The UK’s financial regulator did not do enough to hold banks accountable for a £2.2bn interest rate hedging mis-selling scandal that began 20 years ago, and used flawed criteria to exclude some customers from the redress scheme, an independent review has found.
The report by John Swift QC published on Tuesday sharply rebuked the Financial Services Authority, the forerunner of the Financial Conduct Authority, for not being transparent enough with customers affected by the scandal and giving unrealistic timelines on how long the redress scheme would take.
The Swift review examined the role of the supervisor’s handling of the mis-selling scandal between 2001 and 2011 and the ensuing compensation scheme.
A person familiar with the process attributed the long gap between the scandal and the regulatory review to the complexity of the report and the volume of data involved, the last of which was handed over by December 2020.
The FSA was responsible for overseeing the nine banks who mis-sold tens of thousands of small businesses interest rate hedges that left them with big bills when interest rates plummeted. The FSA was abolished in 2013 and the FCA took over its responsibilities for the UK’s financial services industry.
Swift found that most customers eligible for the redress scheme had fared better than they would have without it, but highlighted several failings. These included the FSA and FCA’s failure to explore enforcement actions against the banks involved.
“The FSA/FCA should have carried out a more intensive investigation of the root causes of the mis-selling before concluding not to pursue enforcement action,” the report said.
It added: “With the benefit of such further investigatory work, the FSA/FCA would have been in a much better position to assess whether to pursue enforcement action in addition to the [compensation] scheme and, if so, to ensure accountability where appropriate.”
The review also found that the FSA “fell below the appropriate standard of transparency” in how it set up the redress scheme, mostly by failing to consult on how it was designed. This included not telling the public that the final scheme “deviated significantly” from what the regulator originally proposed to the banks involved.
Swift also criticised the FCA and its predecessor for excluding as many as 10,000 of the 30,000 cases during a review of the compensation scheme based on “subjective criterion” about whether those customers had the knowledge and experience to buy the swaps.
The FSA and FCA were further criticised for giving the public unrealistic timelines on how long it would take to review eligibility for the scheme — in January 2013 the regulator promised it would take up to 12 months to complete but the exercise took until the autumn of 2015.
The mis-selling involved nine banks, including Royal Bank of Scotland, Bank of Ireland, Barclays, HSBC, Lloyds, Allied Irish Banks, Clydesdale & Yorkshire Banks, Co-operative Bank and Santander UK.
In a statement, the regulator said it was not wrong to exclude sophisticated clients from the compensation programme. “Accordingly, the FCA will not seek to use its powers to require any further redress to be paid to [interest rate hedging product] customers,” it added.
FCA chair Charles Randell, who is stepping down next year, stressed that the FCA is “a very different organisation from the FSA as it existed when these products were sold and when it established the redress scheme,” adding: “We would expect to act far sooner and more decisively today.”
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