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The cost of compensating businesses for the mis-selling of complex derivative products is to double to more than 31.5bn across the UK’s major banks.
The Sunday Telegraph had revealed that at least one of the “Big Four” banks – HSBC, RBS, Lloyds TSB and Barclays – are poised to increase its provision for the sale of interest rate swaps to small to medium sized firms by more than twofold. Another of the four is understood to be ready to treble the amount it has set aside for its involvement in the scandal.
One senior banking source said he thought that it was possible that all four banks would have to at least double the combined £720m they have so far set aside to cover the cost of swaps mis-selling.
Banks are becoming increasingly concerned that the Financial Services Authority (FSA) has set the parameters on which businesses are eligible for compensation too widely, meaning that many sophisticated players in the financial markets are attempting to claw back money.
The Sunday Telegraph revealed last year that banks had been selling complex interest rate “swap” products to businesses with little prospect of understanding them. They were supposed to protect against interest rate rises.
Bed and Breakfast and chip shop owners were then left with major bills after the financial crisis caused a collapse in interest rates.
In total, 11 banks – including Santander UK, the Co-operative Bank and Yorkshire Bank – have signed up to a re-dress scheme run by the FSA, meaning the total bill is likely to be in excess of £1.5m.
The reason for the increases in provisions – which will be published as part of the full-year figures due in six weeks’ time – is that the number of swaps the banks will have to pay out on has risen.
The FSA’s pilot study – which saw each bank assess 50 claims with the help of an independent auditor – is understood to have referred far more claims for payment than had been expected.
At the same time, the regulator is not happy with financial redress the banks are suggesting be paid out, which will further increase the eventual compensation.
Several banks are also querying the workings of the FSA’s pilot study. One key issue is the test of whether a company’s directors could be deemed to be “sophisticated” and therefore able to understand the complex calculations behind the products that they were buying.
The pilot study judged companies on revenue, number of employees and size of balance sheet,. If a company met two of three criteria, its directors were deemed to be sophisticated.
But with so-called special purpose vehicles, such as property companies set up alongside operating companies, or subsidiaries of global companies, these criteria were not met even though the firms were run by professionals.
To date, Barclays has taken the highest provision, of £450m, while HSBC has set aside $240m (£150m). RBS has set aside £50m, while it is understood Lloyds, which in the past has described its provision as “not material”, has put aside £90m in its books.
Another source indicated that the provisions would be inflated by the pace at which the FSA will demand the claims are assessed, and the scarcity of experienced professioanls to do the work.
More than 40,000 interest rate swaps are estimated to have been sold to small businesses, according to the FSA.