Most of the complex interest-rate hedging products, or “swaps”, purchased by small businesses had been mis-sold to them by banks, a Financial Services Authority report concludes.
Some 40,000 businesses up and down the down the country have been waiting for this day for more than eight months, some many years.
There’s no doubt every one of them will breathe a sigh of relief this morning after the Financial Services Authority said it had concluded its review of a pilot scheme into 173 complex interest rate hedging products and found that 90 per cent of them were mis-sold by the banks.
But many questions remain unanswered. Why has the FSA still left it to the banks themselves to run the process? And if mis-selling has occurred, exactly what compensation will be due?
Interest rate hedging products, or swaps, were sold to thousands of businesses in Britain during the height of the financial boom.
They were billed as insurance products that customers were told they had to take out on loans to protect them from interest rates rising and making the loan more expensive. Yet just as thousands of these products were sold the market crashed as the financial crisis hit and interest rates plummeted.
What all the small businesses did not know was that as rates fell, they would be liable to pay the bank, often thousands of pounds.
For many, the payments have crippled the businesses and forced the owners to sack staff, sell off buildings and in dozens of cases, go under altogether.
So Thursday’s statement from the FSA will be seen by many as a vindication of what they have been saying for years.
But businesses I’ve spoken to today say they are still confused as to exactly how the redress process will work.
Bully Banks, which represents more than 800 affected businesses, had this to say today.
“This is a Polo settlement – it has a fundamental hole in the middle, with no definition of what is “fair and reasonable”, what actual redress businesses will receive, nor any deadline for resolution.
“Until the FSA and the banks complete the process by addressing the hole we will not be satisfied, able to rest easy or sleep at night.”
The FSA has now officially kick-started a process that will force the banks to sift through the remaining 39,800-odd cases with a view to deciding how many of those were also mis-sold.
But the problem is it’s the banks themselves who will be in charge.
It’s true there are independent reviewers on each bank’s team. But in many cases, those “independent” reviewers are the banks’ own accountants- paid for by the banks. So many would rightly ask, can they really be impartial?
The boss at the FSA’s conduct unit, Martin Wheatley, told me he would ensure there’d be no back-scratching and if any was detected, the independent reviewer would be immediately removed.
But with more than 40,000 incidences of mis-selling it might be hard for the FSA to be across every case. Let’s wait and see.
But one things for sure. If the percentage of mis-selling in the remaining near 40,000 cases works out to be the same, or even close to the same as today’s 90 per cent figure, swaps will turn into a major financial blow for the banks. Just when they can least afford it, with PPI and Libor interbank fixing fines piling up.
But just how big a financial blow it is for the banks isn’t yet clear – because this is the language Mr Wheatley uses.
“Small businesses will now see the result of the review as the banks look at their individual cases. Where redress is due businesses will be put back into the position they should have been in without the mis-sale.”
Now, that could mean that where miss-selling has occurred the banks will have to cancel the swap product, compensate all the payments made by a business, typically over a number of years, and restore the business to its financial health before the swap was put in place.
Under that scenario the banks will have to pay out billions of pounds and this process will be very painful indeed.