Out-Law News 2 min. read
25 Jul 2012, 12:55 pm
Allied Irish Bank, the Bank of Ireland, Clydesdale and Yorkshire Banks, Co-operative Bank, Northern Bank and Santander UK have also agreed to provide redress to customers should any evidence of mis-selling be uncovered by the review.
Last month Barclays, HSBC, Lloyds and RBS announced that an investigation into sales of the complex products – designed to insure borrowers against changes in interest rates – would be carried out by an independent reviewer at each bank. The announcement came after the FSA uncovered "serious failings" in the way the products were marketed and sold to small businesses, including cases where sales staff had failed to properly ascertain whether customers had fully understood the risks associated with the products that they were buying.
However the FSA stressed that it had not made any findings against the additional seven banks, which together account for around 10% of overall interest rate hedging sales in the UK.
Clive Adamson, director of supervision with the regulator, said that the additional banks had agreed to the same terms of reference as the larger banks. Affected customers could have existing products cancelled or replaced and receive partial or full refunds, according to the FSA's earlier announcement.
"This is a major exercise but one that we hope will ensure even more businesses benefit from having their individual situation reviewed," Adamson said. "Although the number [of sales by the additional banks] was smaller and while there is no presumption that mis-selling has occurred, it shows their willingness to do the right thing and ensure their customers who bought these products can be confident that they will be treated on an equal basis."
Swaps provide borrowers with protection against changes in interest rates by locking in net cash outflow to a fixed interest rate. The product is designed so that the swap provider – usually the bank which also provided the underlying loan – covers the cost of increased payments if the interest rate rises while customers have to pay the bank if rates fall. Simple products merely fix an upper limit to the interest rate on a loan, while more complex 'structured collars' introduce a degree of interest rate speculation to the transaction. In all cases, customers risk having to make higher payments than anticipated if the market does not perform as expected.
The potential mis-selling of the products was raised in Parliament by Guto Bebb, a Conservative MP, in January after he was approached by a constituent who had lost his hotel and been declared bankrupt after losing money on what he claimed was a "highly complex interest rate product".
The FSA has also published its terms of reference (2-page / 357KB PDF) for the independent reviewers who will be appointed by the four larger banks to oversee their investigation and potential redress processes "objectively and consistently". These include giving each customer the right to have the reviewer present during any meetings or calls with the bank.
The regulator said that it expected those banks to proceed "rapidly" with their reviews.
"Following the agreement announced on 29 June, we have pushed ahead with the necessary work to bring this announcement into reality," Adamson added. "The terms of reference that we have agreed for the independent reviewers shows the detailed and thorough scrutiny that we will expect of them."
Reviewers will, the note said, typically be appointed from accountancy, law or consultancy firms. Although nominated by each bank the FSA must approve the selection or it will ask the bank to nominate another reviewer. In situations where there is a conflict of interest, including where the reviewer has a conflict of interest with the customer, the regulator will "require the bank to involve a second independent reviewer", it said.
The FSA will also need to be satisfied with the process each bank intends to use for its review and redress exercises, which will involve a "pilot exercise", it added.