(11 years, 10 months ago)
Commons ChamberRead Hansard Text Read Debate Ministerial Extracts
Guto Bebb (Aberconwy) (Con)
I beg to move,
That this House has considered the matter of the mis-selling of interest rate swap products to small and medium-sized businesses; notes the work undertaken by the Financial Services Authority in this respect; and calls for a prompt resolution of the matter.
I thank the Backbench Business Committee for awarding me the debate. It has received a number of fine applications for time in the main Chamber and I am grateful for the opportunity to raise the issue of the mis-selling of bank interest rate swap products. A number of colleagues have indicated their willingness and a desire to speak in the debate, so I shall try to be as concise as I can in my opening remarks.
The issue came to my attention in dealing as an MP with the hassles raised in constituency surgeries. It is a great advert for doing surgeries: we never know what will come through the door. Back in the autumn of last year, a constituent came in to talk about interest rate swaps, collars, caps and similar things. I was a self-employed business person for 15 years before I was elected to this place, and it crossed my mind that this business man who was talking about the loss of his business and his hotel and the potential loss of his house might be finding an excuse for his business failure. I am not a hard-hearted individual, but I have been in business for a long time and I have the view that there is the rule of buyer beware in transactions with banks and other financial institutions. I therefore listened to his case attentively but with a degree of scepticism, wondering whether he was looking for an excuse for what happened to him.
The more I listened, however, the more I thought that there was something that I should look into, and the crux for me came when I tried to get hold of the verbal agreement between my constituent, Mr Colin Jones, and his bank. It took us a long time to get the bank to allow us to see a transcript of the verbal agreement, and by that point I understood something about the nature of interest swap derivatives and what was meant by swaps, caps and collars. I had a degree of understanding that we were not considering a straightforward financial product.
My concern, which became apparent from the transcript, was that time and again—on four if not five occasions—during the telephone conversation that was the basis of the legal agreement the bank described the product as a fixed rate one. The bank even went so far as to say, in essence, “Mr Jones, it is basically a fixed rate product. It will protect you in the same way as a fixed rate product would protect your house.” His problems and the financial effect of his decision to sign up to that product have been extremely damaging. He was misled, given that the description of the product as akin to a fixed rate product was, to say the least, economical with the truth.
Alison Seabeck (Plymouth, Moor View) (Lab)
I congratulate the hon. Gentleman on securing this debate. I apologise for being a tad late in getting to the Chamber. I assume that the person his constituent was talking to was fully qualified under the Financial Services Authority to sell that product. I have some constituency business in which, clearly, there is a real issue about the competence and qualifications of the person doing the selling. Has the hon. Gentleman come across any similar problem either in his constituency or as a result of this debate being called?
Guto Bebb
There have been examples of such scenarios, which have come across my desk as a result of what has now become a campaign. One of the reasons for holding the debate is to ensure that more cases come forward, because the more information we have, the easier it will be for the FSA, for example, to bring the issue to a resolution and for the banks to acknowledge that there is a problem. The hon. Lady makes an important intervention.
Paul Uppal (Wolverhampton South West) (Con)
I have a slight confession to make. I spent a great deal of my 20 years in business dealing with swaps, collars, caps and all sorts of financial instruments. The case highlighted by my hon. Friend of its being a fixed rate product in a sense misses the point. In general, such products were hedges—they were there to mitigate risk. A lot of customers went awry because the bank would often present the products as a loan but would gear up much more if the risk could be mitigated. Such financial products were often sold on that basis.
Guto Bebb
That is an important point. My comments will state clearly that those products are not necessarily wrong. The question at stake is whether the products were sold appropriately, and whether there was a degree of mis-selling. Sophisticated investors, understanding what they are doing, should have the right to enter into such agreements. My question is whether the banks should be going after businesses with turnovers of less than £200,000 a year.
Nick de Bois (Enfield North) (Con)
I have a constituent, whom I will not name for understandable reasons, who has suffered a loss in excess of £1.5 million as a result of such a product. Does my hon. Friend not agree that the banks have an extra responsibility, because they are often dealing with inexperienced people who, nevertheless, place a massive trust in their long-term relationship with their banks?
