New sting in sight for the British banks. After the Libor scandal, this time the major British lenders risk footing an even heavier bill. Their fault is that they have irregularly sold derivative securities to British small and medium-sized enterprises. In particular – as often happens when such complex financial instruments are involved – the transactions would have been concluded without customers being adequately informed about the mechanisms and risks.
According to a fact-finding survey by the Financial services authority (the English Consob), the 90% of the 173 contracts examined would violate the rules. If the suspicions are confirmed, the banks will have to compensate the companies. The institutions involved are four absolute big names in international finance: Hsbc, Barclays, Lloyds e Royal Bank of Scotland. It is still not clear how much the compensation could amount to, but the sum at stake is still in the order of billions of pounds.
Now let's get to know these derivatives of discord better. In the FSA's sights are the bonds that banks sold to businesses to hedge interest rate risks. In essence, these contracts functioned as guarantees for those who feared that they would not be able to keep up with their payments in the event of a rate increase. Too bad that customers have ended up taking on complex financial products without having the means to manage them. And of course, when rates started to fall instead of rising, heavy losses followed.
But it is not the first time that Her Majesty's institutes have found themselves in trouble for having disposed of instruments of this type with excessive ease. The British banking system is already at risk of paying up to 13 billion pounds to atone for the faults related to a high type of derivatives. These are the PPIs, i.e. the "Payment protection insurance“, insurance related to real estate mortgages and loans. Among the customers who were victims of the scam (hundreds of thousands), many were induced to subscribe to them even though they did not have the rights to possibly collect them. Others, on the other hand, hadn't even asked for it.
