Banks hit headlines again for failing to maintain standards

Bonuses and champagne were lavished on staff at the UK bank Lloyds for selling complicated but risky interest rate swaps with small business loans, a whistleblower has claimed in sworn testimony to a national newspaper.

He maintained many business customers did not understand the swaps, and Lloyds side-stepped the safeguards intended to prevent mis-selling.

He said the swaps – financial devices aimed at limiting exposure to interest rate fluctuations – protected businesses when rates increased but trapped them in expensive contracts when percentages fell to record lows and imposed crippling break penalties for switching to cheaper deals.

The whistleblower, James Ducker, a Lloyds employee from 2004, recalled that salespeople who brought back individual contracts generating £100,000 ($163,000, €€126,000) profits could receive bonuses doubling their pay and were given bottles of champagne. He reported that, by contrast, those who failed feared dismissal.

Ducker said the emphasis was on profits and “rarely, if at all, on ensuring the customers’ interests were properly protected”.

Consequently, Lloyds has had to earmark £580m to compensate small business victims of mis-selling. The UK banks collectively have set aside billions for this purpose.

Ducker made his statements in 2011 during a legal fight over the issue initiated by the property investment company Wingate Associates. Lloyds settled out of court, paying Wingate’s £8m break penalty and £1.5m for the contract but imposing a gagging order.

Wingate breached the order on the grounds that the selling was related to Lloyds’ Libor irregularities involving fraud and the agreement was therefore invalid.

The company is now claiming an additional £8m-plus for “consequential losses”, including legal fees not covered by the Lloyds settlement.

Lloyds said: “We do not recognise these alleged practices in our business.”

A Wingate company has already received an out-of-court payment from Barclays over swaps mis-selling and is threatening to sue Lloyds if it refuses to pay the second £8m.

Lloyds has now followed up its own Libor investigation by dismissing eight staff and cancelling the total £3m they would have received as bonuses. The bank said other bonuses could be affected.

Group chairman Lord Blackwell said the actions of those responsible for the Libor manipulation were “completely unacceptable”.

In July Mark Carney, governor of the Bank of England, warned the Libor culprits could face criminal charges.
Another big UK bank has been fined £14.5m by the finance regulator for “serious failings” in selling mortgages without suitable advice.

The Financial Conduct Authority (FCA) ruled that Royal Bank of Scotland and its NatWest business had failed to assess customers’ budgets when making recommendations, had given inadequate debt consolidation guidance, and had not advised applicants appropriately on mortgage length.

In one review of 164 sales the FCA found only two transactions met required standards.

The lenders are now contacting about 30,000 customers who received mortgage advice from 1 June 2011 and 31 March 2013.

RBS chief executive Ross McEwan admitted the failings were “unacceptable and should never have happened”. Staff have since been given extra training. The lenders point out, however, that only 1,200 of the 30,000 may have suffered financially.

RBS has already been fined £390m for its part in Libor rate fixing and has allocated £3.2bn to pay compensation for mis-sold insurance.