By Huw Jones
LONDON - Britain's financial watchdog refused on Tuesday to widen a redress scheme that had excluded businesses missold interest rate hedging products, despite a critical review by an independent lawyer of the regulator's actions.
The products were supposed to protect businesses from rising interest rates, but when rates fell, companies had to pay crippling extra charges running to tens of thousands of pounds.
The Financial Conduct Authority set up the redress scheme nearly a decade ago for the hedging products missold from 2001, with thousands of small businesses receiving redress worth a total 2.2 billion pounds ($2.91 billion) from nine banks, including HSBC, Barclays, Lloyds and Royal Bank of Scotland, now rebranded as NatWest.
Figures in 2014 showed that banks paid out less than 40% of the 4 billion pounds they had set aside to cover the misselling scandal, provoking a political and public backlash.
Businesses complained the scheme was voluntary and excluded many of those affected, which led to an independent review by barrister John Swift into lessons learned from the scheme.
Swift's delayed review, published on Tuesday, said excluding about 10,000 sales of the hedging product, a third of the total, was an "inadequate regulatory response" to those customers.
Regulators had also failed to put more focus on potential enforcement action, leaving them without a viable fallback option, the review added.
The FCA's predecessor, the Financial Services Authority, never disclosed that the scheme deviated significantly from the proposals it had first put to the banks, the review said.
How regulators communicated "did not provide a level playing field" between the banks and potential beneficiaries of the scheme, the review added.
The FCA said on Tuesday there were "clear shortfalls" in processes, governance and record-keeping related to the scheme.
But it added: "The FCA does not consider that the FSA was wrong to limit the scope of the redress scheme to less sophisticated customers and has concluded that it would not be appropriate or proportionate to take further action.
"Accordingly, the FCA will not seek to use its powers to require any further redress to be paid to IRHP customers."
Charles Randell, the FCA's outgoing chair, said the regulator was now a "very different organisation" from the FSA when the products were sold.
"We would expect to act far sooner and more decisively today," Randell said. ($1 = 0.7570 pounds)