Guto Bebb
That is a key point. Time and again, businesses have told me that their relationships with banks go back 15 or 20 years, and that they believed the banks had their best interests at heart. In some situations, however, they have clearly been sold products that they did not understand, but they trusted their bank manager because they had dealt with them for so long.
Having been persuaded by Mr Jones’s transcript to look into this issue, I started asking questions, and as a result I came across the Federation of Small Businesses working hard on this issue and the organisation Bully-Banks. We have identified literally thousands of businesses that have been affected, and debates such as this are necessary to show that the House understands and cares about the problem and wants to see a resolution.
John Healey (Wentworth and Dearne) (Lab)
I congratulate the hon. Gentleman on his leadership of this debate. He is looking for evidence and examples, but has he come across Guardian Care Homes, a firm with two care homes in my constituency? Its problem was that the term of the swaps that it was sold far exceeded the term of the loans to which they were linked.
Guto Bebb
That is a key issue. In many cases, the term of the swap is longer than that of the loan, which the Financial Services Authority believes to be evidence of mis-selling.
Evidence about the background to interest rate swaps suggests that banks started to target small businesses from about 2006 onwards. The practice was probably curtailed in 2008-09, although there are a few examples of such products being sold after that. In a number of cases, banks have settled with businesses out of court. My concern is that banks have placed significant gagging orders on those businesses, which stops them explaining the terms and conditions of the settlement.
Existing regulations should have been taken into account when these products were sold. Swaps are financial derivatives covered by section 85 of the Financial Services and Markets Act 2000. They are, therefore, a regulated product and any adviser who tries to sell them has a duty to understand the needs of their customer. That is a key point. A fair, clear and not misleading explanation of the product must be provided to the customer, yet in many of the cases I have seen the information provided was far from satisfactory.
Damian Collins (Folkestone and Hythe) (Con)
I, too, congratulate my hon. Friend on securing this debate. Does he share my concern about the experience of Castlewood Hotels in my constituency? It was sold such a product by the bank and told that if it did not accept it, its business could be in jeopardy in future.
Guto Bebb
Again, that is an important point. In significant numbers of cases a swap product has been sold to a business as a condition of a loan being made available, so that the future availability of credit was dependent on the acceptance of a swap product. Obviously, a business in need of finance would be persuaded of the need to take up that product in order to receive finance, and that is a key issue.
Mr Tyrie
I am grateful to my hon. Friend for securing this important debate. As he will know, the Committee is already looking into this matter and has written to the FSA and the Financial Ombudsman Service asking them to investigate fully and get back to us. He may not be aware, however, that we also raised this issue with the chairman of the FSA, who has promised to provide a progress report by the end of July. The Committee is extremely anxious, not least because a number of its members, including me, have seen constituents with exactly the sort of complaint my hon. Friend outlines.
Guto Bebb
I am aware that the FSA has promised to provide a progress report, and I sincerely hope that that will be with us before the end of July, if not sooner. My concern is that businesses are being put into administration as we speak—we have seen examples of that this week alone—and in the current economic climate we should not accept the loss of any businesses or jobs as a result of mis-selling.
Nicky Morgan (Loughborough) (Con)
Do we not also need to get on with it because lots of claims are time-limited? Some of my constituents have only until October this year to launch a claim, and they need to know the position of the FSA and the Financial Ombudsman Service so that they can decide whether to have recourse to the law.
Guto Bebb
That is an important point. As many of these products were sold from 2006 onwards, many affected businesses are now watching the clock run down on their opportunity to take action. That crucial point should resonate within the Chamber and outside.
In addition to the two duties I have mentioned, advisers must also take reasonable steps to show that the client understands the product and the risks involved. The bank must also take steps to ensure that the product is suitable. Mr Jones was sold a product by RBS. I wrote to RBS on his behalf, and was shocked that, in one transaction, I could highlight seven breaches of conduct of business sourcebook regulations. I cannot take the time to go through all seven examples, but I shall give a few. For one, RBS never sought to quantify the termination costs for the swap, which is a pretty severe piece of negligence, in my view. Neither did it take reasonable steps to ensure that it was in possession of sufficient personal financial information about Mr and Mrs Jones, which is also a big issue. It did not take reasonable steps to ensure that they understood the nature of the risks involved or provide a suitability letter. These are breaches of COBS rules and should be taken very seriously. To break seven such rules in one case raises the question: what were the banks doing?
