Misselling compensation scheme totally unjust, say MPs

Martin Wheatley, FCA Image copyright Getty Images

MPs have accused the UK's top financial regulator of watering down a scheme meant to compensate small firms which were victims of misselling by banks.

Conservative MP Mark Garnier said that the new scheme was "fundamentally unjust" and had been changed after the regulator met with the banks.

The swaps were sold to more than 25,000 companies to protect them against the impact of an interest rate rise.

The regulator said it was confident that the compensation scheme was fair.

In a heated Treasury Committee hearing, Mr Garnier said that the Financial Conduct Authority chief executive Martin Wheatley and chairman John Griffiths-Jones had changed the compensation scheme after meeting the banks in January 2013 to make it "fundamentally unjust".

Andrew Tyrie, chairman of the Treasury Select Committee, said the small businesses were at risk of "being done over a second time", after having already been "ripped-off" by mis-sold "swaps contracts"

'Natural justice'

Under the new scheme, businesses who feel their compensation is inadequate have only one safeguard if they feel the bank has paid out less than they have lost due to misselling.

An independent reviewer, typically a "big four" accountancy firm such as PwC or KPMG, is expected to review the evidence.

In the initial review drawn up by the FCA in January 2013, both the bank and the independent reviewer were to have access to all the facts in any given misselling case. But in the subsequent review, only the banks would have access to all the facts.

Mr Garnier said this meant the independent reviewer would only see what the bank chose to show them - and that this offended natural justice.

He said one of his constituents had submitted a 70-page, legally-drafted report on his misselling case, but the reviewer had only been shown one paragraph.

"There is no justice system in the world that will allow a victim of a crime to have to submit their evidence to the perpetrator of a crime, to then edit that information and then subject it to a closed court. This is completely and totally unjust," Mr Garnier said.

Mr Wheatley replied that the FCA was "not dealing with crime here; we're dealing with conduct issues between banks and their customers".

Huge sums

However, he accepted that hundreds of customers - and possibly more - were unhappy with their compensation.

The misselling arose when banks insisted that small firms applying for loans must have insurance in place in case interest rates rose, making repayments unmanageable.

That insurance took the shape of so-called "swap" contracts, also known as interest rate hedging products, which would usually pay out if rates rose by more than 1% or 2%.

What the bankers did not tell the businesses was that the "swap" contracts also worked in reverse. If interest rates fell, it would be the business, not the bank, that paid out huge sums. In other words, the businesses were insuring the bank against interest rate falls.

When rates hit rock bottom in March 2009, instead of benefiting from cheaper repayments, the businesses found themselves coughing up hundreds or thousands of pounds extra in premiums for the swap contracts.

Court challenge

If they wanted to get out of them, the exit cost commonly ran into hundreds of thousands of pounds.

The then regulator - the Financial Services Authority (FSA) - now the FCA set up a compensation scheme in 2013 after finding that more than 90% of the swap contracts had been mis-sold.

Mr Wheatley said the scheme had achieved much of its aim of compensating businesses quickly, with thousands of business receiving a total of £1.8bn in compensation and 14,000 accepting settlements offered by the banks.

He argued that businesses that remain unhappy can turn to the courts.

But many companies, which have been forced to sell assets or in gone into administration because of the swaps, say the compensation is far less than they have lost. And many also say they cannot afford a court challenge.

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