Mis-Selling Derivatives Scandal: Banks Use £3bn Redress Pot for Products Not Victims

Britain's biggest banks have only set aside £3bn in redress for victims of mis-sold derivatives but, according to the financial regulator's chief executive, a bulk of this money pays for products and not to the victims.

During the CFA Institute conference in London, the Financial Conduct Authority's chief executive Martin Wheatley said the watchdog also has no idea about what the banks' final bill for compensating victims will be, as lenders are not handling claims fast enough.

"The last month we published the third set of figures showing a significant pickup but there are lots of small businesses affected so we still want the banks to pick this up faster and move it on," said Wheatley.

Meagre Compensation

Banks have only set aside £3bn to deliver redress to around 30,000 customers that have potentially been mis-sold interest rate swap agreements (IRSA).

Interest rate swap agreements 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.

However, according to FCA data, only £15.3m has been paid out in redress.

In comparison, banks have set aside over £17bn to deal with mis-sold payment protection insurance (PPI) and, on average, 74% of the compensation pot has been spent

Wheatley still said he was unclear whether the final mis-sold IRSA bill will top or remotely reach that of the PPI scandal.

FCA Concerned Over Consequential Losses

The reason why Wheatley was unable to estimate the final bank bill for mis-sold derivatives is because banks have also not set aside set amounts for consequential loss claims.

"There is more uncertainty about consequential loss ... it's more complex and will take longer. It's hard to predict whether it will be bigger or not," said Wheatley.

For example, banks such as RBS, have not aside any cash for consequential loss claims.

Consequential loss claims, which involve the party providing evidence that it incurred losses as a result of the IRSA, are filed separately to the FCA review scheme.

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

HSBC was the first to announce that it plans to compensate all customers more quickly with a new system that will pay firms redress before consequential losses are determined.

RBS opted for the same approach a day later.

Lloyds eventually revised its system and then offered customers the same split payments as RBS and HSBC.

Barclays is now the only bank out of Britain's largest four financials to not pay redress before consequential losses on a case-by-case basis.