Warning over FSA scheme for swaps victims

A Financial Services Authority "redress" scheme may fail to help tens of thousands of victims of the interest rate swaps mis-selling scandal because it has “banks at its core”, the Government has been told.

The Federation of Small Businesses has written to the Treasury expressing its “urgent concerns” that the FSA’s process “has lacked transparency”, been too slow and could leave costly litigation as the “only route” available to victims.

The lobby group’s intervention comes ahead of a long-awaited statement by the regulator this week which will reveal the results of a pilot version of the scheme designed to provide “redress” to those affected.

In a letter to Greg Clark, financial secretary to the Treasury, the FSB said there is “no clear indication that the announcement will provide a straightforward, unambiguous way forward.

“We remain deeply concerned that the banks themselves have been at the core of this process,” the FSB added.

Tens of thousands of small businesses ranging from fish & chip shops to children’s nurseries were sold the complex derivatives products alongside conventional bank loans, with many complaining that they were not warned of the risks that came with them.

The products were supposed to protect against a rise in interest rates, but left customers nursing huge losses when rates fell. Business owners say they were frequently sold as a condition of loans, typically between 2006 and 2008.

Firms also report that they were not told about the significant costs if they wanted to exit the swaps, which often lasted longer than the loan with which they were sold. These "break costs" often ran into hundreds of thousands of pounds.

Last year, the FSA said it found “serious failings” in the way banks sold the products.

In the leaked letter, seen by the Daily Telegraph, the FSB urges the Government to take “whatever steps [it] can” to ensure the scheme is “one in which small firms so very badly affected by mis-selling can have full confidence”.

It said the FSA should reconsider its "arbitary and unworkable" guidance that only "unsophisticated customers" will be offered redress through its scheme and "crucially...suspend all swap [repayments] on those who enter the scheme".

The FSB also called for HM Revenue & Customs to be given notice of which companies are in the FSA review so they can be treated "with sensitivity" while their case is being assessed.

The Sunday Telegraph reported yesterday that a source familiar with government discussions over the issue said there are “two camps” within the Treasury: those who want full and fair recompense for affected businesses, and those who fear that would “cost too much and blow a hole in banks’ balance sheets”.

A spokesman for the FSA said the results of the pilot scheme will be “published shortly”.

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