BRITAIN’S biggest banks will begin the process of compensating thousands of small businesses after a review found more than 90% had been mis-sold complex financial products.
The Financial Services Authority (FSA) looked at 173 cases where so-called interest rate swaps had been sold to small firms as part of a pilot study and said a “significant” proportion were likely to result in redress being due to the customer.
UK lenders are expected to face a compensation bill of at least £1bn in what marks the latest in a long line of recent scandals to hit the sector.
It is believed that as many as 40,000 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 yesterday said the UK’s four big banks – Barclays, HSBC, Lloyds Banking Group and Royal Bank of Scotland – have agreed to start work on reviewing individual sales and providing compensation.
The Federation of Small Businesses (FSB) said the findings were alarming but that they will also come as a relief to the thousands of small firms who have been waiting for clarity on the situation.
FSB chairman John Walker added: “Now the pressure is on the banks to contact its customers. They must do so quickly and decisively to draw a line under this matter and bring the situation to a close.
“This review only covers the first four banks, with the report into the remaining seven due in the coming weeks. The FSB will continue to fight for other firms caught up in this scandal.”
The FSA has also been reviewing sales of interest rate swaps by Allied Irish Bank, Bank of Ireland, Clydesdale and Yorkshire banks, Co-operative Bank and Santander UK. It expects to confirm by February 14 that these banks can launch their own reviews.
Spanish-owned banking giant Santander UK said it has uncovered a raft of former Alliance & Leicester small business customers that were potentially mis-sold interest rate swaps.
In announcing 2012 results, the group said it was set to review a number of cases where swaps were sold by Alliance & Leicester before the former building society’s takeover by Santander at the height of the credit crunch in 2008.
It has identified less than 500 potential swap mis-selling cases and has set aside £232m to cover costs such as compensation for mis-selling of interest rate swaps, on top of £751m put by in 2011 for the payment protection insurance scandal.
The forthcoming bank reporting season is set to reveal another wave of provisions for mis-selling after a devastating year for the industry, which is still reeling following the recent Libor rate-rigging scandal.
Financial Secretary to the Treasury Greg Clark said the update from the FSA makes a step towards “righting the wrongs of the past”.
“Small businesses, in particular, should have been able to regard their banks as long-standing partners and advisers. Instead some of them were conned by the very people they trusted into buying products that were worthless to them, but made money for those selling them,” he said.