HSBC Holdings PLC HSBA

DJ 2nd UPDATE: FSA OKs Settlement With UK Banks on Rate Hedges

--HSBC, Barclays, RBS, Lloyds to compensate clients

--Second misselling scandal by banks in past few years

--Follows Barclays record GBP290M fine in connection with Libor-manipulation probe

(Adds detail and comment in paragraphs 5, 11-14, 21.)

By Marietta Cauchi

LONDON--The Financial Services Authority on Friday confirmed settlements with the U.K.'s four major banks after it found "serious failings" in the sale of interest-rate hedging products in what has been one of the worst weeks ever for the sector.

The financial regulator said that the four banks involved--Barclays PLC (BCS), HSBC Holdings PLC (HBC), Royal Bank of Scotland Group PLC (RBS) and Lloyds Banking Group PLC (LYG)--would take action to redress the customers that bought the most complex products and would stop marketing interest rate structured collars to retail customers.

"These firms have responded to the need to provide a fair deal for customers by working with us, and I welcome this outcome," said Martin Wheatley, managing director of the Conduct Business Unit of the FSA.

"I am particularly pleased that the CEOs: Bob Diamond, Brian Robertson, Antonio Horta Osorio and Chris Sullivan have provided a personal assurance that they will have responsibility for oversight of this work and will ensure that complainants are treated fairly," Mr. Wheatley added.

The FSA isn't imposing fines on any of the banks.

Interest-rate hedging products can protect bank customers against the risk of interest-rate movements and can be an appropriate product when properly sold in the right circumstances. During the period 2001 to date, banks sold around 28,000 interest rate protection products to customers.

These products range in complexity from comparatively simple "caps" that fixed an upper limit to the interest rate on a loan, through to the more complex derivatives such as "structured collars" which fixed interest rates within a band but introduced a degree of interest rate speculation.

HSBC and Lloyds each said that the financial impact of redressing its customers and associated costs wouldn't have a material financial impact on their business.

RBS said that the FSA's oversight of the banks' review redress procedure would give customers clarity and certainty and said that it had already moved swiftly to compensate "the small number of less-sophisticated customers who entered into more complex swap products."

Barclays said it was committed to "resolving mistakes" in connection with the sale of the hedging products. "Where we have made mistakes in the way we have provided these for clients we are committed to resolving them," the bank said.

It added that the financial impact of remediation costs won't be material to the group.

The U.K. government said it welcomed the FSA's "timely and detailed" response to its request that the authority investigate the misselling of the hedging products after a series of complaints received by lawmakers earlier this year.

"Such products took advantage of small businesses, many of which could not reasonably have been expected to understand what they were signing up to, at a time when loans were difficult to come by," said Andrew Tyrie, chairman of the Treasury Select Committee. "This is completely unacceptable."

This is the second major hit taken by U.K. banks over the past few years in connection with the misseling of financial products. The same four U.K. banks were forced to set aside millions of pounds each after a High Court ruled in support of the FSA's claim that the banks should compensate customers for missold payment protection insurance, or PPI.

This insurance was often sold alongside loans to insure borrowers could continue repayments in the event that they lost their jobs or fell ill. It was missold to many consumers who didn't qualify or weren't even aware they had purchased the insurance.

RBS last year set aside GBP850 million to cover PPI claims on top of the GBP100 million it provisioned the year before; Lloyds set aside GBP3.2 billion; HSBC provisioned $440 million and Barclays earmarked GBP1 billion to PPI customers.

Meanwhile, Friday's settlement comes just two days after Barclays agreed to pay GBP290 million ($452 million) to settle a long-running probe by U.S. and U.K. regulators into allegation that traders at the bank sought to manipulate interbank lending rates.

The authorities are probing several other global banks including include Citigroup Inc. (C), Deutsche Bank AG (DB), HSBC, J.P.Morgan Chase & Co. (JPM) and RBS. Newspapers Friday report that RBS is expected to pay around GBP150 million.

Bank of England Governor Mervyn King on Friday added his weight to the growing body of dissatisfaction with the banking sector. Mr. King said investment banking in the U.K. needs "a change of culture." He condemned "deceitful manipulation" of Libor and banks' "shoddy treatment" of customers.

-Write to Marietta Cauchi at marietta.cauchi@dowjones.com

(END) Dow Jones Newswires

June 29, 2012 07:50 ET (11:50 GMT)

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