Update: Fresh banking scandal over IRSA rate swap mis-selling

BRITAIN’S banks need a “real change in culture”, Bank of England governor Sir Mervyn King said today as the sector was rocked by yet another scandal.

Sir Mervyn’s comments came as Britain’s biggest lenders were embroiled in fresh controversy over rigging key interest rates, as well as further evidence of mis-selling, this time involving complex financial products sold to small business.

The governor ruled out a Leveson-style inquiry but hit out at the banks for “excessive levels of compensation, shoddy treatment of customers and a deceitful manipulation of one of the most important rates”.

The Financial Services Authority (FSA) revealed earlier that Barclays, HSBC, Royal Bank of Scotland and Lloyds Banking Group had agreed to pay compensation to customers who were mis-sold interest rate swaps.

The findings come after Barclays was fined �290 million by UK and US regulators for manipulating the rate at which banks lend to each other.

Discussing the deepening banking culture crisis, Sir Mervyn said: “There must be many people who work in the banking industry who know they are honest, hard-working and feel they have been let down by their colleagues and indeed their leaders.

“Everyone understands that something went very wrong with the UK banking industry and we need to put it right.”

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The latest scandal to stain the already tarnished record of the banking industry saw lenders pushing interest rate swaps on businesses that did not fully grasp the downside risks.

Martin Wheatley, managing director of the FSA’s conduct business unit, said: “For many small businesses this has been a difficult and distressing experience with many people’s livelihoods affected.”

Swaps are complicated derivatives products that may have been sold as protection - or to act as a hedge - against a rise in interest rates without the customer fully grasping the downside risks.

Banks sold around 28,000 interest rate protection products to customers since 2001, the FSA added.

The affair echoes the payment protection insurance (PPI) mis-selling scandal that emerged last year, costing banks billions of pounds.

Meanwhile, banks are facing the threat of a criminal investigation over fixing the interbank lending figures that affect millions of homeowners and small firms.

The Treasury has started to look at strengthening criminal sanctions for those responsible for market abuse after the FSA exposed the dealings at Barclays on Wednesday.

Serious Fraud Office investigators are in talks with the FSA over the scandal while pressure is mounting on Barclays chief executive Bob Diamond to stand down.

Prime Minister David Cameron said it was very important that accountability for what went on “goes all the way to the top of that organisation” and that Mr Diamond had “some serious questions to answer”.

In a further blow, the Financial Times called directly on the senior banker, who it said was behind the bank’s “hard-driving culture”, to step down.

However, Mr Diamond, who was head of the bank’s investment arm at the time of the allegations, showed no signs of quitting after agreeing to appear in front of the Treasury Select Committee to account for his bank’s actions.

HSBC and taxpayer-backed Royal Bank of Scotland are among several other lenders being investigated by the City watchdog for trying to influence the Libor - London interbank offered rate - and Euribor interbank lending rates to boost their profits.

The latest mis-selling scandal involves so-called interest rate swap arrangements (IRSAs) which the FSA found had been widely sold were sold as protection against a rise in interest rates without customers fully grasping the downside risks.

As well as offering redress directly for those customers that bought the most complex products, the banks have also agreed to stop marketing certain IRSA products to retail customers, the FSA said.

The City regulator has spent the last two months reviewing the sale of IRSAs, talking to more than 100 customer who came forward.

It found poor sales tactics including failing to provide sufficient information on the hefty exit costs involved, failure to gauge the customers’ understanding of risk and found rewards and incentives were a driver of these practices.

The FSA added that not all businesses will be owed redress, but for those that are, the exact redress will vary from customer to customer. This exercise will be scrutinised by an independent reviewer at each bank appointed under the FSA’s powers.

The British Bankers’ Association, the leading trade association for the UK banking and financial services sector with more than 200 member banks, said: “Our members have been working closely with the FSA while it carries out its thematic review into interest rate swaps and will continue to co-operate fully.”

In a statement, Lloyds, which set aside �3.6 billion to cover the cost of PPI compensation, said it did not expect the costs of redressing customers who were missold IRSA products to be “material”.

It said: “Interest rate derivative products are not products the group has sold widely.

“Given the limited exposure of the group to these products the financial impact of this remediation and the associated costs are not expected to be material to the group.”

A survey by Bully Banks, which has been set up by alleged victims of swap mis-selling, found nearly three quarters of its members claim to have been forced to buy a swap by their lending bank as a condition of their loan.

A statement for RBS said: “In the case of a small number of less sophisticated customers who entered into more complex swap products we have agreed to move directly to redress.

“We believe risk management products are an essential part of corporate banking and it is important we restore customer trust in this area.

“We are committed to the fair and timely treatment of our customers and will work closely with the FSA to achieve that end.”