A new mis-selling scandal has rocked the banks relating to products known as swaps which are designed to provide interest rate protection. Some are suggesting that this could prove to be the biggest scandal since the well-publicised PPI scandal first broke in 2011.
The nature of the scandal is very similar to that of the well-known and ongoing PPI scandal. Once again, banks stand accused of selling unnecessary or inappropriate protection policies with certain products to customers who never asked for them. The result was that banks collected millions in fees from customers for products that were never needed. However, unlike the PPI scandal which affected millions of ordinary people, this new mis-selling debacle relates largely to more specialist and higher-value products. Initial investigations focussed on interest-rate hedging products (IHRPs), which are largely sold to small or medium-sized businesses. The scale of investigations have now expanded into other high-value areas, such as policies valued at over £10 million.
It is estimated that the total value of repayments in relation to this latest scandal could reach levels as high as £22 billion. According to the latest figures from the Financial Conduct Authority (FCA), PPI compensation payouts have amounted to £14.7 billion so far. These figures are based on payouts since a High Court order first required that banks make repayment provisions in 2011, up to March of this year. It should be noted, however, that the PPI scandal is still very much ongoing with the first quarter of 2014 seeing monthly payouts of well over £300 million. As such, the estimate does not necessarily suggest the scandal will far exceed PPI in terms of repayment value.
One consequence of this latest mis-selling scandal is that the government’s objective of returning the Lloyds Banking Group to private ownership may be hindered. The government currently holds 25% of the group, but aimed to restore it to being fully privately owned before the next general election. With estimates suggesting Lloyds’ liability in the most recent scandal could be as high as £5 billion, these plans may have to be revised. The government’s hopes of restoring confidence in banks in general are also likely to suffer.
Some analysts are suggesting that, from the banking world’s point of view, this scandal could be even worse than PPI. While the profits made on PPI mis-selling were still able to somewhat offset the cost of repayments, this is not likely to be true of swaps.