Santander, Co-Operative Improperly Sold Rate Hedges: FSA

Banks including Banco Santander SA’s U.K. business, Bank of Ireland and Co-Operative Bank Plc may have to compensate customers for improperly selling interest-rate hedging products to small companies, the U.K.’s financial watchdog said.

Around 90 percent of the products -- also sold by Allied Irish Banks Plc, Clydesdale Bank Plc and Yorkshire Bank Plc -- broke U.K. rules, the Financial Services Authority said in a statement on its website indicating the lenders agreed to review their sales of the products.

A “significant proportion of the cases” will “result in redress being due to the customer,” the agency said.

Barclays Plc, Royal Bank of Scotland Group Plc, HSBC Holdings Plc and Lloyds Banking Group Plc reached agreement with the FSA on Jan. 31 on plans to review deals and compensate customers improperly sold rate-hedging products. The lenders may have to pay as much as 5 billion pounds to compensate customers following the probe.

The FSA announcement “gives clarity” and enables banks to take steps to resolve the issue, the British Bankers’ Association said in an e-mailed statement. “Where customers have suffered unfairly the banks have all agreed that they will put it right.”

The claims against lenders may turn into another costly scandal for U.K. banks still paying back customers wrongly sold insurance on personal loans. Banks have reserved more than 10 billion pounds ($15.5 billion) to cover customer claims over payment-protection insurance -- which was meant to pay credit-card bills and mortgages in case of illness or unemployment.

The rate-hedging 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 like 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 high payments.

Before it's here, it's on the Bloomberg Terminal.