Sir Mervyn King condemns banks as watchdog reveals more mis-selling

THE Bank of England Governor has launched a blistering attack on the banking system, as the industry was hit by a fresh mis-selling scandal involving Royal Bank of Scotland, Barclays, HSBC and Lloyds Banking Group.

On another black day for the sector, it was revealed the four mis-sold financial products to small businesses and will be forced to pay compensation to customers who have lost out as a result.

At the end of a tumultuous week, in which it emerged Barclays bankers had rigged interest rates, and a computer glitch caused misery for RBS customers, Sir Mervyn King was unable to conceal his anger. “From excessive levels of compensation, to shoddy treatment of customers, to a deceitful manipulation of one of the most important interest rates and now news of yet another mis-selling scandal, we can see we need a real change in the culture of the industry,” he said.

“There must be many people who work in the banking industry who know they are honest, hard-working and feel they have been let down by their colleagues and indeed their leaders.

“Everyone understands that something went very wrong with the UK banking industry and we need to put it right.”

Earlier tonight, Barclays chief executive Bob Diamond was still resisting pressure to quit following a terrible week for his bank, while RBS chief Stephen Hester’s announcement that he will not take his £2.4 million bonus this year did little to quell the fury that has been stoked by the banks’ behaviour.

The UK government is now facing calls for an inquiry into banking culture and practices.

The new scandal was revealed by the Financial Services Authority (FSA), and the four banks have agreed to pay compensation to the customers affected.

The banks mis-sold interest-rate hedging products to small businesses without the risks of such a scheme being fully explained. It has echoes of the costly payment protection insurance (PPI) mis-selling scandal that emerged last year.

In the latest controversy, some 28,000 of the products have been sold since 2001 and may have been offered as protection – or to act as a hedge – against a rise in interest rates without the customer fully grasping the risks.

The FSA’s announcement followed a two-month review, during which 100 customers came forward to complain about their treatment by the banks.

Martin Wheatley, managing director of the FSA’s conduct business unit, said Mr Diamond would take responsibility for the mess at Barclays. Antonio-Horta Osorio, chief executive of Lloyds, and Chris Sullivan and Brian Robertson, the heads of corporate banking at RBS and HSBC respectively, would take responsibility for resolving the situation in their groups.

Mr Wheatley said: “They have also committed that, except in exceptional circumstances, they will not foreclose on or vary existing lending facilities without the customer’s prior consent.”

The regulator is keen to avoid a repeat of the PPI scandal which, while on a much larger scale, was delayed for years as the banks argued with the FSA in the courts.

Calculating the amount of compensation for each customer is likely to be complex, as some products may need to be cancelled. The FSA did not impose a deadline on when the redress must be agreed.

There was no sign of the banking controversies abating when taxpayer-financed RBS confirmed it was being investigated for the same sort of rate-rigging that came to light at Barclays.

Barclays was fined £290 million by UK and US regulators for manipulating the London Inter-Bank Offered Rate (Libor) and Euribor rates, at which banks lend to each other.

Banks are facing the threat of a criminal investigation over fixing the inter-bank lending figures that affect millions of homeowners and small firms.

The Treasury has started to look at strengthening criminal sanctions for those responsible for market abuse after the FSA exposed the dealings at Barclays.

Serious Fraud Office investigators are in talks with the regulator over the scandal.

Sir Mervyn refused to say whether or not he thought Mr Diamond was a “fit and proper person” to run Barclays. The chief executive, who waived his bonus for 2012 in light of the scandal, has agreed to appear in front of the Treasury Select Committee to account for his bank’s actions.

The Governor also stopped short of recommending that a Leveson-style inquiry should be held into the banking industry, when he spoke at the Bank of England’s twice-yearly financial stability report.

Sitting next to Sir Mervyn, FSA chairman Lord Turner said in parts of investment banking “there’s a degree of cynicism and greed that is quite shocking”.

He went on: “We would be fooling ourselves if we thought some of this behaviour … [is] not found in some other areas of trading activities as well.”

Lord Turner said recent events had “reinforced the wisdom” of the independent commission on banking chaired by Sir John Vickers, which proposed the formal splitting of banking activities – keeping investment banking apart from household and small business lending.