Santander Joins Six Others in Interest-Rate Swap Sales Probe

Santander Joins Allied Irish to Review Interest-Rate Swap Sales
A pedestrian is seen reflected in the window of a Banco Santander SA bank branch in London. Photographer: Simon Dawson/Bloomberg

Banco Santander SA’s U.K. arm and six other lenders will review potential rule violations in sales of interest rate hedging products to small businesses as part of the Financial Services Authority’s plan to compensate customers.

Allied Irish Banks Plc, Bank of Ireland Plc, and units of the National Australia Bank Ltd. joined Co-Operative Bank Plc and Northern Bank Ltd. in the review, which could lead to compensation to buyers of improperly sold interest-rate derivatives. The banks make up around 10 percent of the U.K. market for the products, the FSA said in an e-mailed statement.

Barclays Plc, Royal Bank of Scotland Group Plc and Britain’s two other biggest banks said last month they would compensate small and medium-sized businesses for sales of swaps that lost money as interest rates plunged. While the FSA found “serious failings” by the banks dating back to 2001, it stopped short of fining the firms.

“It is appropriate and fair that any business which purchased these products is offered the opportunity to discuss them with us,” Steve Pateman, head of U.K. banking at Santander, said in an e-mailed statement.

Santander said it would review sales of interest-rate products to around 200 customers who bought them from December 2001 onwards.

Banks offered derivatives to small businesses and individual customers on concern that they might not be able to service loans if floating rates rose.

‘Major Exercise’

“This is a major exercise but one that we hope will ensure even more businesses benefit from having their individual situation reviewed,” Clive Adamson, director of supervision at the U.K. financial watchdog’s market conduct unit, said in the statement.

Bank of Ireland “will cooperate fully as always with the FSA to bring the review to a swift and satisfactory conclusion,” Anne Mathews, a spokeswoman for the Dublin-based lender, said in an e-mail.

Niamh Hennessy, a spokeswoman for Allied Irish, said the lender agreed to take part in the review. She declined to comment further.

Products included caps, where customers paid a premium to keep borrowing costs below a pre-defined maximum, swaps, where customers locked in a fixed rate, and more complex combinations of these products, among them collars, which kept payments within a fixed range.

When interest rates fell, the market value of many swap and collar products plunged, leaving customers with less money. The banks sold 28,000 of the products since 2001, the FSA said last month.

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