FSA ups estimate of mis-sold swaps

FSA lifts estimate of mis-sold swaps

More than 40,000 interest rate swaps could have been mis-sold to small businesses by their lenders, according to a revised estimate of the potential scale of the scandal by the Financial Services Authority.

The FSA has been forced to up its estimate of products mis-sold to businesses across the country by about a third. Photo: PA

By Harry Wilson

 

The FSA has been forced to up its estimate of products mis-sold to businesses across the country by about a third, from 28,000, after being supplied with new information by banks.
 

The new figure suggests the potential cost of the swap mis-selling scandal could be substantially higher than current estimates by both banks and the regulator.
 

Barclays, HSBC and Royal Bank of Scotland have so far put aside a combined total of about £630m against the cost of compensating customers mis-sold interest rate hedging products by their investment banking arms. Lloyds Banking Group has said it does not expect the compensation costs to be “material”.

Britain’s four major banks signed up to an FSA redress programme in June. Seven smaller lenders, including the Co-op and Santander UK, have also joined the compensation scheme.

Barclays is in the process of putting together a 500-strong team to process swap mis-selling claims, while all the banks have also hired major accountancy firms to act as independent reviewers to oversee the compensation process.

Estimates of the eventual cost of swap mis-selling vary greatly, however some derivatives experts believe the scandal could end up costing the banking industry more than £10bn, potentially making it more costly than payment protection insurance mis-selling.

 

The dramatic upward revision follows more detailed information being handed to the regulator by the banks on how many interest rate swap contracts they sold to their small business customers.
There are even suggestions the scandal could get far bigger if the FSA decides to investigate fixed-rate business loans, sold by banks, that contain embedded derivative contracts that have left some customers with large break costs, which they say they were never warned about.