Mis-sold swaps may cost UK banks billions

Thu Jan 31, 2013 7:34am EST
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By Matt Scuffham

LONDON (Reuters) - British banks face another round of compensation claims that could total billions of pounds after the regulator found they had widely mis-sold complex interest-rate hedging products to small businesses.

The interest-rate swaps are the latest in a series of costly banking scandals that include insurance on loans and mortgages that was also mis-sold, rigged global benchmark rates and breaches of anti-money laundering rules.

Britain's financial watchdog said on Thursday it found that in the 173 interest-rate swap test cases it examined, more than 90 percent did not comply with at least one or more regulatory requirements.

A significant proportion will result in compensation being due, the Financial Services Authority (FSA) said.

Martin Berkeley, a senior consultant at Vedanta Hedging, which advises on interest-rate hedging products, said the final bill for banks could be as high as 10 billion pounds ($16 billion).

So far, the four biggest banks have set relatively small sums aside for compensation. Barclays BARC.L has taken the highest provision at 450 million pounds, HSBC HSBA.L has set aside about 150 million pounds, RBS RBS.L 50 million pounds and Lloyds LLOY.L has said the cost won't be material.

Investec's banking analyst Ian Gordon said he expected the overall bill for the industry to be around 1 billion pounds.

Banks have already set aside 12 billion pounds to compensate customers mis-sold payment protection insurance (PPI) and industry sources expect that number to double.   Continued...

A combination of four photographs shows (top L-R) a worker silhouetted against an illuminated sign in a branch of HSBC; Two people walking out of the headquarters of the Royal Bank of Scotland; (bottom L-R) a Lloyds bank branch near St Paul's Cathedral and a customer using a Barclays ATM, in central London July 23, 2010. REUTERS/Andrew Winning