Bank Sales of Interest-Rate Swaps to Be Probed by U.K. FSA

The U.K. Financial Services Authority is investigating claims that banks improperly sold interest-rate derivatives to small businesses, Adair Turner, the agency’s chairman, said.

The FSA will assess the sales techniques and design of the products to “assess whether there is a widespread issue” that requires regulatory action, Turner said in a letter released today responding to queries from U.K. lawmakers.

Companies made around 605 complaints last year over banks’ bundling of interest-rate swaps with loans, according to Turner’s letter. The London-based FSA initially didn’t see any “widespread, underlying issues” with the practice and instructed firms to review their sales systems, Turner said.

“It is now up to the FSA to get to the truth,” Andrew Tyrie, chairman of the Treasury Select Committee, said in an e-mailed statement. “We will do what we can to ensure that they do.”

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.

The owners of Guardian Care Homes Ltd. sued Barclays Plc for about 12 million pounds in a Bristol Court over swaps sold on two loans in 2007 and 2008 last month in one of the biggest swaps lawsuits yet 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.

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