Nick Parmée Wealth Briefing

The Financial Services Authority, the UK regulator, today confirmed that Barclays, HSBC, Lloyds and RBS will fully review their sales of interest rate hedging products to small businesses, in the wake of serious failings found in the sale of such products. Estimates of the potential cost to banks range as high as £10 billion ($16 billion).

But so far, according to Reuters, the four banks have set much less aside: Barclays the most at £450 million, HSBC £150 million pounds and RBS £50 million; Lloyds has said the cost will not be material.

In June last year, the FSA announced that it had found serious failings in the sale of IRHPs; a pilot review of sales carried out by the banks and independent reviewers has confirmed the FSA’s initial findings.

The new scandal will join PPI mis-selling, LIBOR-rigging and anti-money laundering failings among the recent issues associated with major international banks.

The FSA looked at 173 sales to non-sophisticated customers and found that over 90 per cent of the sales did not comply with at least one or more regulatory requirement. A significant proportion of these 173 cases are likely to result in redress being due to the customer. But the small number of typically more complex cases in the sample may not be representative of all IRHP sales.

The FSA has also revised the eligibility criteria to ensure that the review is focused on those small businesses that were unlikely to understand the risks associated with those products. This might include, for example, bed and breakfast businesses which would previously have been ineligible owing to their large numbers of seasonal workers.

At the same time, some businesses within the criteria published last June will be excluded. These include, for example, small subsidiaries of multi-national corporations, or special purpose vehicles that are sophisticated enough to have understood the terms of the product or have sufficient resources to obtain advice.

The FSA has also been reviewing sales of IRHPs by Allied Irish Bank (UK), Bank of Ireland, Clydesdale and Yorkshire banks, Co-Operative Bank, and Santander UK. The FSA aims to be able to confirm that these banks can launch their reviews by 14 February 2013.

Customers of all these banks will be directly contacted by the banks and will not need to involve other advisors.

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