FSA OKs Settlement With UK Banks on Interest-Rate Hedges
06/29/2012| 03:16am US/Eastern
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--HSBC, Barclays, RBS, Lloyds to compensate clients
--Second misselling scandal by banks in past few years
--Follows Barclays record GBP290M fine in connection with Libor-manipulation probe
By Marietta Cauchi
LONDON--The Financial Services Authority on Friday confirmed settlements with the U.K.'s four major banks after it found "serious failings" in the sale of interest-rate hedging products in what has been one of the worst weeks ever for the sector.
The financial regulator said that the four banks involved--Barclays PLC (BCS), HSBC Holdings PLC (HBC), Royal Bank of Scotland Group PLC (RBS) and Lloyds Banking Group PLC (LYG)--would take action to redress the customers that bought the most complex products and would stop marketing interest rate structured collars to retail customers.
"These firms have responded to the need to provide a fair deal for customers by working with us, and I welcome this outcome," said Martin Wheatley, managing director of the Conduct Business Unit of the FSA.
"I am particularly pleased that the CEOs: Bob Diamond, Brian Robertson, Antonio Horta Osorio and Chris Sullivan have provided a personal assurance that they will have responsibility for oversight of this work and will ensure that complainants are treated fairly," Mr. Wheatley added.
Interest-rate hedging products can protect bank customers against the risk of interest-rate movements and can be an appropriate product when properly sold in the right circumstances. During the period 2001 to date, banks sold around 28,000 interest rate protection products to customers.
These products range in complexity from comparatively simple "caps" that fixed an upper limit to the interest rate on a loan, through to the more complex derivatives such as "structured collars" which fixed interest rates within a band but introduced a degree of interest rate speculation.
HSBC and Lloyds each said that the financial impact of redressing its customers and associated costs wouldn't have a material financial impact on their business.
This is the second major hit taken by U.K. banks over the past few years in connection with the misseling of financial products. The same four U.K. banks were forced to set aside millions of pounds each after a High Court ruled in support of the FSA's claim that the banks should compensate customers for mis-sold payment protection insurance, or PPI.
This insurance was often sold alongside loans to insure borrowers could continue repayments in the event that they lost their jobs or fell ill. It was missold to many consumers who didn't qualify or weren't even aware they had purchased the insurance.
RBS last year set aside GBP850 million to cover PPI claims on top of the GBP100 million it provisioned the year before; Lloyds set aside GBP3.2 billion; HSBC provisioned $440 million and Barclays earmarked GBP1 billion to PPI customers.
Meanwhile, Friday's settlement comes just two days after Barclays agreed to pay GBP290 million ($452 million) to settle a long-running probe by U.S. and U.K. regulators into allegation that traders at the bank sought to manipulate interbank lending rates.
The authorities are probing several other global banks including include Citigroup Inc. (>> Citigroup Inc.), Deutsche Bank AG (DB), HSBC, J.P.Morgan Chase & Co. (JPM) and RBS. Newspapers Friday report that RBS is expected to pay around GBP150 million.
Write to Marietta Cauchi at marietta.cauchi@dowjones.com
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