UK banks have paid out £500,000 in compensation to ten companies mis-sold interest rate swap agreements, according to regulator the Financial Conduct Authority (FCA).
The FCA said this figure is expected to rise steeply as it has sent 210 offers of redress to businesses and expects to send a further 1,700 offers shortly. In total, it is thought at least 30,000 companies were mis-sold the agreements.
Complicated financial products called interest rate swap agreements (IRSAs) were mis-sold to thousands of small and medium-sized enterprises (SMEs) by big UK banks, bringing otherwise healthy businesses to their knees.
The swaps were sold to bank customers with large loans between 2001 and the onset of the global financial crisis in 2008 as a means of protection from rising interest rates that could cause loan repayments to become unaffordable.
Swaps allow borrowers to fix their rates and control their costs. But when interest rates fall they can be massively expensive as they come with hefty exit fees – which the Financial Conduct Authority says the banks often hid from SMEs.
Since the beginning of the FCA's full review in May 2013, the banks involved have taken on 2,800 extra staff to work through claims and have so far reviewed in excess of five million documents.
More than 25,000 sales (85% of the total number of sales) are in the process of being assessed and the first letters offering compensation have been sent out.
Barclays has had 92 acceptances of its offers for redress, with 68 at HSBC, 20 at RBS, and 13 at Lloyds.
Martin Wheatley, chief executive of the FCA said: "With 85% of cases now under review, banks have made progress. But like the thousands of affected small businesses, we want to see redress paid quickly to those who have suffered loss as the result of mis-selling."
The FCA said that customers who took out the most complex products will be automatically due redress, while those sold other interest rate hedging products will have their cases reviewed to see if they were mis-sold.
Any customers who were mis-sold a product and suffered loss as a result will be offered "fair and reasonable redress which will aim to put them back in the position that they would have been in had there not been a mis-sale". The FCA said that any redress payments will attract interest at a typical rate of 8% a year.
It is these complicated claims for consequential losses that the FCA expects will take much longer to complete.
Anthony Browne, chief executive of banking trade body, BBA, said: "Today's report by the Financial Conduct Authority shows that the majority of customers affected have been contacted by their bank and are working through the detail of their reviews. Banks are working hard with the regulator to ensure that the process, which began four months ago, is completed as quickly as possible.
"As the FCA reports today the industry has suspended payments for businesses in financial distress pending completion of the review. If any other business is facing financial distress and wants a suspension of payments they should get in touch with their bank immediately."