U.K. Banks Pay Out 500,000 Pounds Over Improper Swap Sales

The U.K. Financial Conduct Authority said banks have agreed to pay out 500,000 pounds ($779,000) to companies that were improperly sold derivatives to hedge the effect of interest-rate changes.

The amount will increase over the coming months as banks continue to send hundreds of compensation offers to businesses and consumers, the FCA said in a statement on its website today.

“With 85 percent of cases now under review, banks have made progress,” Martin Wheatley, the chief executive officer of the FCA, said in the statement. “But like the thousands of affected small businesses, we want to see redress paid quickly to those who have suffered loss as the result of mis-selling.”

British banks may end up paying billions of pounds for improper sales of swaps, according to analysts. It’s one of at least three mis-selling scandals facing U.K. banks. Lenders have also had to pay out billions over payment-protection and identity-theft insurance products.

Royal Bank of Scotland Group Plc has more than 10,000 claims under review, more than the combined total for HSBC Holdings Plc (HSBA), Barclays Plc (BARC) and Lloyds Banking Group Plc (LLOY), the FCA said. The Edinburgh-based bank may have to increase its 750 million-pound provision for settling swap disputes, Investec Ltd. analyst Ian Gordon said in a note to clients.

Reasonable Redress

“We are committed to ensuring that all those that were mis-sold these products get fair and reasonable redress,” RBS said in an e-mailed statement. “We are prioritizing those businesses that are most in distress first, and working towards processing the majority of cases within the timeframe set by the regulator.”

RBS shares fell 0.9 percent in London trading.

Groups representing businesses that bought the interest-rate products said the process wasn’t moving fast enough. The FCA report is “depressing” because it shows that only 10 companies out of 15,000 claims have been offered compensation, said John Allan, chairman of the Federation of Small Businesses.

“We are quickly losing confidence in the banks and the regulator as this scheme remains unbelievably slow,” Allan said in an e-mailed statement.

The British Bankers’ Association said the FCA report indicates that financial institutions have been working to contact all parties potentially affected by the swap sales.

“Banks are working hard with the regulator to ensure that the process, which began four months ago, is completed as quickly as possible,” the BBA said in a statement.

Floating Rate

Rate swaps are contracts that convert floating-rate debt into fixed-rate debt, or vice versa. They are supposed to keep payments within a specific range. When interest rates fall, for example, customers might pay less interest on a loan to balance out the higher cost of the swap.

The Bank of England has kept its benchmark interest rate at a record low of 0.5 percent since March 2009.

HSBC is trying to complete reviews as quickly as possible to provide a fair outcome for customers, bank spokesman Steve Gracey said in an e-mail. Lloyds spokesman Ian Kitts said the bank was making good progress and is confident it will review all cases within the 12-month deadline.

The owners of Guardian Care Homes Ltd. last year sued Barclays Plc for about 12 million pounds over swaps sold on two loans in 2007 and 2008 in one of the biggest swaps lawsuits filed in the U.K.

Municipal governments from Milan in Italy to Jefferson County, Alabama, bought swaps from firms such as JPMorgan Chase & Co. and Deutsche Bank AG. Such derivatives have cost Italian taxpayers more than $1.5 billion, according to the country’s central bank, and U.S. taxpayers about $4 billion by 2010, according to data compiled by Bloomberg.

To contact the reporter on this story: Kit Chellel in London at cchellel@bloomberg.net

To contact the editor responsible for this story: Anthony Aarons at aaarons@bloomberg.net

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