Mis-sold swaps may cost UK banks billions

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: Quote) has taken the highest provision at 450 million pounds, HSBC (HSBA.L: Quote) has set aside about 150 million pounds, RBS (RBS.L: Quote) 50 million pounds and Lloyds (LLOY.L: Quote) 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.