UPDATE 2-UK banks pay out fraction of swaps mis-selling claims

Tue Feb 4, 2014 4:17am EST

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* 306 million paid out by end Jan vs 159 mln by end Dec

* Banks have set aside 3.75 bln stg for mis-selling

* Regulator says compensation flowing to small businesses

* Banks have yet to pay out for consequential losses

By Matt Scuffham

LONDON, Feb 4 (Reuters) - Britain's biggest banks have so far paid out less than 10 percent of the 3.75 billion pounds ($6 billion) they have set aside to compensate small firms mis-sold interest rate hedging products, data from the financial regulator showed on Tuesday.

The Financial Conduct Authority (FCA) said that 306 million pounds ($500 million) had been paid out by Britain's biggest four banks - Lloyds Banking Group, Royal Bank of Scotland, Barclays and HSBC - by the end of January. That compared with 159 million at the end of December.

The mis-selling of complex financial products is one of numerous scandals facing the UK banking sector that range from problems in consumer finance to interest rate rigging in global financial markets. The latest payments come on top of more than 20 billion pounds set aside by the banks to compensate customers mis-sold loan insurance.

The interest rate hedging products were designed to protect smaller companies against rising interest rates but when rates fell, they had to pay large bills, typically running to tens of thousands of pounds. Companies also faced penalties to get out of the deals, which many said they had not been told about.

"Redress is now rapidly flowing to small businesses," Clive Adamson, the FCA's director of supervision said on Tuesday.

Daniel Hall, managing director of All Square, which advises companies pursuing claims, said the real issue for banks could be claims for so-called consequential losses, which have not been factored into the payouts made so far.

Those claims would effectively set the clock back to the point before the products were sold and would require banks to compensate not just the direct cost of the mis-sold contracts but any losses that businesses have suffered as a result of leaving the agreements.

"Our estimate of the final bill for consequential losses is double that of direct losses," Hall said on Tuesday.

The FCA had ordered banks to begin paying compensation last May after saying there were serious failings in the way they were sold. It said on Tuesday that all four banks were on track to complete the compensation process within a year of the scheme starting. It urged firms that had not yet agreed to have their case reviewed in the scheme to do so.

There are 18,700 firms that have so far agreed with banks to have their cases reviewed. 2,092 firms had accepted compensation or alternative products, up from 1,040 at the end of December.

In 1,741 of the cases, banks tore up the arrangement and paid cash compensation. In the remaining 351 cases, businesses have been offered alternative products. In 372 cases, the review found no compensation was required.

The average payout per offer of compensation stood at 146,000 pounds at the end of January, less than the 152,500 average at the end of December.

The FCA data showed differing rates of progress in dealing with cases between the banks. RBS has told customers the outcome of the review in 2,429 cases, compared with 1,688 at HSBC, 1,041 at Barclays and 819 at Lloyds.

Both RBS and Lloyds have increased the amounts they have set aside for compensation in the past two weeks.

RBS has more claims under review than its big three rivals combined. It is assessing 9,039 cases, compared with 3,315 at HSBC, 3,250 at Barclays, and 1,756 at Lloyds.

RBS has set aside 1.25 billion pounds for compensation, less than the 1.5 billion at Barclays, which has made the biggest provision of all the banks. Lloyds has set aside 530 million and HSBC 460 million.

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