Over the past few years, there have been a record number of claims regarding scandals involving UK banks, causing the public to view them in a negative light. At the moment, the interest rate swap, the Libor scandal and the payment protection insurance scandals are all prominent, meaning that the banks are having to put increasing funds aside in order to compensate those who have fallen victim to mis-selling.
The newest scandal is that of mis-sold interest rate swaps, involving the mis-selling of derivative products to small businesses. Interest rate derivatives have the purpose of protecting small business against rising interest rates as the underlying asset is the ability to pay a set amount of money at a set interest rate. However, the concept is complex and as a result small businesses were unlikely to comprehend the implications of the products they had signed up for. There are requirements in place in order to regulate the selling of derivative products however, up to 80% of the sales of these products fail to meet the requirements. The result is that businesses have paid out more money to banks, without realising what they were signing up to or without giving permission to swap interest rates. UK banks have now set aside more than £2billion to deal with the expected influx of interest rate swap claims.
The PPI scandal has also escalated recently. Customers were given an option to insure themselves against an inability to repay loans, mortgages and the like, meaning that if redundancy occurred, repayments would still be made. Unfortunately, this too has also been mis-sold meaning that people have been paying for PPI when in actual fact they cannot claim on the insurance, or pressuring has occurred meaning that people have purchased PPI unnecessarily.
The Libor fixing scandal has been ongoing since 2005. Libor is the most crucial interest rate in finance as it underpins the majority of loans and financial contracts. In 2005 it as discovered that certain banks were trying to regulate the rate, by manipulating the rate it gave an inflated impression of the ability to raise funds. This has led to people losing money either through having to pay back more than required on loan or increasing bank fees as bank try to minimize their losses.
The recent scandals, which are causing banks to put aside millions of pounds in compensation, has dented the credibility of banks as well as escalated the economic crisis being felt worldwide.