David Cameron rules out Leveson-style inquiry into banks.

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- By Joe Murphy, Evening Standard, UK

Sir Mervyn King today lashed the “shoddy and deceitful” behaviour of Britain’s banks, as yet another scandal heaped disgrace on some of the City’s most trusted names.

The Bank of England governor demanded a “real change in the banking industry culture” in a fierce attack on the financial services community.

“Britain’s biggest lenders are already in disgrace from the shocking disclosure that bank staff at Barclays and others rigged interbank interest rates to make or protect fortunes.”

He hit out at “excessive levels of compensation, shoddy treatment of customers and deceitful manipulation of one of the most important rates”. Pressure snowballed for a Leveson-style inquiry into the banks, with Shadow Chancellor Ed Balls formally calling for an independent probe.

David Cameron backed the call for change and pledged new laws but ruled out an inquiry, agreeing with the governor that action is the priority.

Sir Mervyn spoke after four of the biggest banks — Barclays, HSBC, Lloyds and Royal Bank of Scotland — were censured for “serious failings” over the sale of completely inappropriate and highly risky interest swaps to small businesses that did not understand the dangers.

A Financial Services Authority report revealed small firms suffered losses and huge distress as the complex interest rate swap arrangements backfired.

Such products are used by large companies to hedge against interest rate movements — but in the wrong hands can cause huge losses.

Britain’s biggest lenders are already in disgrace from the shocking disclosure that bank staff at Barclays and others rigged interbank interest rates to make or protect fortunes. Sir Mervyn said recovering people’s trust would now require “leadership of an unusually high order and changes to the structure of the industry” — an apparent criticism of Barclays boss Bob Diamond.

However, he ruled out a Leveson-style inquiry into the systemic failures of the banking industry and its leadership, saying he and the regulators knew what needed to be done.

Compensation for the mis-selling of interest swaps will now also be paid.

Barclays was fined a record £290 million for manipulating the Libor rate at which banks lend to each other. RBS is reported to be facing a £150 million fine.

Mis-selling victims included farmers, small hotels and even chip shop owners and electrical stores – small high street traders who had no idea what they were getting into. All four main banks have agreed to pay out compensation, said the FSA.

The banks sold about 28,000 such products to customers since 2001, it said. Victims were not told about hefty exit costs or the risks involved. Sales were driven by big cash incentives – and some customers said they had been “forced” by their banks to take them out as loan insurance.

The scandal echoes the payment protection insurance furore of last year, costing banks billions of pounds in pay-outs. As well as offering redress directly for those customers who bought the most complex products, the banks have also agreed to stop marketing certain IRSA products to retail customers, said the FSA.

RBS said: “In the case of a small number of less sophisticated customers who entered into more complex swap products we have agreed to move directly to redress.

“We believe risk management products are an essential part of corporate banking and it is important we restore customer trust in this area.”

The British Bankers’ Association, representing more than 200 banks, said: “Our members have worked closely with the FSA as it carries out its review into interest rate swaps and will continue to co-operate fully.”

Lloyds, which set aside £3.6 billion to cover PPI compensation, said it did not expect the costs of redressing customers who were mis-sold IRSA products to be “material”.

Meanwhile Stephen Hester, the £1.2 million RBS chief executive, gave up a bonus after the computer chaos that left customers unable to access their money. He said: “I don’t deserve one and wouldn’t take one.”

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