Fallout begins from Barclays admission that mistakes were made with SMEs

After the admission last week by Bob Diamond, Barclays’ chief executive, that mistakes were made in the selling of interest rate products, many SMEs, or small to medium enterprises, are consulting specialist law firms. This is to try and help them out of the complex contracts that are causing them much financial hardship.

Mr. Diamond’s admission came at Barclays’ AGM after it was revealed by the Financial Services Authority that his bank had the most customer complaints for 2011. The banks have come under pressure for mis-selling payment protection insurance plans and interest rate swaps. Interest rate swaps are nothing more than betting on interest rate movements.

It is possible that many thousands of businesses in the UK could have been wrongly sold financial products that are complex in the extreme. The FSA conducted a six-year inquiry into the mis-selling of PPIs resulting in the possibility of compensation payouts in the region of £6 billion. It is interesting that the UK’s 5 largest lenders have put aside £6 billion for possible payouts.

The FSA have been forced to act because of the number of complaints received about the mis-selling of Interest Rate Swap Agreements. They began their formal review of IRSA cases last month. An IRSA is a contract where one party pays a variable rate of interest and receives a fixed rate in return.

This hedges against large movements of interest rates in any period of time. Many firms saw their value work against them because of the fall of interest rates during the economic downturn. Consequently, they now owe catastrophic amounts to the banks in interest every year.

The FSA have requested details from the leading banks in the UK of these products sold to SMEs. £1.9 billion has already been paid out by sixteen financial institutes in the last year due to mis-selling. Now firms are turning to the courts because they say that they should not have been sold these products and to get out of these contracts with the banks is an extremely costly business as most of them charge astronomic sums to do so.