FSA and banks buy time and credibility on swaps claims

City regulator the Financial Services Authority’s announcement that it has agreed with major banks the terms of a settlement ‘scheme’ to compensate business owners who were mis-sold interest rate swaps (IRS) products relieves some of the enormous pressure that the banks and the FSA itself has been under.

The FSA was slow to accept there was a problem, and in defending cases, banks had played hardball with customers who claimed or complained. Now the FSA can appear more proactive - especially as it acts in the same week as it hands out fines to banks whose employees used deception and collusion to fix the inter-bank lending rate (Libor - more of that below).

The banks’ tacit acknowledgement that there was wrongdoing on a scale that merits the creation of these schemes is a public display of contrition that plays well in a bad week. And certainly the direction of travel is welcomed by business owners and their lawyers.

But speed of action, and the co-operation of the banks, has come at a price for the outcome. The scheme will operate only for small businesses - indelicately defined as ‘unsophisticated’ by the FSA.

The announcement gets ‘two cheers’ from the Bully Banks business campaign, and, on talking to solicitors and expert witnesses, that rings true. The main point to make is that the banks ‘own’ the operation of this scheme, despite FSA oversight of its operation. Business owners can negotiate with a bit of greater confidence, but that is all the scheme allows.

As ever with IRS claims, each case is individual, and the FSA warns ‘not all customers be owed redress’. That warning softens up claimants for the news that what is ‘fair and reasonable’ may include ‘a mixture of canceling or replacing existing products with alternative products, and partial or full refunds of the costs of those products’.

As one expert witness tells the Gazette, this may reflect the FSA’s concern that the scale of mis-selling is such that full restitution would threaten banks’ stability at a difficult time.

The FSA’s briefing on the scheme also goes out of its way to remind business owners that the scheme is ‘straightforward’ and that involving solicitors costs money. That would seem to reflect banks’ preferences for doing a deal with customers who have been separated from expert advice.

This may be a problem when quantum remains un-straightforward in these cases. Many products’ pricing was set with reference to the Libor rate - the fixing of which has produced such a headache for the banks named yesterday by the FSA. The Libor rates are a key component in prepared experts’ reports and seen by the Gazette.

Both the FSA and the banks have bought themselves some breathing space this week - and business owners see significance in the regulator and banks’ acceptance that problems were widespread.

But solicitors who advise on these cases are not now preparing to close client files and send them off for secure storage in their firms’ archives. That is because today’s announcement is not the wide-ranging and complete solution trailed yesterday in a leak to Sky News.

Eduardo Reyes is Gazette features editor

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