I can highlight a number of general mis-selling examples. In some cases, businesses have been provided with a product not suitable for them and products have been described as similar to fixed rate mortgages, as I have already mentioned. There are also numerous examples of no opinion analysis being provided, meaning that a business was offered one product alone. I challenge the banks to state that that was not because of commission issues.
Mark Tami (Alyn and Deeside) (Lab)
That is the key. Many businesses have contacted me about that very point. It was a case of, “Take it or leave it.” Only one product was offered, and obviously people who needed finance for their businesses took it, with the dreadful consequences we have seen.
Tessa Munt (Wells) (LD)
That is a good point. I have a constituent, whom I will not name, who is a farmer and was offered such an arrangement completely inappropriately. He said specifically that he did not want it. None the less, his bank, Barclays, wrote to him on 6 June 2008 with a contract, which he read in detail, but on 10 June sent him the final contract, into which it had slipped two clauses that turned it into this sort of agreement. He accepts that he probably should have read the second document, but it did not indicate at all that it had changed the arrangement. That was very poor.
Guto Bebb
That is another example that should be taken on board in this debate.
Another example of general mis-selling already touched upon is where a swap is for a period longer than the loan. I have also seen examples of where the swap was for a sum in excess of the loan. Another crucial example is where the break cost for terminating the swap was described in one e-mail from a bank as being £9,000 but, three years later, when the customer approached the bank to break the swap, a figure of £135,000 was quoted to settle. I fail to understand how it could go from less than £10,000 to £135,000 in three years. That is another example of mis-selling. Another one worth mentioning is where the bank classified the client as a professional client and experienced derivative trader. I can assure the House that the business in question was blissfully unaware of the nature of the product it was buying, yet, for paperwork purposes, the bank had described it as a professional client rather than a retail client.
It is generally agreed that there is an issue here. The FSA accepts it is an issue. Bully-Banks, an organisation representing 350 victims, has done some work highlighting that 96% of businesses in its organisation were approached about such products by relationship managers. Businesses did not go looking for these products; they were approached with a solution to a problem that often they did not have. Some 87% of businesses surveyed by Bully-Banks were unaware that the adviser was not an adviser but a salesperson, and there was a general lack of understanding. In 95% of cases, businesses stated categorically that they entered into these agreements on the basis of advice and guidance given by their bank relationship managers.
Steve Baker (Wycombe) (Con)
I would like to offer my hon. Friend an explanation of why banks are doing this kind of mis-selling. In my private Member’s Bill last year on the regulation of derivatives, I explained how mark-to-market rules allowed banks to up-front unrealised cash flows to declare profit immediately on moneys that they have not received. I wonder whether the Treasury Committee will investigate whether that is a key factor in encouraging this bad business.
Madam Deputy Speaker (Dawn Primarolo)
Order. Before the hon. Gentleman rises to deal with that point, may I gently remind him that he was supposed to speak for about 10 minutes? He has been extremely generous in taking interventions, but there is a time limit for everyone else who wants to contribute, and it is getting shorter the longer he speaks.
Guto Bebb
Thank you for your guidance, Madam Deputy Speaker. I will refrain from taking any more interventions and finish my comments.
The figures from Bully-Banks illustrate the fact that businesses feel that they have been mis-sold such products. The final figure from Bully-Banks that is worth mentioning is that 75% of its members claim that the swap product was a condition of the loan agreement that they entered into. Some Members might say that the way forward is therefore for individual businesses to take legal action on that basis, but I have concerns about that. A solicitor said to me yesterday that the problem in England and Wales is that the law is far too bank-friendly. There is a concern that in many cases businesses that take legal action face costly cases before the banks finally settle and put in place a gagging order. It is also a concern that small businesses should be expected to fund their own cases when they are already in crisis
Glyn Davies (Montgomeryshire) (Con)
Will my hon. Friend take an intervention?
Guto Bebb
I will not take another intervention, due to the guidance from Madam Deputy Speaker.
Small businesses that have to take legal action also face the risk of losing the support of their banks. There are examples of loans being called in or overdraft facilities being taken away from businesses that are taking action. I therefore do not think that the way forward is necessarily to expect individual businesses to take action against the banks, unless we can have some certainty that the banks will not act in that way.
