Mis-Selling Derivatives: MPs Confirm FSA Delays Pilot Scheme Results

Eighteen members of the All-Parliamentary Party Group (APPG) revealed that the Financial Services Authority (FSA) will delay the results of the pilot redress scheme it has with Britain's biggest banks to deal with interest rate swap agreement (IRSA) mis-selling to small businesses.

In a meeting on 13 December that IBTimes UK exclusively unveiled last month, the APPG heard evidence from the FSA but said "despite expecting the FSA to make an announcement on the results of the pilot scheme before Christmas, the APPG learned that there would not be an announcement on the outcomes until the New Year, with the outcome of the pilot scheme not being known until late January to early February."

The announcement confirms reports from IBTimes UK's sources, who told us that there is no deadline set for the banks to come to a decision on these cases and that the outcome of these pilot reviews could be unveiled as late as the second quarter of next year.

Under the Pilot Scheme, the FSA tasked the banks to investigate 30-50 cases of IRSAs sold to businesses, in order to determine whether mis-selling had occurred and if so, what terms of compensation they are owed.

"It is disappointing that the pilot scheme hasn't been completed and reviewed before Christmas as originally expected, however I understand this is a as a result of differing methodologies used by the banks and do accept there are some logistical difficulties," says Guto Bebb, Chairman of the APPG.

"For example, we heard anecdotally that there are 90,000 pieces of evidence for 30 pilot cases submitted by one of the banks with one case amounting to 31 lever arch files of evidence. Whilst I appreciate that it is important to get it right before the FSA press the go button for a full redress scheme for the small businesses it is crucial that the FSA and the banks understand that time is of the essence for many small businesses facing financial ruin," he adds.

A spokesperson at the FSA said that "work was continuing" and that they hope to have the results out "by 31 January 2013."

During the evidence session, the APPG members raised significant concerns about the problems with the sophisticated customer test, called for moratorium of all swap payments with immediate effect and asserted that the process was skewed in favour of the banks.

The group said that if the outcome of the pilot scheme showed that "mis-selling was rife" then "suspension of swap payments should become the default position rather than the exception."

Recently all 11 banks agreed to adopt some policy of suspension of swap payments for small businesses that are facing severe financial distress as a result of mis-selling.

The APPG had written to the banks involved urging them to follow the decisions made by HSBC and Barclays to start suspending payments and adopt a similar policy for SMEs in distress.

"Suspending swap payments is a positive step towards helping those most vulnerable small businesses who need immediate cashflow relief from swap payments in order to survive but there is an urgent need to suspend all swap payments pending the outcome of the review. It is important that businesses are able to function and to keep their employees in work whilst the FSA redress process takes its course, which is now taking longer than expected," says APPG Member, Tobias Ellwood MP.

Treasury Select Committee Member Mark Garnier MP also commented on the need for clarity on the net present value of swap contracts liabilities on bank balance sheets.

"It is the view of the FSA that two thirds of customers still have swap payment contracts outstanding, with payments crippling their businesses. We need to know what the net present value for all these products on the balance sheets of UK banks in order to understand the scale of the problem and the potential impact of an effective redress scheme on the finances of the banking sector," he says.