Barclays, HSBC, Lloyds Banking Group and Royal Bank of Scotland have agreed with the FSA to review the full extent of misselling of interest rate swaps to small businesses.
The regulator announced last June it had found “serious failings” in the way the products were sold, prompting 10 banks to agree to review the sale of 40,000 swaps made on or after 1 December 2001.
The FSA then established a pilot review to test the effectiveness of each bank’s approach ahead of the banks beginning a full review of their swaps sales.
Last week, the FSA published the findings of the pilot review carried out by Barclays, HSBC, Lloyds, RBS and independent reviewers in 2012. It looked at 173 sales to non-sophisticated customers and found over 90 per cent did not comply with one or more regulatory requirements.
The four banks will now conduct a full review of their sales of interest rate swaps.
The regulator says it expects to confirm that Allied Irish Bank (UK), Bank of Ireland, Clydesdale and Yorkshire Banks, The Co-operative Bank and Santander UK will start their own full reviews by 14 February.
Following the pilot, the regulator has changed the test banks apply in assessing whether the swap was sold to a sophisticated customer. The test is now focused on small businesses who were unlikely to understand the risks associated.
Businesses such as small subsidiaries of multi-national corporations and special purpose vehicles are excluded from the full review. Customers who have a balance sheet total of more than £3.26m and more than 50 employees will be eligible to review swap sales where the total value of existing swaps is equal to or less than £10m.
Banks will have to pay redress to customers where they failed to provide clear, fair and not misleading information on the swap’s product features and risks in good time before the sale.
Redress will also be payable if the customer took out a swap for a higher amount or a longer term than the underlying loan and the potential consequences were not clearly disclosed, and where a customer was advised to take out a swap without the bank taking reasonable steps to ensure the recommendation was suitable.
The FSA expects banks to complete their sales review within six months, though says for banks that sold a higher volume of swaps this process could take up to a year.
Evolve Financial Planning director Jason Witcombe says: “Most people in the street would not know what an interest rate swap was a year ago, and now it transpires the banks have been selling these products by the bucketload. It sounds like PPI mark II, and makes you wonder what misselling scandal is coming next.”