The scale of the problem is significantly greater than we have accepted to date. Today the Law Society Gazette gives the figure of about 4,000 businesses affected, with about £1 billion-worth of potential claims. In my view that figure is probably an underestimate, so the scale of the problem should be taken seriously.
Let me state what I am calling for from this debate. It is very easy to have a debate in which we all highlight our concerns about individual businesses and our belief that the banks have behaved badly, but this House has a responsibility to try to offer a solution. We need to encourage the Financial Services Authority to move more quickly to a resolution of this issue. It needs to inform the banks that, for example, they have an obligation and a responsibility to act fairly with their clients. We also need some transparency from the banks about the exact size of the problem. We know, for example, that between 2006 and 2010 the banks engaged in significant amounts of swaps. Some of them might have been completely legitimate, but quite a few were sold to small businesses.
Those small businesses are feeling under pressure from their banks, so my specific request today is for the Minister to call on the FSA to give written assurances that the banks will not adversely treat any business that makes a complaint. We live in a country governed by law. If a business wants to make a complaint, it should not be subject to undue pressure from its bank. In the same way, if a complaint has been made to a bank or the FSA, the bank should refrain from foreclosing on that business. Those are my short-term requests for the Minister. In the long term, I think it is crucial—
Madam Deputy Speaker
Order. The hon. Gentleman was allocated 10 minutes. He has now been speaking for 20 minutes. There are about 15 Members wishing to take part in this debate, which is due to conclude at 2.30 pm. Will he please now make one more, brief remark and then resume his seat?
Guto Bebb
I was coming on to my final request, which is that in the long term we must avoid a repeat of what happened with PPI—payment protection insurance—which has created an ambulance-chasing gift for solicitors of disreputable means. We should have a system that allows such cases to be settled in a constructive manner, in agreement between the FSA, the banks and their clients.
Madam Deputy Speaker
I remind Members that the time limit is eight minutes for Back Benchers. There are a large number who wish to participate in this important debate. It may therefore be necessary to reduce the time limit. We shall have to see how we proceed, but we shall start with eight minutes.
Emma Reynolds (Wolverhampton North East) (Lab)
I, too, would like to applaud the hon. Member for Aberconwy (Guto Bebb) for delivering such a fantastic speech. I want to tell the House about a similar case in my constituency. It is the case of Guardian Care Homes, and it has already been mentioned by my right hon. Friend the Member for Wentworth and Dearne (John Healey). The company’s headquarters are in my constituency, but it employs about 900 staff in 30 care homes across the country. Small and medium-sized enterprises such as these need to be supported, rather than exploited.
I recently met members of the senior management at Guardian Care Homes, and I was shocked by what they told me. In 2007, they were sold two interest rate swap products, which were taken out against existing loans that had been taken out to improve the business model and to improve the care homes. They also said that the bank that sold them the products told them that this was a condition of getting the original loans, and that the products would protect them against interest rate rises. They were not informed of the dangers and financial implications of interest rate falls, however. According to Guardian Care Homes, the bank did not at any point during the sale of those swaps fulfil its obligation to explain that such costs could be incurred.
Guardian Care Homes also discovered that the swaps that had been sold to them vastly exceeded the original terms of the loans, by 10 and 15 years respectively, which made things incredibly difficult for the company in the long term. An independent study of this specific case recently described the bank’s behaviour as reckless, and a complaint has been made against the bank. It beggars belief that banks were requiring SMEs to take these products alongside loans, and I look forward to hearing the Minister’s response to these points today.
Even if the case involving the company in my constituency had been a one-off, it would have been extremely worrying, but there appear to be hundreds, if not thousands, of SMEs in the same situation. I am sure that we shall hear of cases in other right hon. and hon. Members’ constituencies later. Anecdotal evidence from SMEs suggests that, in many cases, swaps were bought without the companies having received any legal advice on their nature. The banks have a duty when selling financial products to ensure that the products and the risks involved are identified to businesses, and that there should be no coercion involved. I have written to the bank in question and requested that no punitive measures be taken against the company in my constituency while the complaint is ongoing.
