By Matt Scuffham
LONDON (Reuters) - Britain's biggest banks have paid out less than 40 percent of the 4 billion pounds ($6.4 billion) set aside to cover the mis-selling of complex interest rate hedging products, according to data from the financial regulator.
The mis-selling is one of a number of scandals involving British banks in the past five years and provoked a political and public backlash against an industry blamed by many for the financial crisis - during which the government spent 66 billion pounds of taxpayers' money rescuing Royal Bank of Scotland (RBS.L) and Lloyds Banking Group (LLOY.L).
Banks have also been accused of misdeeds ranging from the attempted rigging of benchmark interest rates to the mis-selling of loan insurance, which alone has cost the industry 22 billion pounds in compensation.
The Financial Conduct Authority (FCA) last year ordered banks to review 29,500 cases for possible mis-selling after finding "serious failings" in how interest rate swaps were sold to small businesses.
Banks, however, dismissed more than a third of the cases, with customers deemed sufficiently sophisticated to have understood the products. More than half of those left under review were then offered alternative hedging products rather than full cash compensation.
The products were supposed to protect smaller companies against rising interest rates, but when rates fell the companies had to pay extra charges, typically running to tens of thousands of pounds. Companies also faced penalties to extricate themselves from the deals, with many claiming they had not been made aware of the penalty clauses.
The FCA said on Tuesday that 1.5 billion pounds in compensation had been paid out so far in 9,858 cases settled by Britain's biggest four banks - Barclays (BARC.L), HSBC (HSBA.L), Lloyds and RBS.
That included more than 300 million pounds to cover so-called consequential losses. Claims for such losses 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 entering the agreements.
That could include missed opportunities for firms to expand because they were tied into crippling monthly repayments on the swaps.
Abhishek Sachdev, managing director of Vedanta Hedging, which advises businesses on hedging, said that where alternative products were provided, firms that accepted them will have only limited scope for making subsequent claims for consequential losses.
"By making more alternative products, at a stroke the banks are not only reducing the amount of cash they're paying out, they are legitimately cutting off the basis for the majority of the consequential loss claims," he said.
The regulator said on Tuesday that banks had sent out 17,000 decisions to customers, 14,000 of which included some element of cash compensation. However, 36 percent of customers had yet to accept the offers made to them.
The FCA said that, in addition to the 1.5 billion pounds paid out in direct compensation to customers, the banks had set aside funds from the 4-billion-pound pot to meet the cost of closing the original hedging contracts. That covers the loss of payments customers would have made to banks under their hedging arrangements if they were still in place.
The regulator also said that the costs of employing more than 3,000 people to carry out the review exercise and engaging independent reviewers to look at every case were also included in the banks' provisions.
The FCA data showed RBS has examined 7,353 cases in the review, far more than any other bank. HSBC has reviewed 3,160 cases, Barclays 2,902 and Lloyds 1,638. But RBS has set aside just 1.4 billion pounds to compensate customers, less than the 1.5 billion set aside by Barclays. Lloyds has set aside 580 million and HSBC 566 million.
(Editing by David Goodman and Pravin Char)