Victims of interest rate swap mis-selling have written to the Financial Services Authority urging the regulator to “strongly resist” pressure from banks to “water down” the findings of its review of the scandal.
In a letter to the FSA’s Martin Wheatley, Bully Banks which represents more than 2,000 firms who claim they were mis-sold the complex financial products called on the regulator not to limit the “scope and application” of a compensation scheme for affected companies.
On Thursday, the FSA is expected to announce the results of a pilot scheme to provide “redress” to mis-selling victims. This will determine the structure and scale of the programme that businesses can access.
Tens of thousands of small and medium-sized companies were sold the complex derivatives products alongside conventional bank loans. Many complained the risks that came with them were not outlined.
While supposed to protect against a rise in interest rates, customers ranging from fish and chip shops to caravan parks were left nursing huge losses when rates fell. Business owners also claim that significant costs of ending the contracts were not explained and that the products were sold by “highly incentivised” salesmen as a condition of loans.
Last year, the FSA said it found “serious failings” in the way banks sold interest rate swaps.
Bully Banks asks the regulator to define exactly what it means when it says it will provide “fair and reasonable redress” to companies through the scheme. It also asks for the FSA to “clearly stipulate” how it will decide if mis-selling has occurred and calls for the regulator to rethink its decision that only strictly defined “unsophisticated borrowers” can qualify.
Bully Banks argues that there are “clearly unsophisticated borrowers” who were mis-sold swaps but “fall foul of the [FSA’s] test of financial sophistication agreed with the banks”.
Jeremy Roe, chairman of Bully Banks, said: “We are concerned that there are those in government and in the banks who seek to reduce the scope of the FSA’s scheme because of the fear that the scale of redress will damage the balance sheets and share price of the banks.
“We believe that the FSA is fully aware that the banks mis-sold these products. We are concerned that they [will not be] allowed to act with the rigour that is required of an effective regulator. If this is the case this is a major political scandal in the making.”
The Federation of Small Businesses has written to the Treasury expressing concerns that the c ompensation scheme has “banks at its core”.
Banks implicated in the mis-selling of swaps fear that the scandal could cost them more than £1.5bn. Chief executives of some major lenders have reportedly met to “share profound concerns” that the FSA will make the redress scheme too broad.