Glyn Davies
The scale of this problem is far greater than we are being told. I have two examples in which the people I have spoken to are not going to take action. They have other clients and they are afraid to take action because they fear that they will be punished and that future relationships could be damaged. This is a huge problem, and we are seeing only part of it.
Emma Reynolds
I totally agree with the hon. Gentleman. I would very much like to hear from the Minister today whether the Government have a grasp of the scale of the problem, as it is certainly significant.
John Healey
Like my hon. Friend, I have written to the head of Barclays, which was responsible for selling the two swaps that have cost Guardian Care Homes at least an extra £12 million so far. Does my hon. Friend agree with the point being made on both sides of the House that such small companies are often afraid to complain, for fear that their loans will be pulled? Does she also agree that a moratorium is needed following complaints, and that firms should be able to make collective challenges for redress?
Emma Reynolds
I thank my right hon. Friend for making those points, and I hope that the Minister will be able to respond to them in due course, if not today.
There seems to be an extremely worrying level of coercion involved in the banks’ selling these products to small businesses without making sufficient information available. I have no doubt that what happened to the company in my own constituency has been replicated across the country. That is regrettable at a time of such difficult economic uncertainty when small businesses are the backbone of the British economy. We need to make sure that they are supported, not systematically exploited.
Tessa Munt
I have a quick point. One of my constituents took his local bank manager to Bristol to talk to Barclays about what had happened, yet that local bank manager did not understand it. If bank staff do not understand what is going on, how is a farmer who has so many things to consider every day meant to understand it?
Emma Reynolds
The trust between the bank and SMEs certainly seems to have been exploited, as the hon. Member for Aberconwy demonstrated, although one would have hoped that the banks would support small, viable businesses rather than exploit them.
Emma Reynolds
I shall not speak for much longer, as I know others want to contribute.
Let me end by asking the Minister a few specific questions. Will she reassure us that the Government are taking this issue seriously? What are the Government doing to ensure that SMEs struggling with these swap agreements are supported in the short term and will not have punitive measures imposed on them by the banks if they complain? What steps are the Government taking to ensure that this practice will not happen in future? Do they have any idea of the time scale for the Financial Services Authority report?
Mr Dominic Raab (Esher and Walton) (Con)
The hon. Lady is making her case in a typically powerful way. One of my constituents sought legal recourse against Barclays and was subsequently threatened with foreclosure of his loan, which would result in him being forced to sell his house, even though he was not in arrears, unless he signed a waiver removing his right to take legal action. Does the hon. Lady agree that such punitive action is utterly unconscionable?
Emma Reynolds
I think it is utterly disgusting that this is happening. We are told that our banks are too big to fail. They have taken advantage of significant Government intervention, yet now we find that they are not even supporting viable small businesses across the country. Something needs to be done about this urgently, so I look forward to hearing what the Minister has to say.
Caroline Nokes (Romsey and Southampton North) (Con)
I start by adding my congratulations to my hon. Friend the Member for Aberconwy (Guto Bebb) not only on securing today’s debate, but on the immense work he has done on this subject over the past few months.
I do not pretend that the mis-selling of interest rate swap agreements is a huge issue in my constituency; in fact, it has been raised by only a very small number of constituents who are local business owners. For the individuals affected, however, it is a massive issue, and as they contribute to the local economy, provide jobs for local people and use local services to assist with their businesses in the region, the knock-on effect has the potential to be very significant indeed.
It has been reported that RBS and Barclays, two of the UK’s biggest high street lenders to small business, have sold roughly 7,000 of these products between them. I can certainly add Lloyds bank to the list, as one of my constituents has had significant difficulties with that bank, which sold him this product several years ago.
Interest rate swap agreements are highly complex. As one of my constituents pointed out, these are the territory of corporate bankers, but have been sold to chip shop owners, to care home providers, as we have heard, and indeed to landlords. A constituent who approached me is the owner of a company that rents out a significant number of properties in Southampton, largely to the student market. He pointed out that, should his company fail, 1,000 individuals could be turfed out on to the streets of Southampton in the middle of their studies. What redress do these businesses have should it all go wrong?
Fear of the bank calling in the debt has kept many quiet. Micro-businesses have the option of going to the Financial Ombudsman Service, but that is possible only for those with small turnovers employing fewer than 10 people. My affected constituents are not eligible for assistance from the ombudsman, having too high a turnover and too many employees. So they have been forced to consider court action. However, as one of them said:
“how can you sue a bank you need to support you?”
