UK banks face big bills for mis-selling derivatives to small businesses

Four of Britain's biggest banks, including HSBC, have agreed to compensate what could potentially be thousands of small businesses that were improperly sold interest rate derivatives, after a probe by the country's financial regulator.

The Financial Services Authority said it found serious failings in reviews of products sold by HSBC, Barclays, Royal Bank of Scotland and Lloyds Banking. The FSA looked at 173 sales to "non-sophisticated" customers and found that more than 90 per cent did not comply with the rules.

"The products that they sold were just absurdly complex," FSA managing director Martin Wheatley said on BBC Radio 4 yesterday. If small businesses can show that "the break costs weren't clearly stated or understated or there was a mismatch with the size of the loan", then there would be a case for compensation, he said.

The banks sold 28,000 of the products since 2001, the FSA said. A significant portion of the 173 cases reviewed by the regulator is likely to result in compensation.

The claims against lenders may turn into another costly scandal for British banks still paying back customers wrongly sold insurance on personal loans.

British banks have reserved more than £9 billion (HK$110 billion) to settle claims on payment protection insurance, which was meant to cover payments on credit cards and mortgages in case of illness or unemployment.