FSA expected to confirm thousands of firms may have been wrongly sold interest rate swap contracts

A DAMNING report from the financial regulator is expected this week on “systematic” mis-selling by Britain’s biggest banks of complex interest rate swap contracts to thousands of UK businesses.

The publication of the Financial Services Authority’s review is set to be the latest mauling for a sector whose image has been tarnished in recent years by similar fiascos involving pensions, endowment mortgages and payment protection insurance (PPI).

The FSA is expected to confirm there is substantial evidence to support a groundswell of complaints from constituency MPs that what are essentially hedges against interest rate movements have been sold unethically to small and medium-sized enterprises (SMEs).

Politicians from all the major parties claim lenders – including Barclays, HSBC and Royal Bank of Scotland – railroaded small business customers into buying the products, which in some cases have ended up bankrupting firms. All the banks vigorously contest the allegations.

Martin Wheatley, head of financial conduct at the FSA, told a Treasury select committee meeting last week that banks had “questions to answer” over the issue.

Stewart Hosie, the SNP Treasury spokesman, told Scotland on Sunday he agreed that the outcome of the FSA review was vital, given that banks were in the dock again for alleged mis-selling.

He said: “Martin Wheatley is right. We are right to be worried, given what the Federation of Small Businesses has said: that it is only now the scale of this [issue] is beginning to emerge. It is right and proper that the FSA has looked into this.”

It is believed that, in some cases, customers for the interest-rate swaps have been saddled with costs of between hundreds of pounds and hundreds of thousands of pounds. Some allege they have lost millions.

John Walker, national chairman of the Federation of Small Businesses, said: “We are pleased that the FSA plans to report back this week. We urge the FSA to ensure swift action and recompense for affected firms, should they find failings.

“Thousands of small firms may be affected by this mis-selling, and so we’re pleased that the FSA will be able to shed light on where businesses stand.”

Andrew Tyrie, chairman of the Treasury committee, has welcomed the public debate on what could develop into the next big blight on banks’ reputations.

He said it has been “valuable in revealing the breadth of concerns among fellow MPs across the country, all who gave credible stories”.

Banks are believed to be on tenterhooks for the publication of the FSA report, expected on Thursday or Friday, particularly in the wake of the devastating impact of the regulatory crackdown on PPI mis-selling last year.

That scandal saw the banks take between hundreds of millions and billions of pounds of writedowns that hit 2011 profits and plunged Lloyds Banking Group into the red.

A spokesman for the industry trade body, the British Bankers’ Association, said: “Interest-rate swaps are a way of helping business customers manage the risk that rates may go up when they borrow and where the individual business does not want to be tied to a fixed-rate loan.

“Swaps can provide some certainty about what businesses will pay for long-term borrowing, and this can help with budgeting and forecasting.”