Salz Review - Wall Street Journal

59
Salz Review
An Independent Review of Barclays’ Business Practices
venture between the investment bank and the Retail and Business Banking known as
the Retail Sales Group. A high level of complaints emerged in 2008, when interest
rates fell to historically low levels. Complaints frequently related to the high cost of
the break clause which, in a lower interest rate environment, could be up to 20% of
the notional value of the loan.
6.26 Following press articles and complaints, the FSA launched a review into SME
derivatives in 2012. The regulator found that Barclays, among other banks, had sales
rewards and incentives schemes that could have exacerbated the risk of poor sales
practice. 94 Moreover, in early 2013 the FSA reported that more than 90% of the
interest-rate derivatives in their sample did not comply with at least one regulatory
requirement. 95 While some clients may have understood the derivative arrangements,
others did not and relied on the advice of their relationship manager. Some clients
may have felt they had no choice if they wanted the loan. It is also likely that few had
foreseen, when they took out protection against increases in interest rates, that there
would be an unprecedented period of low rates – with costs they had not anticipated.
This is very much a current issue for Barclays. For its year-end 2012 accounts, it
announced £450 million for SME compensation during 2012 and a further
£400 million in February 2013 (total £850 million). In addition, the bank is
currently undertaking an SME sales review.
6.27 It seems to us that Barclays should take care to ensure that complex derivatives
products manufactured in the investment bank and sold to less sophisticated
customers in the retail bank are properly understood by whoever oversees the sale to
the Barclays customer. We noted that, since the experience on these cases, Barclays
has increased its attention to customer needs by improving its sales processes to
ensure that risk is appropriately explained, especially when dealing with small
businesses. In addition, some pay arrangements for staff are being reviewed to
encourage employees to give due consideration to customer suitability. Again, we
consider it likely that the issues arising from the sales of derivatives to SMEs could
have been reduced if the culture within the bank had placed higher priority on
meeting the needs of customers.
Investment Funds
6.28 Barclays misclassified two fund products developed by a fund management affiliate
of Aviva which it sold to customers between 2006 and 2008. The products were:
― A so-called Global Cautious Income Fund, which should have been labelled
as a risky investment;
― A Global Balanced Income Fund, which was also more risky than described.
6.29 Aviva itself rated the funds as four out of five on a risk scale, with five being highrisk.
96 However, using an accelerated classification process, Barclays incorrectly
94 FSA, “FSA agrees settlement with four banks over interest-rate hedging products” (FSA/PN/071/2012),
press release, 29 June 2012.
95 Source: FSA, “FSA confirms start of full review of interest-rate swap mis-selling” (FSA/PN/010/2013),
press release, 31 January 2013.
96 Aviva later reclassified the Cautious Income Fund to three out of five – i.e., medium risk.