Thousands of small UK companies will soon be informed they may have been mis-sold interest rate caps by their lenders, which could result in the UK’s largest banks being put on the hook for at least £1 billion in new compensation payouts. The unexpected move from the city watchdog may come as early as today.
It has been predicted that the Financial Conduct Authority (FCA) will say that approximately 5,500 to 6,000 business can join the redress scheme for swap mis-selling, after they were overcharged by ten or even hundreds of thousands of pounds on ceilings to provide protection against interest rate rises.
Industry insiders believe the Royal Bank of Scotland may be hit the hardest by the move, as it sold more than a third of the caps that could now be reviewed.
HSBC may also face a large bill, while Barclays and Lloyds Banking Group are thought to have smaller exposures.
The decision to review the claims will be announced soon, along with a decision from the FCA that is has set a deadline for 31st March for all claims to be submitted to its interest rate swap mis-selling compensation scheme. The same deadline will most likely also apply to interest rate cap claims.
Bank representatives, all of whom signed up in June 2012 to the regulator’s original interest rate hedging products redress scheme, have argued over the letters’ wording that they will be required to send to affected customers.
Guto Begg, the chairman of the all-party parliamentary group on interest rate swap mis-selling, has stated he was “bemused” by the change of approach, and cited problems with the existing scheme.
Mr Begg commented: “In effect, the FCA is instruction banks to offer them access to what we would consider to be a redress scheme that is not delivering.”
Tracey McDermott, the former head of financial crime and enforcement at the FCA, has reportedly driven the decision.
There has been growing pressure to allow access to businesses that were sold caps to the review, as the few allowed into the scheme has shown almost identical mis-selling and conduct breaches as those found among the sale of swaps, which are more complex products.
Over 90% of the interest rate hedging product sales reviewed were found to have some instance of mis-selling, although not all victims have been entitled to the same compensation.
Banks have offered 1.5 billion in compensation, but campaigners have criticised the process for being too slow and idiosyncratic, with complaints that redress packages have varied significantly between lenders.
Over 19,000 potential victims have been reviews and only a few were businesses that were sold caps. Prior to today’s change, customers who have been sold a cap were entitled to compensation, but only if they had bought a complex interest rate swap that ran concurrently to it, or if they wrote to their lender asking to be included.
Dissimilar to swaps, which result in victims with fees to break the deal and big premiums when interest rates were cut over six years ago, mis-selling involved customers who paid large upfront fees that failed to reflect the real cost of the product to their bank.
An FCA spokesperson declined to comment.