Mis-Selling Derivatives: HSBC Installs Two-Step System to Deliver Victims' Redress

HSBC plans to compensate customers quickly in relation to the mis-selling of complex interest rate swap agreements, using a new system that will pay firms redress before consequential losses are determined.

In a statement to IBTimes UK, HSBC said it has installed a two-stage repayment system, so businesses can receive compensation before consequential losses are determined.

"To ensure that customers who are due redress are paid money as soon as possible, we have decided to introduce a two-stage payment process which provides an initial payment for those due redress, with any linked claim for consequential loss which the customer may wish to be considered looked at separately," said HSBC.

"This move will speed up the process for customers, ensuring they get any redress payment they are due at the earliest opportunity.

"The current industry process, agreed with the Financial Conduct Authority (FCA), is for one payment only to be made at the end of the review process, to cover redress and any assessment of consequential loss.

"Overall, this change means that customers will potentially receive any redress cash months earlier than would otherwise have been the case under a single payment process."

The FCA's chief executive Martin Wheatley recently said: "I welcome the move to pay compensation in two stages. I've been urging the banks to consider what more they could do to ensure the small businesses affected by swap mis-selling get the compensation they're owed as quickly as possible."

"The announcements over the last couple of days are a good first step."

The Current Process

Interest rate swap agreements (IRSAs) are contracts between banks and customers where typically one side pays a floating or variable rate of interest and receives a fixed rate of interest payments in exchange.

Such contracts are used to hedge against extreme movements in market interest rates over a given period. Companies that saw the value of these products move against them as rates fell during the recession now owe banks inordinate sums of money in yearly interest payments.

Banks mis-selling derivatives to Britain's small-to-medium enterprises have already cost the economy £1.7bn (€2bn, $2.8bn) in lost revenue, as well as 400,000 jobs.

At the end of January this year, an FCA pilot scheme examined the sale of 173 IRSAs to British firms and found that at least 90% of those did not comply with regulatory requirements.

Some 40,000 IRSAs sold to UK businesses are said to be eligible for review by the FCA, but no payments can be usually be made until the entire process of determining redress is completed.

However, under the FCA review, no payments can be made until the entire process of determining redress is completed. This prevents a party being able to make claims over and over again and costing firms multiple sets of bills from fresh reviews.

This means that while a bank can make an initial offer - a product tear-up or switch and/or compensation - if a company is claiming for CL on top of this, then it would have to wait until after the bank's have assessed the application for damages.

It is also subject to agreement with the company.