Banks face £1.5bn payout to victims of interest rates-swap loans scandal
Britain's scandal-hit banking industry is facing a compensation bill of around £1.5 billion, after a review of complex products sold to small businesses found more than 90% had been mis-sold.
The Financial Services Authority said yesterday that the UK's four big banks have agreed to start work on compensating small firms that became tied into paying pre-recessionary interest rates on interest-swap loans taken out prior to the economic crash.
It is believed that as many as 40,000 firms were sold interest rate swaps by banks, as a condition of taking out loans.
The swap deals were a purportedly "low cost" solution to protect small businesses against interest rate hikes, but involved conditions that turned out to be far more complex than borrowers say they had been led to believe.
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When recession hit and the base rate fell to an all-time low of 0.5%, small business found they have been locked in to making repayments on loans at pre-recessionary interest rates, which have continued to rise.
The FSA highlighted "serious failings" in the sale of the products last summer, and following a review into 173 individual cases, concluded yesterday that most were owned redress by the banks.
The cost of compensating businesses could total as much as £1.5 billion across the sector, with Barclays, HSBC and Royal Bank of Scotland – which is 80% taxpayer owned – having already set aside around £630 million to cover potential claims.
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.
Martin Wheatley, chief executive designate of the Financial Conduct Authority, said: "Where redress is due, businesses will be put back into the position they should have been without the mis-sale.
"But it is important to remember that this review is firmly focused on the particular circumstances of each sale."
John Walker, chairman of the Federation of Small Businesses, said: "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."
Westcountry law firm Stephens Scown is acting on behalf of around 40 small businesses currently seeking financial redress.
Some are aiming to recoup the cost of massive interest payments they are still paying, while others are seeking to claim back the hefty cost of exiting the loans.
Civil litigation partner Mark Stubbs said: "The news is very welcome to those who are eligible and can't have come soon enough. They have been in very serious difficulty and need the reviews to be sped along as soon as possible."
Anthony Browne, chief executive of the British Bankers' Association, said: "Banks will be contacting those companies affected shortly, prioritising those with the greatest need."
The highest-profile Westcountry victim of the scandal has been Plymouth based business park owner London & Westcountry Estates, which became tied into an interest swap arrangement after taking out a £57 million loan through RBS in 2008 and was placed into administration after the debt was called in by creditors last April.
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