Regulators struck secret deal to dilute damages paid by big banks

The Times Harry Wilson City Editor

Regulators reached a secret deal with the biggest banks to water down a multibillion-pound scheme to compensate customers mis-sold complex interest rate derivatives blamed for bankrupting hundreds of businesses.

Documents seen by The Times show significant differences between the final rules for compensation schemes for victims of interest rate swap mis-selling and those put forward less than two weeks before.

In the first draft of the rules, the Financial Services Authority — the predecessor of the Financial Conduct Authority, the City regulator — proposed handing a key role to an independent reviewer to oversee the redress process. Days later officials apparently had changed their minds, relegating the role of the “skilled person” to effectively rubber-stamping compensation offers.

Letters sent on January 17, 2013, and on January 29, 2013, to Chris Sullivan, a senior executive at Royal Bank of Scotland at the time, show that the regulator changed its position after meeting representatives of the lender, as well as staff from Barclays, HSBC and Lloyds Banking Group.

The letter of January 17 repeatedly states that key parts of the process should be decided upon by “the firm and skilled persons”, but in the follow-up 12 days later all reference to the reviewer had largely been taken out and most decisions were left entirely to “the firm”.

For instance, in the case of deciding whether to offer a full tearing-up of their interest rate hedge, the first letter stated: “Firms and skilled persons can consider whether there was an express wish for interest rate protection when considering whether the customer would not have purchased an IRHP [interest rate hedging product] at the original point of sale.” In the second and final letter, this had been changed to: “When considering the counterfactual, the firm can consider whether there was an express wish for interest rate protection.” In addition, the second letter introduced a cap that excluded any business with swaps worth more than £10 million from using the compensation scheme.

Martin Wheatley, chief executive of the FCA, admitted on Tuesday that this rule had excluded “about a third” of the businesses sold interest rate hedging products.

Guto Bebb, the chairman of a parliamentary group supporting victims of swap mis-selling, said that the changes highlighted in the letters were “invariably in favour of the bank . . . It’s astonishing that the FCA continue to place so much confidence in the independent reviewers in view of a structure that allows banks to pick and choose what is presented for consideration.”

Demands by MPs, as well as separate FoI requests, to quantify the value of the swaps excluded through the late introduction of the £10 million threshold have been rejected by the regulator. However, derivatives experts think it likely that this rule could have cut the potential compensation bill to banks by half.

MPs on the Treasury select committee have slammed the swap redress scheme as “unjust” and, while giving evidence on Monday, Mr Wheatley and John Griffith-Jones, the chairman of the FCA, were accused of running a process that was not delivering justice for many victims. Mark Garnier, a Conservative MP, told Mr Wheatley that lawyers for one victim had submitted a 70-page report to their lender as part of the review process, but that a document disclosure exercise in a subsequent legal case had revealed that only one paragraph of this had made it into the case file sent by the bank to the independent reviewer.

Mr Garnier accused the FCA of creating a scheme that had “no natural justice” and said that the regulator had “succumbed” to pressure from the banks to water down the compensation process.

In another damning intervention, Andrew Tyrie, chairman of the committee, said that the large number of long-dated caps being awarded to some businesses in lieu of financial compensation highlighted the unfairness of the scheme. “Having been done over once by the banks, there’s a grave risk a number of small business [are] being done over again,” he said.

Mr Wheatley countered the complaints by saying that victims had the “chance to bring their evidence to the table” and he insisted that the independent reviewers had taken a full part in the redress process.

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