British banks face another round of compensation claims that could again total billions of pounds after a study of interest rate hedging products sold to small firms found the vast majority were mis-sold.
The Financial Services Authority said on Thursday it found that, in the 173 test cases examined, more than 90 percent did not comply with at least one or more regulatory requirements. A significant proportion will result in compensation being due.
While the products were supposed to protect firms against rising interest rates, they left them facing huge bills when rates fell. Firms also faced hefty penalties to get out of the deals, which many said they were not told about.
Martin Berkeley, a senior consultant at Vedanta Hedging, which advises on interest rate hedging products, said the final bill for banks could be as high as 10 billion pounds.
The scandal had a worse impact on victims than mis-selling of payment protection insurance (PPI) to individuals on loans and mortgages, which has cost banks 12 billion pounds so far in compensation, he said.
"The difference between this and PPI is that people lost their homes and businesses. These products were toxic."
The FSA said Barclays, HSBC, Lloyds and RBS will now review sales of the products. Customers will be contacted by their banks and need not involve other advisers.
Banks are keen to keep claims managements companies out of the process, having blamed them for inflating the cost of compensating customers mis-sold insurance on loans and mortgages.
The FSA has estimated over 40,000 of the products were sold.
A report by Reuters last year, citing bank emails and phone conversation details, exposed a picture of an aggressive sales culture where bank staff under pressure to hit targets fell short of their obligation under FSA rules to provide "clear, fair and not misleading" information about their products.
(Reporting by Matt Scuffham; Editing by Dan Lalor)