Several more banks will be added to the list of high street lenders involved in the interest rate swap compensation scheme, the regulator has confirmed.
They will join Barclays, Royal Bank of Scotland, Lloyds Banking Group and HSBC, which last month agreed a deal with the Financial Services Authority that could lead to hundreds of thousands of pounds being paid in compensation.
The Daily Telegraph reported that Clydesdale and Yorkshire banks would be among those added to the list, although these lenders, both brands owned by the National Australia Bank, declined to comment.
The FSA’s original document, which concluded that there had been “serious failings” in the sale of interest rate hedging products to small and medium-sized businesses, was criticised for being too vague about what compensation would be paid to whom.
The regulator has therefore been preparing to give more detail about how the process will work.
Although the FSA’s next announcement will show that the selling of interest rate hedges was much broader than originally thought, the revelation is unlikely to greatly increase the estimated size of the potential payout, since the vast majority of these products were sold by the big four banks.
Interest rate swaps are derivative contracts that allow businesses to swap a variable interest rate loan facility for a fixed rate for a certain period.
Many of those persuaded to move from variable rate loan facilities to derivative products are struggling to pay off debts ranging from £500,000 to £10m, according to lawyers .
The regulator has estimated that as many 28,000 businesses were sold interest rate hedging products since 2001, which is as far back as it has traced the process.
The banks maintain that many of these were simple products and so those who took them out would not be eligible for compensation.
The agreement struck with the four main banks highlighted evidence of poor sales practices across a number of products, including poor disclosure of exit costs; failure to ascertain the customer’s understanding of risk; and “over-hedging”, where the duration of the swap product sold did not match the underlying loan it was meant to be protecting.
The FSA has left it up to the banks to review cases brought by their customers. Each complaint will then be scrutinised by an independent reviewer, appointed by the bank and overseen by the regulator.
The agreement also limits the right to redress to “non-sophisticated” customers, which are companies that fall below a certain headcount, turnover and size of balance sheet.
Even if companies meet this criteria, however, banks will still be able to avoid having to pay compensation if they can prove to the FSA that the businesses understood what was happening when they signed up to the interest rate hedge.