New Scandal for UK Banks, Compensation Claims Loom

UK banks were faced with further damage to their revenues and reputations Friday after the UK financial regulator announced that they would have to pay compensations to customers over mis-selling of interest rate swaps.

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The Financial Services Authority added that this had resulted in a “severe impact” on a number of businesses.

Barclays' share price reversed early gains in London morning trading Friday, while HSBC, Lloyds and RBS rose slightly after Thursday's losses.

Barclays, HSBC, Lloyds and RBS will have to “provide appropriate redress” in cases of mis-selling and have stopped marketing one of the products – interest rate structured collars - to retail customers.

This is the latest issue to hit UK banks’ top lines and reputations, as RBS looks set to join Barclays in taking a hit over the Libor-fixing scandal.

Lloyds said that the impact on its results was “not expected to be material”. Barclays said: "Where we have made mistakes in the way we have provided these for clients we are committed to resolving them."

HSBC said that these kind of products accounted for less than one of its UK business and added that it is moving "rapidly to redress" customers. RBS also said that it has "move" directly to redress" in the case of "a small number of less sophisticated customers."

"We believe risk management products are an essential part of corporate banking and it is important we restore customer trust in this area," an RBS spokesman said in a statement.

Taxpayer-backed RBS could become the target of increased public ire as it is believed to have one of the biggest liabilities for the interest rate swaps mis-selling too.

Bob Diamond, the under-fire chief executiveof Barclays, admitted on Thursday that the decision to fix Libor lower was taken at bank – not at individual trader – level.

He will appear in front of an influential committee of UK MPs to answer questions about the Libor issue.

Interest rate swaps are fast shaping up to be the “PPI for the small business world” a source in the banking industry told CNBC Thursday, referring to the payment protection insurance mis-selling scandal, which resulted in billions of pounds being claimed from UK banks by consumers.

The swaps were supposed to protect customers against big moves in interest rates by converting floating rate into fixed rate debt, or vice versa.

The allegations are that banks didn't properly explain the potential costs and ramifications to customers – and that employees were selling the products without being properly qualified. When interest rates plummeted to historic lows following the credit crisis, the swaps became more expensive - in some cases, small businesses claimed that repayments sent them out of business as margins became more squeezed.

"We are aware of many businesses that have been forced into severe financial distress, administration and liquidation, often at a huge emotional cost to the owners and managers, as they were unable to keep up with their payments," Michael Brennan of Bracewell Law, one of the solicitors acting on behalf of claimants, told CNBC.