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'Serious failings' in IRSA selling
Some of Britain's biggest banks are facing a hefty compensation bill after the City watchdog said it found "serious failings" in the sale of complex financial products to small businesses.
Barclays, HSBC, Lloyds and Royal Bank of Scotland have agreed to compensate customers where the mis-selling of so-called interest rate swap arrangements (IRSAs) has occurred, the Financial Services Authority (FSA) said.
IRSAs are complicated derivatives products that may have been sold as protection - or to act as a hedge - against a rise in interest rates without the customer fully grasping the downside risks. Banks sold around 28,000 interest rate protection products to customers since 2001, the FSA added.
Martin Wheatley, managing director of the FSA's conduct business unit, said: "For many small businesses this has been a difficult and distressing experience with many people's livelihoods affected."
As well as offering redress directly for those customers that bought the most complex products, the banks have also agreed to stop marketing certain IRSA products to retail customers, the FSA said.
The City regulator has spent the last two months reviewing the sale of IRSAs, talking to more than 100 customer who came forward. It found poor sales tactics including failing to provide sufficient information on the hefty exit costs involved, failure to gauge the customers' understanding of risk and found rewards and incentives were a driver of these practices.
The FSA added that not all businesses will be owed redress, but for those that are, the exact redress will vary from customer to customer. This exercise will be scrutinised by an independent reviewer at each bank appointed under the FSA's powers.
The British Bankers' Association, the leading trade association for the UK banking and financial services sector with more than 200 member banks, said: "Our members have been working closely with the FSA while it carries out its thematic review into interest rate swaps and will continue to co-operate fully."
In a statement, Lloyds, which set aside £3.6 billion to cover the cost of PPI compensation, said it did not expect the costs of redressing customers who were missold IRSA products to be "material" as the products were not sold widely.
A statement for RBS said: "In the case of a small number of less sophisticated customers who entered into more complex swap products we have agreed to move directly to redress. We are committed to the fair and timely treatment of our customers and will work closely with the FSA to achieve that end."