FSA Faces Legal Action

Two weeks ago I berated the toothless and useless FSA for kowtowing to the banks and giving them a "get out of jail card" for the rate swap mis-selling scandal, in the form of a £10M ceiling on the size of swaps for which compensation can be claimed.

The government, fearing that it will be associated with the failure of the FSA, has finally woken up to this mess. Greg Clark, Financial Secretary to the Treasury, has told the FSA that banks must allow businesses that could have been mis-sold an interest rate swaps to cease making premium payments.

The Telegraph reports that Clark privately told the FSA that its finding that more than 90% of interest rate hedging products had likely been mis-sold to SMEs was a “game changer”.

By way of "coincidence" the FSA faces legal action over its compensation scheme.

Law firm Manches is preparing to launch a judicial review against the FSA, which it claims “acted unreasonably in establishing and changing the criteria for businesses to be within the review”.

In particular, Manches will challenge the introduction of the £10M cap. Rich Eldridge, a partner at Manches, said the FSA had used its powers “improperly”:

“The cap is illogical. An indicator of mis-selling is a swap for more than the loan. If a business with a loan of £9m is sold a swap of £9m it can be within the review. If the same business is sold a swap of £11m it cannot. The £11m swap is worse as the swap is more than the debt, but the £10m cap allows the bank to escape the review procedure for this swap.” 

The sooner we are rid of the ineffective and useless FSA the better!

FSA Kowtows To The Banks

Last week the FSA stated that banks had mis-sold around 90% of rate swaps. Martin Wheatley, chief executive designate of the Financial Conduct Authority stated:

"We believe that our work will ensure a fair and reasonable outcome for small and unsophisticated businesses."

Was this statement an indication of a new tough approach by the FSA against mis-selling by the banks?

Unfortunately, for the hapless SME's who were sold these products, the answer is no.

The Independent reports that banks have been given a "get out of jail card" by the FSA, in the form of a ceiling on the size of swaps for which compensation can be claimed. What the FSA chose to hide in their statement last week was the fact that swaps of £10M and above will be excluded from the review that it has ordered banks to undertake, this exclusion will mean that banks will be exempted from compensating companies that took swaps of £10M or more out.

Aside from the fact that the FSA has yet again proved that it is weak and toothless when pressured by the banks, this exemption is a clear indication that banks are in a weak financial position (ie the industry cannot afford to take another £10BN hit akin to the PPI scandal).

The sooner the FSA is expunged from history, the better!

Banks Mis-sell 90% of Rate Swaps

In an unsurprising revelation it appears that banks have yet again been fingered for selling another "dodgy" financial product that was totally unsuitable for the hapless customers onto whom it was foisted.

This time the offending products were complex interest rate derivatives, sold to SME's.

The FSA is of the view that around 90% or more of these products, which did not comply with one or more regulatory requirements, were mis-sold.

Seemingly the banks structured these products in such a way that escape from them was prohibitively expensive.

Martin Wheatley, chief executive designate of the Financial Conduct Authority, accused lenders of selling businesses “absurdly complex products” and said many customers could now expect compensation from their banks.

Mr Wheatley is quoted in the Telegraph:

“This marks significant progress in our review of these products. We believe that our work will ensure a fair and reasonable outcome for small and unsophisticated businesses.”

Lenders have seemingly set aside over £700M against potential swap mis-selling claims, with Barclays making the largest provision of £450M. Whilst it is expected that the provisions will double, the final cost may in fact hit £10BN.