FSA Reveals Scale of Interest Rate 'Swap Mis-Sell'

The Financial Services Authority has revealed that more than 90% of interest rate swaps were allegedly mis-sold to small businesses by banks.

Last night Sky News City Edtior Mark Kleinman revealed that the City regulator had set out a revised framework for small business enterprises (SMEs) to pursue possible redress.

It is the latest mis-selling scandal to hit Britain's high street banks and involved selling interest rate hedging products that were designed to provide insurance against steep rate rises.

Britain's scandal-hit banking industry now faces another hefty compensation bill after the review of the complex products.

The FSA said a significant proportion of the 173 cases examined were likely to result in redress being due to the customer.

It is thought that as many as 40,000 of the interest rate swaps could have been mis-sold to small businesses since the end of 2001 after the FSA highlighted "serious failings" in the sale of the products last summer.

The FSA announced that the UK's four big banks - Barclays, HSBC, Lloyds and Royal Bank of Scotland - have agreed to start work on reviewing individual sales and providing compensation.

It is thought the cost of compensating businesses could total as much as £1.5bn across the sector, with Barclays, HSBC and RBS having already set aside around £630m to cover potential claims.

Interest rate swaps are complicated derivatives that might have been sold as protection - or to act as a hedge - against a rise in interest rates without the customer fully grasping the downside risks.

They were marketed as low-cost protection against rising interest rates, often as a condition of a business loan. But businesses as small as bed and breakfasts and takeaway shops were left with major bills after the financial crisis caused interest rates to slide.

The FSA has now released new guidelines for banks to differentiate between sophisticated firms that knew what they were buying and small firms which did not understand the products.

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