Just when British banks would have loved some positive publicity at the end of June the Financial Services Authority (FSA) announced that it had found "serious failings" by Barclays, HSBC, Lloyds and RBS in the sale of interest rate hedging products to thousand of small and medium sized businesses. The cost of the problem could be as much as £1 billion.
The products were essentially sold to protect customers in the event of interest rate rises. With interest rates now at historic lows, customers have found that these products are very expensive to maintain and can be even more expensive to exit.
The FSA's investigation found a range of poor sales practices including:
- Poor disclosure of exit costs
- Failure to ascertain the customers' understanding of the risk
- Non advised sales straying into advice
- Employee rewards and incentives driving sales
The four banks have agreed to pay "appropriate redress where mis-selling has occurred". The exact redress will vary from customer to customer, but could include a mixture of cancelling or replacing existing products, together with partial or full refunds of the costs of those products.
The FSA says that 28,000 such products were sold since 2001 although not all will have been mis-sold. Interestingly, of the 48 complaints against Barclays that have been ruled on by the Financial Ombudsman Service (FOS), only 10 per cent were decided in favour of the customers. The Courts - to whom many businesses will have to complain – are traditionally less pro customer than the FOS.
It remains to be seen whether this will be a headache for financial institutions underwriters. Two types of claims might be made on policies – claims on the civil liability form in respect of customer redress, and claims for regulatory/investigation costs cover under both the civil liability and directors' and officers' wordings.
The process agreed with the FSA will inevitably result in payment of redress to customers where no claims have been made. This will call into question whether the banks truly owe a legal liability to customers or whether they are compensating more customers than they need to in an attempt to curry favour with the FSA and to preserve their brand. Claims are likely to be made on mitigation covers meaning that issues raised in the recent Standard Life judgement may need to be revisited. Given that the most questionable sales look likely to have occurred in 2008 and earlier, retroactive date exclusions may be triggered.
The timing of any notifications will also need to be scrutinised. Finally, that part of compensation representing the bank’s fees and commissions will likely be excluded.
This article was first published in Insurance Day on 12 July 2012.