Business

Regulator capped mis-selling payouts

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The Treasury lobbied financial regulators to limit compensation for business victims of mis-selling by banks, the BBC has learned.

Thousands of business owners bought interest rate hedging products without understanding them.

Independent experts say banks could have been on the hook for £30bn of compensation, but so far only £1.9bn has been paid out.

The Treasury said it does not interfere with the independence of the regulator.

Click here to watch Andy Verity's Newsnight report.

Draining cash

Businesses from small to large were sold more than 30,000 interest rate hedging products between 2003 and 2012.

Like payment protection insurance, they were sold when customers applied for a loan. Unlike payment protection insurance, banks often forced businesses to take them as a condition of the loan.

Business owners - many of them small businesses - were typically told the hedging products were a form of insurance that would pay out if interest rates rose, enabling them to manage their repayments.

What many were not told, however, was that if interest rates dropped, it would be the business, not the bank, that paid out.

If they then wanted to end the contract, the break costs were prohibitively high.

In some cases the hedging products were draining so much cash that the businesses were severely damaged. More than 1,000 businesses went bust after being sold the products and others were forced to sell a large portion of their assets. Many business owners lost their life's work and the stress took its toll on their personal lives and their health.

'Sophisticated'

In 2012 the financial regulator, then called the Financial Services Authority, did a study which found more than 90% of interest rate hedging products had been mis-sold. Banks had not properly warned purchasers what might happen when they bought the hedging products. The FSA then proposed a compensation scheme.

Independent estimates by derivative consultancy Vedanta Hedging put the potential cost of compensating all mis-selling victims at £30bn. Their estimates of cost were conveyed to senior members of the government. Pressure group Bully Banks pressed the government to pay fair compensation.

In late 2012, the regulator drew up its compensation scheme on the basis of proposals first drafted by the banks. It agreed to exclude the largest businesses on the basis that they were deemed "sophisticated" and capable of taking their own advice on the products.

But Treasury officials remained worried about further weakening the banks with a huge compensation bill. They met with regulators at the Financial Conduct Authority - the City watchdog - to press their concerns over what compensation would cost.

£10m cap

A Treasury spokesman told the BBC: "The FCA is an independent regulator and as such the government does not intervene or interfere with its work."

However, the BBC has learned that the Treasury not only met FCA officials over the scheme, it was also copied into emails about the shape the scheme was taking.

In January 2013, banks also lobbied the regulator intensively. The FCA then changed its scheme to exclude businesses with loans of more than £10m. That excluded more than 5,000 cases from the compensation scheme - saving the banks billions.

The FCA acknowledged that the £10m cap was suggested by the banks, but denied it caved in to lobbying.

FCA chief executive Martin Wheatley told Newsnight: "I am worried there is criticism of a scheme that has delivered redress for the vast majority of people and has achieved a payout of nearly £2bn."


Image caption Sebastian Parsons

Sebastian Parsons used to run a highly successful business called Elysia, distributing Dr Hauschka's ethical skincare products. Over 13 years, he and his two sisters increased sales from thousands to millions of pounds as celebrities from Madonna to Damon Albarn bought the oils and creams.

But when they borrowed £3mn to buy the Worcestershire farm where their distribution warehouse was based, HSBC mis-sold them an interest rate hedging product.

Mr Parsons was told it would pay out if interest rates rose so the business could manage its repayments.

What was less clear was that if interest rates fell, as they did in 2009, it could be the business, not the bank that had to cough up. Mr Parsons found himself paying an extra £100,000 a year into the hedging product.

Then the bank told him if he wanted to get out of the contract, he'd have to find nearly half a million pounds. With that debt, caused by mis-selling, he was in negative equity.

Mr Parsons' supplier, the maker of the creams, learned the hedging product was draining company funds and terminated its contract. Forty jobs were lost and he and his family lost their business. A forensic accountant found that but for the mis-selling, they would have made £7m - known as a "consequential loss".

HSBC offered to pay back what Mr Parsons paid into the product but put that consequential loss at just £27,000. It declined to comment on Mr Parsons' case but says it is committed to fair compensation.


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