In any case, the maximum redress the Financial Ombudsman Service can award is limited to £150,000, which is scant compensation when one of my constituents assures me that he has been charged an additional £6.1 million on a £3 million loan and he has already made payments into the interest rate swap agreement of over £1 million.
Damian Collins
Does my hon. Friend agree that this looks like old-fashioned extortion? Were the banks not simply trying to obtain the maximum possible rate, with the threat that rates might rise even higher unless people took advantage of the product?
Caroline Nokes
Let me reply to my hon. Friend by quoting a constituent who said to me, quite seriously, “I would have been better off going to Wonga.”
I welcome the FSA’s decision to review these products, and sincerely hope that the outcome will be assistance for the thousands of small businesses that have been affected. We should not forget that they are the lifeblood of the British economy. As that same constituent said, he is paying £3 million on top of the interest on an £8 million loan. The loan was for only three years, but the swap product was for 10. As he said, if he had not been stuck in the product he would have expanded more, employed more people, and paid more tax to the Exchequer. He also came out with a fantastic remark which really hit home in describing precisely the sort of small business man to whom these products have been sold. He said, “I left school with no qualifications. I learned my maths by scoring darts at my father’s pub. Yet suddenly I am involved in interest rate future, caps, collars, derivatives, curves, flows. All I wanted was a loan.”
My constituent is in no doubt about the fact that the loan to expand his business was dependent on the swap product. He has been quite clear about the position. His bank has been threatening him, telling him not to raise the matter with his Member of Parliament or to pursue the complaint via the courts. Land sales over which the bank has had a charge have been delayed until he makes his intentions regarding court action known to the bank. All the while, his business has been saddled with a swap product which, against the odds, he has managed to service. It has cost him more than £1 million over the last four years, and his business, family and employees have faced uncertainty.
I commend the work of my hon. Friend in pursuing this issue. I have no doubt that, as the motion says, prompt action is needed to ensure that small businesses do not continue to suffer as my constituents have. Their banks must not be allowed to threaten them.
Sandra Osborne (Ayr, Carrick and Cumnock) (Lab)
I, too, congratulate the hon. Member for Aberconwy (Guto Bebb) on securing the debate, and on the work that he has done in encouraging Members in all parts of the House to become involved in local cases.
My constituents do not want their names to be used because they are embarrassed by their position—although they have no need to be, because, as we have already heard today, they are not the only ones to find themselves in such a position. In November 2007, they were invited to a meeting in Glasgow by the Bank of Scotland. There was a fancy PowerPoint presentation, but it did not explain adequately the downside of the product that my constituents were being offered. Indeed, this was described by the bank’s relationship manager—which is a laugh in itself—as a win-win situation. The Herald, which has taken up the cause, described it rather more accurately as a “heads they win, tails you lose” situation.
The contract was struck verbally in a tape-recorded conversation. My constituents had had a 20-year relationship with the bank, and it seemed reasonable to rely on verbal trust and good will, because that had been their experience over all those years. They believed that they could take the bank’s word, and that the bank would follow through what had been agreed. They are shocked by the scale of the impropriety that they have witnessed, and we know that they are not alone in that view.
The bank’s behaviour in derivative selling has been reprehensible. It has bottled out, in the words of my constituents, because the rate swing does not suit it, and it has no appetite to proceed with what was agreed although no risk is posed to it. My constituents feel that the bank should be compelled to implement its selling commitments, or at least to reverse the arrangements as far as the point of sale to remove the premium/penalty element, which it is working both ways to suit itself with no regard for what it agreed with its customers. It seems confident that it can get away with that because the structuring of the arrangements relied on verbal trust and good will.
To add insult to injury, the bank has destroyed the tape of the conversation, wiping out the evidence that proves the verbal side of the bargain. When they requested the tapes, they were first told the bank had them, then they were told they had been lost in the wake of the bank merger, and finally they were told the tapes had been destroyed as the bank keeps them for only one year. How convenient for the bank. That has left my constituents even more vulnerable, however—and, frankly, conned. The bank refuses to discuss the matter with them in any meaningful way, denying a meeting with anyone with any genuine decision-making power. This has been ongoing for months, and they received a response to their complaint only yesterday. It was a glib and bland response; the bank did not engage in any meaningful way with what was a very detailed complaint.
