Case over banks mis-selling to SMEs rumbles on

Back in June of 2012 the Financial Services Authority (FSA) discovered that banks were guilty of mis-selling financial products to many SMEs. In fact, it is now estimated that as many as 40,000 products were mis-sold to small business owners. The findings from the pilot study revealed that about 90% of claims that the firms made to SMEs were upheld meaning that the businesses were mis-sold products.

It was also found that the products that hurt SMEs the most were swap products. These products are a type of future hedging that bets there will not be a drop in interest rates before the loans become payable. Many businesses found that once the interest rates fell instead of benefiting from the changes they were trapped into the ‘swap.’

Most owners stated that they did not understand this would be the case from the start. In fact, some borrowers stated that they were told they would only be allowed to take out a loan if they purchased this type of loan.

As a result of the mis-selling, banks are now upgrading the amount they compensate to victims of the crisis. How much is compensated depends on how complex the product that a SME was sold as well as how much the SME likely understood when they signed into the deal.

Chief Executive designate of the market regulator in Britain, Martin Wheatley, and an FSA official, stated that the swap products were absurd from the start. They estimate that the total cost to the banking industry will be as high as £18m making it something that they want to work hard to prevent from occurring again. The constant concern is that many SMEs, and especially small local businesses, are going to slip through the cracks and not be compensated.