UK banks braced for new mis-selling scandal

LONDON, June 28 Thu Jun 28, 2012 2:31pm EDT

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LONDON, June 28 (Reuters) - Britain's Financial Services Authority will announce on Friday it has found evidence banks mis-sold interest rate swaps to protect companies against a rise in borrowing costs, a source familiar with the situation said.

A finding by the FSA of mis-selling could lead to compensation claims ranging from many millions to several billion pounds from small companies who bought them.

It would be the latest in a string of mis-selling cases that have plagued the financial services industry for over two decades. Banks are already set to pay upwards of 9 billion pounds ($13.96 billion)for mis-selling loan insurance.

The news will compound problems for a sector that reeled on Thursday from news of a record $450 million fine on Barclays for rigging interest rates.

That scandal is expected to spread to other lenders. Shares in RBS and HSBC, which are also under investigation, saw their shares also fall on Thursday.

The FSA, which declined to comment, has been probing the sale of interest rate swaps, a derivative contract for small businesses bought from HSBC, Lloyds, RBS and Barclays.

FSA Managing Director Martin Wheatley has said the main banks have "questions to answer" on their sales of interest rate swaps.

With interest rates having been at historic lows for an extended period of time, thousands of small companies may be sitting on losses.

Michael Brennan at Bracewell Law, which is acting on behalf of some of the small companies that sold the products, said there are likely to be around 4,000 claimants with total claims of 3-6 billion pounds though there are no hard figures so far.

"Over the life of their contract, these financial products turned out to be for the sole benefit of the banks and in the vast majority of cases were highly inappropriate for small companies," Brennan said.

"Sold as protection against rising interest rates, they had the effect of keeping struggling businesses on artificially high rates, costing them thousands of pounds per month to service," Brennan said.

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