31 January 2013

FSA: Pilot findings on interest rate hedging products

This report sets out the FSA's findings from the pilot reviews completed by Barclays, HSBC, Lloyds and RBS. The regulator expects to announce its findings from the pilots of the other banks in the coming weeks. (Includes BBA statement.)

In 2012, FSA carried out a review that found serious failings in the sale of interest rate hedging products (IRHPs) to small businesses. As a result, eleven banks agreed to review the sale of around 40,000 IRHPs made on or after 1 December 2001 to certain ‘non-sophisticated’ customers.

The work on the pilot has confirmed the FSA’s initial findings that there was significant mis-selling of IRHPs. FSA looked at 173 sales to ‘non-sophisticated’ customers from across the four banks and found that over 90 per cent did not comply with one or more of its regulatory requirements. FSA looked at a further 133 cases to check the application of the sophistication test.

The pilot confirmed FSA’s view that the independent reviewers play a vital role in this exercise. The independent reviewers assessed each case in the pilot (as they will do for the full review). FSA saw evidence of the independent reviewers challenging the banks’ views on both whether the sales met our regulatory requirements and on redress, and the views of the independent reviewers prevailed.

The pilot identified some areas where changes or clarifications are necessary to the review approach to ensure the review delivers fair and reasonable outcomes for customers. In particular, FSA has:

• changed the ‘sophistication test’ to ensure the review is focused on those small businesses that were unlikely to have understood the risks associated with these products; and
• created a set of redress principles to ensure there is a sufficient degree of consistency across the banks in determining fair and reasonable redress, including in relation to consequential loss.

Barclays, HSBC, Lloyds and RBS have agreed to conduct the review in line with the approach set out in this report. FSA expects the banks to aim to complete their review within six months, although FSA accepts that for banks with larger review populations this may take up to 12 months. FSA has made sure that the banks will prioritise cases where customers are in financial difficulty.

Full pilot findings

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Responding to the FSA report on Interest Rate Hedging Products, BBA Chief Executive Anthony Browne said: "We are pleased that the FSA has reached agreement with the major banks to provide fair and reasonable redress for businesses affected.  Since the problem was identified the banks have all worked proactively with the regulator and independent experts so that the issue can be resolved as swiftly as possible.

"The announcement today will give clarity to businesses and will enable the banks to put in place the steps needed to resolve each case for customers.  Where customers have suffered unfairly the banks have all agreed that they will put it right. Banks will be contacting those companies affected shortly, prioritising those with the greatest need. Any business which is currently facing financial distress and is seeking a suspension of payments should get in touch with their bank immediately."

Press release © BBA

© FSA - Financial Services Authority