Regulator Shrunk Redress Plan After Bank, Treasury Meetings
(Bloomberg) -- The U.K.’s financial regulator failed to document a decision to bar thousands of small companies from a compensation program, a conclusion it reached after meetings with top British banks and the Treasury, according to an independent review of the process.
The Financial Services Authority, the predecessor to the Financial Conduct Authority, excluded about a third of businesses who had been mis-sold interest rate hedging products after deeming them sophisticated enough not to warrant protection.
Britain’s biggest banks had lobbied the regulators for changes to the program’s scope in 2012 and 2013, according to a review by lawyer John Swift. Treasury officials also flagged concerns about the potential cost of compensation to the FSA in 2013, said the report, which was published Tuesday after more than two years of work.
The investigation “found no explanation why that change was agreed by the FSA,” and the “changes were negotiated in last-minute confidential discussions with the banks.” The Treasury -- then a major shareholder in NatWest Group Plc and Lloyds Banking Group Plc -- was the “only other stakeholder closely involved in that process,” the report said, although it concluded that the FSA’s decision-making remained independent.
The report also said that “the evidence does not suggest that it was the cost of to the banks that persuaded the FSA to agree to the limitations on eligibility,” even if the decision did in practice result in a reduction of the amounts paid out.
A spokesperson for the Treasury said that mis-selling financial products was “completely unacceptable” and it supported the redress program, although the FCA was ultimately responsible for it.
“While we helped to facilitate conversations to reach agreement on the scheme in a timely manner, the FCA was responsible for the operational design of the scheme and maintained its independence throughout,” the spokesperson said in an emailed statement.
Banks paid out about 2.2 billion pounds ($2.9 billion) in compensation to victims of mis-sold interest rate hedging products they took out between 2001 and 2011. That figure would have been far higher had the FSA not excluded some victims.
The FCA, which replaced the FSA in 2013, said in a statement that it welcomed the findings and “it will ensure that any significant decisions on redress made in the future will be transparent, with appropriate governance, and supporting evidence will be properly recorded.”
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