Sajid Javid and George Osborne put pressure on the City’s financial regulator to reduce compensation payouts from big banks to small business victims of a mis-selling scandal, an independent review has found.
Britain’s biggest banks, including Barclays, HSBC, Lloyds and Royal Bank of Scotland (now NatWest Group), paid £2.2bn in redress payments to small business customers who had been missold complex financial products from 2001-2011. However, a review published on Tuesday by John Swift QC found serious failings in the regulator’s approach.
The Financial Conduct Authority (FCA) has admitted there were flaws in City regulation after the review found that its predecessor, the Financial Services Authority (FSA), had changed rules on who would be compensated after intensive lobbying from big banks.
The 493-page report revealed for the first time that Osborne, the chancellor at the time, and Javid, who was financial secretary to the Treasury, lobbied the FSA to ease the cost to banks, which were under pressure after the financial crisis – despite the objections of FSA officials. Osborne now works for an investment bank, Robey Warshaw, among other roles. Javid became chancellor and is now the health and social care secretary.
The redress scheme was launched in 2013, after 30,000 small businesses were left nursing heavy losses from interest rate hedging products (IRHPs) sold to them by major banks. That year, the regulator introduced a cap which effectively stopped those with swap deals over £10m from claiming on the grounds they were “sophisticated” enough to bear the risk. The cap is thought to have excluded a third of potential claimants and saved banks billions.
At the time the compensation scheme was being designed, the government was a shareholder in Lloyds Banking Group and Royal Bank of Scotland, after bailing out the high street banks during the financial crisis.
According to minutes of a meeting between the Treasury and the FSA that January, a Treasury official said: “The Treasury had been lobbied hard by the CEOs of the banks, particularly the two state-owned institutions. As a result, the chancellor had come to the opinion that the total redress costs needed to be reduced, and that the purpose of the meeting was for HMT [HM Treasury] to understand the FSA’s proposals in order to find ways to cut the cost.”
Clive Adamson, then the FSA’s director of supervision, said in the meeting that it was “inappropriate for HMT to intervene in this manner given the nature of its involvement in the issue”. In other words, the government had a conflict of interest given it was the major shareholder of Lloyds and RBS. In evidence to the review, Adamson said: “What was unusual here was a view clearly expressed about [the] desire of ministers to … question what we were doing and I think it’s fair to say that we were disappointed in that.”
Javid personally lobbied to cut the costs for banks, expressing concerns “about where to ‘draw the line’” as to which customers were eligible, and he and a Treasury official pushed for “flexibility”, the review said. Javid is a former investment banker at Deutsche Bank, which was not involved in the mis-selling scandal.
A spokesperson for Osborne said: “The report is thorough and self-explanatory and he has nothing to add.”
Javid has been approached for comment through the health department.
The Treasury has previously denied that Javid was involved, telling the Times in 2019 that the alteration to the redress scheme was solely the responsibility of the Financial Services Authority. In the same report the newspaper cited a Treasury source saying “discussions took place at a ‘higher level’ than Mr Javid”.
The review “found no explanation” why the cap was imposed and said there was not a “level playing field” between banks and customers, who were shut out of talks. The changes were made in “last-minute confidential discussions with the banks”.
“It was a very simple change – a stroke of the pen […] – but one that ultimately resulted in the exclusion of about a third of all relevant IRHP sales from the scope of the scheme,” the review said.The FCA said on Tuesday that it “acknowledged clear shortfalls in processes, governance and record keeping when decisions about the redress scheme were made, and a lack of transparency”.
Ian Lightbody has campaigned for justice on bank mis-selling for almost a decade after his construction company in Glasgow was allegedly mis-sold complex loan products. He welcomed criticisms of the regulator in the review, but told the Guardian that the regulator had “left the banks to it”.
“These banks between 2005 and 2008 really ramped up the sale of these products,” he said. “They were incentivised. They pulled the rug out from all sort of businesses nationwide … The umbrella was there when the sun was shining. When we did need it, it was withdrawn.”
A Treasury spokesperson said: “Any mis-selling of financial products is completely unacceptable and wrong, which is why we supported the independent FCA’s redress scheme and are confident that it brought closure to the issue.”
A spokesperson for UK Finance, the lobby group representing the banks, said: “Lenders are committed to treating customers fairly and ensuring that any disputes are appropriately addressed while following all regulatory requirements.”