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Banks react to the FSA Pilot findings by increasing provision for compensation payouts for mis-sold interest rate hedging products


Our recent blog on the FSA’s Pilot Findings discusses the review currently being undertaken by banks of sales of interest rate hedging products to ‘unsophisticated’ customers. In this blog we will look at bank reaction to the FSA’s Pilot Findings.

Just as the mis-selling of PPI caused the banks to make provision for compensation payments so the banks have been making provision for mis-sold interest rate hedging products. The provisions have been put in place to meet claims arising from not only the bank reviews which are currently being carried out under the auspices of the FSA but also complaints to the Financial Ombudsman Scheme (“FOS”) and claims through the courts.

The attitude of a number of banks up until the publication of the FSA’s Pilot Findings has been fairly complacent, with many banks understating the extent of the problem and making relatively modest provision for compensation to their customers. However, following the FSA’s finding that over 90% of sales of interest rate hedging products to ‘unsophisticated’ customers did not comply with one or more of the FSA’s regulatory requirements and with experts now estimating that the cost of the mis-selling scandal may exceed £10billion, the banks appear to realise that their exposure may be considerably greater than they have been telling everyone.

Initial provisions made by the banks for compensation payouts include £450million set aside by Barclays and £50million set aside by the Royal Bank of Scotland. However, following the publication of the FSA’s Pilot Findings, Barclays has already increased its compensation provision closer to £1billion and we expect other banks to follow suit as more and more cases come under the scrutiny of the FSA, the FOS and the courts.

In our view it is only a matter of time before we see a number of banks setting aside significant sums to cover their potential exposure given the considerable number of interest rate hedging products which appear to have been mis-sold and, particularly, given the significant amounts of compensation which will have to be paid if disaffected bank customers are successful in obtaining remedies, whether the matter is resolved by review, FOS determination or through the courts, which will include awards equal to the amount of interest payments made by the customer to the bank over the course of the interest rate hedging product and/or any break costs incurred by customers to extricate themselves from those products and/or interest.

In conclusion, we expect that the banks will be paying out compensation over the next few years which will run into billions of pounds.

If you believe you have a claim relating to the mis-selling of an interest rate hedging product which exceeds £100,000 and you would like advice on your prospects of success then do not hesitate to call Dominic Blakeley or a member of our team.  

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