The sale by retail banks of controversial interest rate hedging products could be limited under plans by MPs and peers to look further at the way derivatives have been sold to small businesses.
The Commission on Banking Standards has said it will investigate the “control of the sale of derivatives to prevent mis-selling” in the new year as it works on its final report on culture and ethics at major lenders.
More than 40,000 interest rate derivatives are estimated to have been sold to smaller and medium sized businesses by banks in the past decade, according to the Financial Services Authority. Barclays (LSE: BARC.L - news) , HSBC (LSE: HSBA.L - news) and Royal Bank of Scotland have together put aside more than £600m against possible compensation for victims of mis-selling.
Staff at the FSA are reviewing the sale of a small number of the products ahead of the launch next year of a compensation scheme for businesses mis-sold swaps.
Vince Cable, the Business Secretary, said he thought banks had “behaved extremely badly” and he would intervene in the scandal.
“I have taken a personal interest in this. The FSA is now trying to deal with this… It’s a massive scandal and I’m hoping that over the next few weeks there will be a proper set of goals. We want genuine justice for those small companies,” he told Channel 4.
In a report published on Friday, the Commission said: “Banks have argued that a prohibition would result in consumer detriment, but selling derivatives to SMEs has been a highly profitable activity for them and investigations of mis-selling of interest rate swaps demonstrate the risk this poses to trust between banks and their customers.”
Among the changes to be looked at will be proposals to ban the ring-fenced retail banks that will be created by the Government’s Bank Reform Bill from selling derivatives. However, the Commission cautioned that it did not believe this was likely to be the “best tool” to prevent further mis-selling.
Jon Moulton, founder of Better Capital, said trying to stop banks gaming the system was “like trying to control POWs in Colditz”.
“You are going to have regulators to try to administer this big tough electric fence. Bright people fighting and an impossible task rather like trying to control POWs in Colditz. Why bother. It’s just going to be futile,” he said.
News (NasdaqGS: NWS - news) of the Commission’s investigation into swap sales came as RBS (LSE: RBS.L - news) won a case brought against it by a catering company for mis-selling an interest rate derivative.
On Friday, Green & Rowley had its claim for mis-selling against RBS dismissed and was ordered to pay the bank’s costs of £175,000.
Paul Rowley, a Lancashire-based restaurateur, said he was “absolutely gutted” and would be considering his legal options. Mr Rowley’s case is the first for swap mis-selling to go through a full trial in an English court and experts were yesterday studying the verdict to assess its significance in setting a precedent.
Several other cases have been brought against banks, but these have generally settled out of court.