'Serious failings' in bank mis-selling to businesses

The Financial Services Authority (FSA) has found 'serious failings' in the ways banks sold specialist insurance products to businesses, it has announced.

The FSA - the UK's financial regulatory body - said that thousands of small businesses may have been mis-sold the interest rate hedging products known as 'swaps', designed to protect against rising interest rates.

It confirmed that it had reached an agreement with Barclays, HSBC, Lloyds and RBS to provide 'appropriate redress' to those affected and to stop marketing the products.

Around 28,000 swaps have been sold since 2001 to date, although the potential compensation figure is yet unknown.

Martin Wheatley, managing director of the FSA's conduct business unit, said: "For many small businesses this has been a difficult and distressing experience with many people's livelihoods affected."

He added that the FSA had focused on ensuring a 'swift outcome' for these businesses that form an 'important part of the economy'.

It has spent the last two months conducting a review of both simple 'caps', that offer fixed upper limits on loan interest rates, and more complex products such as 'structured collars' that offer a degree of interest rate speculation.

As part of its investigation, the FSA reviewed a combination of bank documentation, including sales files, customer complaints and taped conversations, and also talked to over 100 customers who have come forward. It culminated in an MP debate in the House of Commons last week.

The FSA said that although hedging products can protect customers when sold correctly, it found a range of poor sales practices including:

  • Poor communication regarding exit costs
  • Failure to check the customer's understanding of risk
  • Rewards and incentives for the sales of these products

Businesses that have been affected by the mis-selling will be entitled to the cancellation or replacement of products, with either full or partial refunds.

National Chairman of the Federation of Small Businesses (FSB) John Walker, said: "The huge scale of this mis-selling scandal is starting to emerge. It is vital small firms who have been affected make themselves heard rather that expect their bank to settle if they keep it secret.

"That last thing banks need now is another mis-selling scandal. But exposing it is the only way of dealing with the problem effectively. Small firms are the lifeblood of the economy and these sharp practices carried out by the big banks need to be stopped right away."