Just when it seemed the reputation of the banks could sink no lower following the revelations of manipulation of the interbank lending rate at Barclays, the extent of the scandalous imposition of interest rate swap agreements (IRSAs) on small and medium-sized businesses is revealed by the Financial Services Authority.
Interest rate swaps were supposed to be a hedge against rising interest rates for business customers taking out bank loans. Thousands of these businesses were obliged by their bank to sign up to an IRSA as a condition of a loan only to find that, far from protecting them, it made them liable for escalating costs they couldn't afford. This is because most of the loans were taken out between 2005 and 2008, when the Bank of England base rate was around 5%. Interest rates were cut in a bid to help borrowers but the plunge to the historic low of 0.5% meant a rise in the rate swap repayments on many products which had not been explained, while anyone with a swap lost the benefit of low rates. Worse, when they tried to extricate themselves by paying off the loan, they faced impossibly high break fees. As The Herald has revealed, IRSAs could have added billions to business interest costs while those who sold them could earn up to £1m a year.
The FSA has finally recognised serious failings in the way banks sold IRSAs and similar products, and reached an agreement with RBS, Lloyds, Barclays and HSBC, who promise they will provide redress. They have also agreed to stop marketing certain hedging products to retail customers. Welcome as this is, it comes too late for the rescue of otherwise viable businesses that have been forced to close or cut staff.
It is essential now that the redress, which could range from cancelling agreements to full or partial repayments, is both swift and fair. While the redress agreement may be preferable to creating a compensation bonanza for lawyers, the assessors appointed must be genuinely independent and capable of ensuring the banks pay in full for their malpractice.
However, people with a larger claim may still need to use the courts. The judgment on whether a small property company's action against RBS can proceed to debate, the only case brought against a bank in Scotland for swap mis-selling, is therefore keenly awaited.
IRSAs proved a disaster for individuals who thought they were protecting their business but the banks' hobbling of business customers could have cost the broader economy 80,000 jobs just when they were most needed.
This callous fleecing of small businesses by target-driven bank employees follows the mis-selling of payment protection insurance (PPI), which has already cost banks £8bn, and the interbank lending rate scandal which saw a £290m fine imposed on Barclays, with RBS expected to face a penalty of £150m. The mis-selling of hedging products might now cost the four named banks another £6bn. It can only be a matter of time before another scandal emerges unless yesterday's call by the governor of the Bank of England for structural and cultural reform is heeded.
Only when banking is once again underpinned by responsibility can there be a return of trust.
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