As reported earlier today when the FSA released their findings that 90% of Interest Rate Swaps were mis sold to small businesses. The Telegraph provides an interesting article on how this latest mis selling scandal may be the straw that breaks the Banks and Governments back.
Swap mis-selling may be a scandal too far for the government and banks
Together, Barclays, HSBC and Royal Bank of Scotland have set aside about £630m to meet the cost of swap mis-selling claims, while Lloyds Banking Group’s current public position is that the costs will be non-material. On the other side are an array of derivatives experts, lawyers, former bankers and interested observers who claim the bill from swap mis-selling will be measured in the tens of billions of pounds, not hundreds of millions.
When considering the cost of swap mis-selling it is worth remembering the humble beginnings of payment protection insurance claims.
Back in October of 2010, analysts at Morgan Stanley confidently proclaimed that the “base case” cost of PPI to banks would be £2.6bn and that compensation claims at Lloyds would most likely reach just under £800m. Three years on and total industry PPI provisions exceed £12bn and the cost to Lloyds has topped £5bn.
While this may prove heartening to those who argue swap mis-selling will follow a similar trajectory it may prove to be the opposite.
It is clear that many senior bankers now believe that the decision by Lloyds in 2011 to drop out of the legal challenge against PPI and begin paying out on all claims was a huge mistake. The frantic lobbying of the FSA by the British Bankers’ Association to put in place a time limit on PPI claims shows the efforts now being made to put a lid on the compensation costs and highlights the approach likely to be taken by lenders towards swap claims.
Though the FSA’s pilot study suggests many small businesses can expect some form of compensation, it is certainly not the open door to a blizzard of claims in the manner of Lloyds and PPI. For instance, the FSA admits that redress “will not be owed to the customer in all cases where the sale did not comply with regulatory requirements”. In other words, the bank may have broken the rules, but the customer will not receive a penny in compensation.
Even if a customer is found to have been the victim of a mis-sale, there is the thorny issue of what constitutes “fair and reasonable redress”. This is only likely to become apparent over time as businesses start to receive letters in the post detailing what they can actually expect to receive by way of recompense from their lender. For some, this will be everything they dreamed of, for many others it is likely it will be nowhere near what they believe they are owed [quick aside on litigation, but anyone who thinks a small business will be able to afford bringing a claim against a bank after April has clearly not taken on board the ramifications of the Jackson reforms.
With the parlous state of bank finances and a government unable to afford new handouts to lenders, it is unlikely the authorities and the industry will sanction any compensation that could potentially blow a new hole in lenders’ balance sheets.
Take the FSA’s figures. If more than 90pc of the 40,000 swaps under review required full compensation, you would be looking at a total bill of something in the region of £18bn, based on an average claim of £500,000.
If this were the case, then every major bank would currently be planning an emergency rights issue of some kind, however the nonchalance with which senior bankers continue to treat the issue suggests they think otherwise. As a prudential regulator, the FSA has admitted it is conflicted in its dual responsibility to ensure good conduct and the stability of the financial system.
Senior Cabinet official have privately warned of the problem of landing banks with a compensation costs they cannot afford. Put another way, swap mis-selling may be a scandal too far for the government and banks.
Interest Rate Swap Claims News
Interest Rate Swaps: Barclays Bank, Fair and Reasonable Redress
Certain interest rate hedging products (IRHPs) have come under question by current banking customers and by several banking agencies within the U.K. These banking products are structured collar financial products that are frequently used to hedge against future interest rate expenses. These complex structured collars were sold to numerous loan customers during the period of time before the great international recession. This financial downturn across the international financial markets created unusual interest rate returns for many of the structured collars sold to Barclays Bank customers.
Preparing Businesses for an Interest Rate Swap Claim
The interest rate swap mis-selling fiasco has garnered a lot of attention during the past year. Over 12 months after the first cases went up for review, the claimants are just now receiving the compensation they deserve. Although it may seem like businesses around the country are now experiencing financial windfalls, there is much work that needs to be done before anyone can expect to receive compensation from their interest rate swap mis-selling claims. It has become quite clear that the process is much more involved than a PP mark-II.
Interest Rate Swaps: Natwest, Fair & Reasonable Redress
Natwest Bank in London has begun a direct redress program for those small businesses affected by several interest rate swap products. These interest rate swap products or structured collars were sold to small businesses as a hedge against any risk associated with the interest rate markets. The small businesses or unsophisticated businesses were allowed to purchase these products. The 2008 financial crisis caused many of these hedging products to be of little value against interest rate changes. Small businesses were left with a financial bill that was significantly burdensome.
FCA Interest Rate Swap Flow Chart
Derivatives may be one of the most complicated financial investments on the market. The Financial Conduct Authority (FCA) has created a chart to help consumers, barristers and bureaucrats understand whether a potentially mis-sold Interest Rate swap Hedging Product (IRHP) can be reviewed.
The Financial Conduct Authority (FCA) Interest Rate Flow Chart uses a flow diagram with “Yes/No” questions to show whether a debtor qualifies for regulatory review.
Tim Capper reports on Financial Mis-Selling for Maple Leaf Financial. Our aim is to ensure you get honest advice and proper guidance to ensure a suitable recommendation can be made to pursue a financial claim
Latest posts by Tim Capper (see all)
- PPI Claims Currently Show No Sign of Slowing Down - December 10, 2014
- Swaps (IRHP) Determining the Level of Redress - November 3, 2014
- FCA updates PPI redress for 2.5 million old PPI complaints - October 27, 2014