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Four major British banks have found themselves in the middle of another scandal as UK’s Financial Service Authority (FSA) discovered “serious failings” in the sale of hedging products designed to cover small and medium sized businesses from interest rate fluctuations.
The financial watchdog named Royal Bank of Scotland (LSE:RBS), HSBC (LSE:HSBA), Lloyds Banking Group (LSE:LLOY), and Barclays (LSE:BARC) as culprits of mis-selling financial products believed to have resulted in a “severe impact on a large number of these businesses”.
The latest blow to the UK banking sector was a result of an investigation by the FSA on some 28,000 protection products sold to customers since 2001, digging through sales files, customer complaints, and taped conversations.
Two days ago, three Barclays entities in the United States found guilty of manipulating the London Interbank Offer Rate (LIBOR) and Euribor and was ordered by the U.S. Commodity Futures Trading Commission (CTFC) to pay a fine of £290 million, resulting in calls for the resignation of Barclays CEO, Bob Diamond.
Poor Sales Practices
FSA said “rewards and incentives” drove the “poor sales practices”, including poor disclosure of exit costs, failure to ascertain customers’ understanding of risk, non-advised sales straying into advice, and over-hedging.
Reuters reported the estimated total claims could be between £3 and £6 billion out of about 4,000 claimants.
Lloyds Banking Group, which issued a response following the FSA’s statement this morning, said the bank’s exposure to the said products was limited and the cost “not expected to be material to the Group”.
Lloyds said they are assisting the FSA fully in the investigation by working with an independent third party under FSA’s authority to assess the sale of the products to Lloyds’ customers.
“The banks will move to provide redress directly for those customers that bought the most complex products. They have also agreed to stop marketing interest rate structured collars to retail customers,” FSA declared.
Whilst not all businesses will be compensated, FSA said those that would be may be receive partial or full refunds of the costs of those products sold and/or a cancellation or replacement of these products in a case to case basis.
FSA said it will appoint an independent reviewer for each bank, acting under FSA power to scrutinise the redress.
Assurances
Martin Wheatley, CEO designate of the Financial Conduct Authority and Managing Director of Consumer and Markets Business of the FSA, said he received personal assurances chief executives Bob Diamond of Barclays and Antonio Horta-Osorio of Lloyds that all the complaints will be treated fairly.
HSBC’s Brian Robertson and RBS’ Chris Sullivan also pledged they will not “foreclose on businesses that lodged a complaint except in ‘exceptional circumstances’”.
“I am pleased that Barclays, HSBC, Lloyds and RBS have agreed to do the right thing by their customers and offer redress on past sales,” The Telegraph quoted Mr. Wheatley saying.
The banks have also agreed to stop selling the products to retail customers, FSA said.
