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Feb 01 - The costs for redress of the mis-selling of interest-rate hedging products (IRHP)should be manageable for UK banks but will dent their net earnings prospects in the short- tomedium-term, Fitch Ratings says. It is difficult to quantify the redress costs for the wholeindustry but they are unlikely to be as large as other misconduct costs, such as the payment protection insurance compensation and LIBOR fines. Nonetheless, we expect conduct risks to remain high.
The remediation exercise for IRHP is likely to gain momentum following the Financial Services Authority's revisions to its criteria and principles for assessing redress and the conclusion of the pilot review by the largest four UK banks. This could lead to a spike in provisions for IRHP redress.
The large UK banks started provisioning for interest-rate swap mis-selling costs in 2012, making around GBP700m of provisions. In its pilot findings based on 173 cases, the FSA found that over 90% of interest-rate swaps sold by the four largest UK banks failed to meet regulatory requirements and that a significant proportion are likely to result in customer compensation. RBS has already announced that it would significantly increase its IRHP provision above the GBP50m it made in Q212 for structured collar products sold to SMEs.
We expect IRHP provisions to rise but there are far fewer potential cases than for PPI mis-selling, so the amounts involved should not be as large. Provisions to redress PPI totalled over GBP12bn for the industry by end-Q312, and could rise further as claims continue to be submitted to the banks.
Increased scrutiny of banking conduct and standards by customers, politicians and regulators means that the creation of new high-risk products, including benchmarks, will be substantially reduced. We expect banks to strengthen systems, controls and governance to minimise conduct risks. But it would be unrealistic to assume that the worst is over for the industry from the previous generation of complex products. We believe conduct risk may emerge from a number of sources that have yet to be identified.
The Financial Services Authority announced yesterday the start of a full review of IRHP sales to SMEs by the largest four UK banks - Barclays, HSBC, Lloydsand RBS. It also revised its criteria and principles for assessing redress following the conclusion of the pilot review by these four banks. Other banks, such as Allied Irish Bank (UK), Bank of Ireland, Clydesdale Bank, Co-Operative Bank and Santander UK, are finalising their pilot findings ahead of a fullreview.
