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Banks Face Up To Hefty New Mis-Selling Bill

(c) Sky News 2013

The City regulator will pave the way for Britain's big banks to pay out billions of pounds in compensation over the industry's latest mis-selling scandal.

I have learnt that the Financial Services Authority (FSA) is to set out a revised framework for small business customers (SMEs) to pursue redress for the mis-selling of interest rate hedging products, which were designed to provide insurance against steep rate rises.

Sources said that a crucial element of the FSA announcement would relate to a change in the definition of "sophisticated" customers, or those who would not be eligible to pursue compensation.

The new regime to be outlined by the FSA will alter the bracket of SMEs which will be eligible for compensation by increasing a £6.5m turnover threshold, according to people briefed on the details.

The changes will be an admission that the criteria used during a pilot scheme that ended recently failed to meet the needs of businesses which required the regulator's help.

The methodology was being thrashed out on Wednesday during talks between the FSA and Barclays (LSE: BARC.L - news) , HSBC (LSE: HSBA.L - news) , Lloyds Banking Group (LSE: LLOY.L - news) and Royal Bank of Scotland (LSE: RBS.L - news) , which between them accounted for the overwhelming majority of interest rate hedging product sales.

However, people close to the situation said a deal would be announced at 7am. A number of other banks which participated in the pilot programme are also likely to sign up to the new terms in the near future.

The new framework follows a seven-month pilot scheme involving a small sample of SMEs whose cases had been scrutinised by the banks with the oversight of an independent reviewer. Those reviewers will continue in their roles, potentially racking up huge fees for a small number of accounting and law firms.

Last June, the FSA announced that it had found widespread evidence of mis-selling of products such as swaps, which enabled customers to "fix" interest rates, and collars, which allowed them to limit interest rate fluctuations within a defined range.

"The greatest volumes were sold in the period 2005-2008, before the base rate fell sharply to its current, sustained, historic low," the FSA said in June.

Many SMEs have complained that they were left facing bills of tens or even hundreds of thousands of pounds because of these products.

The major banks have argued that while there were limited cases of mis-selling, most customers understood the risks inherent in hedging products and should not be compensated for costs triggered by the wider financial crisis' impact on interest rates rather than any venality on the part of lenders.

The four banks have now, though, agreed on a set of standards for reviewing thousands more swaps cases during a six-to-twelve month period.

Crucially, the wording of the FSA statement is expected to include a stipulation that the banks will be held liable for "consequential losses" incurred by customers who were mis-sold the hedging products.

While legally difficult to prove, it would mean that SMEs will have the opportunity to pursue significant damages from banks where they can establish that they lost out financially because their capital was wrongly deployed paying for the cost of the swaps.

Further details of the agreement will be announced in the FSA statement.

The FSA and the banks all declined to comment.