Following the FSA’s announcement on Friday that Barclays, HSBC, Lloyds Banking Group and RBS have all admitted misselling complicated interest rate hedging products to SMEs (small and medium sized enterprises) the banks have agreed to compensate businesses after the FSA said it had found “serious failings” in the way they marketed to some customers.
The financial storm unleashed by the FSA’s announcement continued unabated over the weekend with the Herald leading on the story on Saturday – “Scots firms due millions after banks' mis-selling” – a detailed article commenting on the FSA announcement and looking at how the process of compensation was expected to work. As Simon Bain commented,“the agreement with the FSA, intended to avert a PPI-style bonanza for claims companies, could allow the banks to minimise redress” .
However, a number of commentators and experts working in this area, including Cat MacLean of MBM Commercial, expressed serious reservations about whether this will prove to be a fair and accountable process. The banks will appoint independent assessors to review all other cases, and have promised they will "not foreclose on or adversely vary existing lending facilities, without giving prior notice" to any affected customer. This promise by the banks has a hollow ring about it. Nowhere in any of this is the undertaking not to foreclose or call up loans pending a review of any individual customers’ swap; instead it is merely suggested that this will not be done without prior notice being given – a step which would have to be taken in any event.
The Bully Banks campaign, which persuaded MPs to act, also expressed reservations and said it had "serious concerns about the way in which it is proposed to identify instances of mis-selling". Campaign spokesman Paul Adcock said the accountancy firms who might be appointed as assessors all had existing connections with the banks. "We would feel concerned about their independence, and their expertise," he added.
Abhishek Sachdev of Vedanta Hedging, said: "If I were the banks, I would be breathing a big sigh of relief. They will be accountants, not FSA-registered specialists who understand derivatives. They are presenting it as smaller than PPI, but the real claims involved are much bigger."
Cat MacLean, partner at Edinburgh law firm MBM Commercial, was also quoted by Simon Bain: "We must ensure the independent assessor doesn't suffer from the malaise which seems to affect the financial ombudsman, where claims can languish for years and who rarely upholds claims against banks, and that sufficiently relevant evidence is given to the assessor”.
The financial storm worsened on Sunday when the Sunday papers added their weight to the story. The Sunday Herald led with “Bankers behind bars” and an exclusive by Ian Fraser on “the wages of sin”. Ian Fraser commented on the manipulation of LIBOR which had been established by the FSA on Wednesday, including comment and input from Professor William Black of the University of Missouri, expert on financial crime; UK Justice Secretary Ken Clarke; Scottish Justice Secretary Kenny MacAskill; Labour leader Ed Milliband; Prime Minister David Cameron and Cat MacLean of MBM Commercial. With the immediate force of the storm now receding it is time to take stock. There is a sense of relief that the issues both of LIBOR manipulation and swap mis-selling are now properly in the public domain, and are being addressed; and a feeling also of cautious optimism - clearly the FSA's findings are to be welcomed, as is the "in principle" commitment from the banks to compensation. However, the devil will be in the detail and there is no doubt the assessment process will have to be scrutinised very carefully to ensure fairness and accountability. It will be essential to ensure that the banks are not permitted to manipulate the compensation process so as to minimise redress.
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