the small businesses that purchased these products, to help them better quantify the size of the issue and to establish whether any banks have failed to comply with their obligations under the FSA Conduct of Business Sourcebook (COBS)," he said. "Any potential next steps will be considered following the results of this report."

COBS, which sets out the conduct of business requirements the FSA applies to regulated firms, prevents them from recommending products which are unsuitable or inappropriate for the customer in question. In addition, firms must ensure that any communications or promotions are "fair, clear and not misleading".

Swaps provide borrowers 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 bank 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. In addition to the risk of having to make higher payments if the market does not perform as anticipated, customers who wish to abandon a swap arrangement may be liable for substantial exit fees.

The potential mis-selling of interest rate swaps was raised in parliament by Conservative MP Guto Bebb in January after the MP was approached by a constituent who had lost his hotel and was subsequently declared bankrupt after losing money on what he claimed was a "highly complex interest rate product". Last month, Bebb called a cross-party meeting to brief MPs on the issue.

"Obviously I am extremely supportive of this inquiry but I hope it can report with a conclusion which sees these small businesses seeing some meaningful redress," he said in a statement on his website http://gutobebbmp.co.uk/interest-rate-swap-mis-selling-scandal-discussed-by-cross-party-group-of-mps-in-parliament/. "Of course there may be circumstances where these products were sold to businesses who understand the risks, but in some cases it is up to small businesses such as hotels and chip shop owners to seek costly legal redress. It is surely the role of the regulator to protect consumers. If such claims are substantiated on a wider basis then the exposure of the banks could be comparable to, if not greater than, the PPI liabilities."

A spokesman for the FSA confirmed that the regulator was considering the issue.

"The work we are doing at the moment is to find out more about the products sold, how they were sold and whether they met customers' needs," he said. "We have already received some detailed information from banks in connection with their sales of interest rate swaps which we are considering and we have also spoken to a number of customers who have been affected. If we find widespread evidence of breaches or mis-selling we will take appropriate action."