Interest rate swaps the latest focus of banking investigation

Britain’s banks are bracing themselves for renewed investigation today over the selling of complex financial products which have landed small businesses with spiralling bills.

The Financial Services Authority (FSA) is expected to reveal that it has found evidence of mis-selling as part of a review into the way lenders pushed interest rate swap arrangements (IRSAs).

The City watchdog is expected to confirm that banks are writing to customers who have taken an IRSA and an independent assessor will look at the most complicated cases and determine whether compensation should be paid.

Businesses have complained that IRSAs, which were designed to insure borrowers against steep rises in interest rates, left them swamped by huge penalties after interest rates were slashed to record lows in the wake of the financial crisis

Customers are expected to be dealt with in two categories according to whether they were sold relatively simple products or those of a more complex nature.

The latter group are expected to be told that their case will be reviewed by an independent assessor and that they will be compensated if there is evidence of mis-selling. Cat MacLean, partner in MBM Commercial, Edinburgh, which is representing business clients with related claims against major banks, said: “It seems to me vital, if this approach will be adopted, to ensure that the assessment process listens carefully to the customer to ascertain whether the customer truly understood the downside risk.

“None of our clients really understood the downside risk associated with a hedge or swap, not least because the banks were keen to minimise any downside risk.”

This latest setback for the banks comes as a CBI/PwC survey finds financial services firms more pessimistic about their prospects despite business volumes and profit growing strongly in the past quarter.

CBI chief economist Ian McCafferty condemned the Libor rate-fixing as “odious behaviour”. However, he said it was too early to say “whether it is criminal behaviour or not”.

The survey showed that a positive balance of 10 per cent of financial firms reported business levels were “above normal” in the quarter to June – for the first time since before the Northern Rock collapse in 2007.

Of the 108 respondent companies, 59 per cent saw business volumes rise in the latest quarter, and 21 per cent reported a fall.