The City regulator watered down a compensation scheme at the expense of mis-selling victims after the intervention of the Treasury amid fears that the redress bill for banks would be too high, an official report will suggest.
..
John Swift QC’s review of the handling of the redress programme for tens of thousands of small and medium-sized businesses that were mis-sold financial products by high street banks will raise concerns about Treasury interference in regulatory affairs, The Times understands.
It could also call intoquestion evidence given to parliament by the regulator.
The review, due to be published tomorrow morning, contains evidence that a “last-minute” change to a compensation scheme that saved banks billions of pounds was arrived at after intense private lobbying by bank bosses and when the Treasury subsequently indicated the compensation bill should be reduced.
The redress scheme was set up after the discovery by the Financial Services Authority in 2012 of “serious failings” in the way banks sold interest rate hedging products to SMEs before the financial crisis.
Wrongly sold as “protection” against the risk of rising interest rates, swaps left firms facing disastrous cost increases when rates fell during the crisis. Lenders failed to explain the risks associated with the products and mis-selling was found in 90 per cent of cases. Many people lost their livelihoods.
Banks paid out about £2.2 billion in redress but the compensation scheme was dogged by accusations of unfairness. In 2013 the regulator altered its plans for the compensation scheme, introducing a cap, which essentially meant that businesses with a swap worth more than £10 million were deemed “sophisticated” and frozen out.
Critics of the scheme point out that sophisticated businesses would not buy swaps from a retail bank. The Financial Conduct Authority’s own derivatives expert is understood to have advised the regulator that complex derivatives products were inherently unsuitable for most SMEs.
As many as one in three mis-selling victims lost out to the change. No official value has been put on the savings for the nine banks in the scheme but experts have put it at about£10 billion.
The FSA, and its successor, the Financial Conduct Authority (FCA), have claimed the change to the “sophistication criteria” was the result of its own research and the Treasury has previously denied playing a role.
In 2013, the outgoing FSA chief executive Martin Wheatley told MPs that he had not come under any pressure to “go easy on the banks”, while in 2015 the FCA told MPs that the cap did not represent a “concession to bank lobbying”.
However, Swift, 81, is understood to have concluded that the changes were negotiated at the “last minute” in behind-closed-doors meetings with banks which proved successful in limiting their exposure.
The Treasury was also subjected to intense lobbying from bank bosses, and it in turn applied pressure on the FSA before the introduction of the cap, Swift was told. The Treasury, led by George Osborne, chancellor at the time, chaired a meeting between the FSA and the banks when concerns were mounting at the redress bill.
Before that meeting, Andrew Bailey, then managing director of the FSA’s prudential business unit, with responsibility for the prudential supervision of banks, had advised the regulator’s board that there could be some prudential risks arising from the cumulative fines and redress costs facing lenders. Bailey, now governor of the Bank of England, went on to lead the FCA.
A Bank of England spokesman noted that Mr Bailey was not aware of any Treasury lobbying at the time of the comments and that one of his first actions upon taking over at the FCA was to launch the swaps review.
While accountable to the Treasury and parliament, the City regulator is supposed to be independent of it and not subjected to political interference.
The report will be the third independent review in the past 12 months that is critical of the City regulator’s handling of financial scandals, after previous reports covered the London Capital and Finance and Connaught affairs, which put hundreds of millions of pounds of investors’ money at risk.
A spokesman for the Swift review said it was “arguably the most significant and wide-ranging” of the three reviews and that Swift would be making recommendations “which are anticipated to have an impact on the FCA’s future regulatory position”.
He declined to comment on its contents before its publication. The FCA declined to comment. The Treasury, Osborne and Wheatley were approached for comment.
James Hurley, December 13 2021, The Times
Oh look… More corruption from the Tories. Shocker.
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Article contents:
The City regulator watered down a compensation scheme at the expense of mis-selling victims after the intervention of the Treasury amid fears that the redress bill for banks would be too high, an official report will suggest.
..
John Swift QC’s review of the handling of the redress programme for tens of thousands of small and medium-sized businesses that were mis-sold financial products by high street banks will raise concerns about Treasury interference in regulatory affairs, The Times understands.
It could also call intoquestion evidence given to parliament by the regulator.
The review, due to be published tomorrow morning, contains evidence that a “last-minute” change to a compensation scheme that saved banks billions of pounds was arrived at after intense private lobbying by bank bosses and when the Treasury subsequently indicated the compensation bill should be reduced.
The redress scheme was set up after the discovery by the Financial Services Authority in 2012 of “serious failings” in the way banks sold interest rate hedging products to SMEs before the financial crisis.
Wrongly sold as “protection” against the risk of rising interest rates, swaps left firms facing disastrous cost increases when rates fell during the crisis. Lenders failed to explain the risks associated with the products and mis-selling was found in 90 per cent of cases. Many people lost their livelihoods.
Banks paid out about £2.2 billion in redress but the compensation scheme was dogged by accusations of unfairness. In 2013 the regulator altered its plans for the compensation scheme, introducing a cap, which essentially meant that businesses with a swap worth more than £10 million were deemed “sophisticated” and frozen out.
Critics of the scheme point out that sophisticated businesses would not buy swaps from a retail bank. The Financial Conduct Authority’s own derivatives expert is understood to have advised the regulator that complex derivatives products were inherently unsuitable for most SMEs.
As many as one in three mis-selling victims lost out to the change. No official value has been put on the savings for the nine banks in the scheme but experts have put it at about£10 billion.
The FSA, and its successor, the Financial Conduct Authority (FCA), have claimed the change to the “sophistication criteria” was the result of its own research and the Treasury has previously denied playing a role.
In 2013, the outgoing FSA chief executive Martin Wheatley told MPs that he had not come under any pressure to “go easy on the banks”, while in 2015 the FCA told MPs that the cap did not represent a “concession to bank lobbying”.
However, Swift, 81, is understood to have concluded that the changes were negotiated at the “last minute” in behind-closed-doors meetings with banks which proved successful in limiting their exposure.
The Treasury was also subjected to intense lobbying from bank bosses, and it in turn applied pressure on the FSA before the introduction of the cap, Swift was told. The Treasury, led by George Osborne, chancellor at the time, chaired a meeting between the FSA and the banks when concerns were mounting at the redress bill.
Before that meeting, Andrew Bailey, then managing director of the FSA’s prudential business unit, with responsibility for the prudential supervision of banks, had advised the regulator’s board that there could be some prudential risks arising from the cumulative fines and redress costs facing lenders. Bailey, now governor of the Bank of England, went on to lead the FCA.
A Bank of England spokesman noted that Mr Bailey was not aware of any Treasury lobbying at the time of the comments and that one of his first actions upon taking over at the FCA was to launch the swaps review.
While accountable to the Treasury and parliament, the City regulator is supposed to be independent of it and not subjected to political interference.
The report will be the third independent review in the past 12 months that is critical of the City regulator’s handling of financial scandals, after previous reports covered the London Capital and Finance and Connaught affairs, which put hundreds of millions of pounds of investors’ money at risk.
A spokesman for the Swift review said it was “arguably the most significant and wide-ranging” of the three reviews and that Swift would be making recommendations “which are anticipated to have an impact on the FCA’s future regulatory position”.
He declined to comment on its contents before its publication. The FCA declined to comment. The Treasury, Osborne and Wheatley were approached for comment.
James Hurley, December 13 2021, The Times
Oh look… More corruption from the Tories. Shocker.