Mr Clive Adamson of the Financial Services Authority told me its rules require the firm to investigate the complaint and respond to the consumer within eight weeks. The bank is therefore breaching FSA rules in respect of the complaints procedure, in addition to its conduct in the original sale.
So far, these are the only constituents who have contacted me on this matter, but I feel sure many more of them have been affected. The Herald estimates hundreds of struggling Scottish businesses have been caught up in this, with the 83%-taxpayer owned Royal Bank of Scotland alone costing thousands of UK companies £3 billion in extra bank payments. Its investigation shows that UK small businesses—which, as we all know, are crucial to our economic recovery—may have paid at least £10 billion in extra interest costs for IRSPs, and face extra liabilities of over £20 billion, potentially impacting on 80,000 jobs.
This is not a trivial matter. It has consequences for economic growth as well as for the individual businesses concerned. The financial ombudsman has rejected 66 complaints relating to the sale of IRSPs against RBS, apparently because the banks have a disclaimer saying that they do not give advice. How do we define “advice”, however? There was certainly hard-sell, weighted towards the positive aspects of deals, and it appears that the banks did not abide by their responsibility to ensure that any product they sell is appropriate, in the customer’s best interests and fully understood.
I realise that these are complex financial instruments that take time to investigate. However, action must be taken as soon as possible. It is undoubtedly true that regulation has in the past been insufficiently robust, so I welcome the creation of the Financial Conduct Authority, especially as it will focus on early intervention.
Previous mis-selling situations have gone on and on, and have caused a great deal of distress to the victims. We know from experience that the worry these issues causes can lead to serious health problems and some people die before justice is done.
We already know that the banks are not being transparent over this matter, and in some cases are being downright obstructive and unco-operative. We should not allow stalling tactics to impede putting in place a remedy. It is our responsibility as elected representatives to take this up immediately and encourage those who have been affected to come forward. Experience shows that a collective response is more effective in getting things sorted out.
It is not in the interests of the banks to have another long-running mis-selling scandal unfolding in a very public way. That will do nothing to restore public confidence. I understand that there is a six-year time bar for claims as well. Speed is of the essence, therefore, and I urge the Government to do all they can to make sure this situation is dealt with quickly.
Mr Deputy Speaker (Mr Lindsay Hoyle)
Order. Because so many Members wish to speak, the time limit on contributions will now fall to seven minutes.
Ian Swales (Redcar) (LD)
I congratulate my hon. Friend the Member for Aberconwy (Guto Bebb) on securing this important debate and on his excellent work on the matter under discussion.
I am a former finance director of a £1 billion global business, so I am well aware of the benefits of bank services and financial products such as exchange rate hedging, but I am shocked that they are deemed appropriate for small businesses. Like other Members, I have received complaints, and I shall highlight two of them.
Stephen Lilley is a constituent of mine and I believe he is present in the Gallery now—probably. He has given me permission to raise his case. He owns a hardware company in Marske-by-the-Sea, and in late 2006 he bought an interest swap covering 15 years. I have read the telephone transcripts of the conversations between HSBC and the directors of his company whereby the swap was agreed, and they show a clear example of mis-selling.
The directors made it clear that this was their first ever business venture. They wanted loans for a maximum of 15 years and hoped to have them paid off before the end of that period. During a complex discourse on the products, one statement made was:
“The reason we do this rather than doing say an…inclusive fixed rate is that in the future if you want to renegotiate or look at your lending margin, obviously you can’t do that if it’s included as part of the fixed rate”.
Those were apparently warm words. A number of other inappropriate comments were made in the conversation, and no mention was made of the fees being earned by the seller.
The climate is tough for the hardware shop and, in a move that can be described only as bullying, it is now being charged £500 a month for a “relationship manager” who provides no service. I fail to understand the logic of charging a struggling business an extra fee for struggling. Mr Lilley is not a young man and he now faces the real prospect of losing his business and his house, and, as I understand it, still being locked into a financial product that was badly sold. It is difficult for him to fight the bank on which he depends so heavily, and I see it as our responsibility to fight for people in his position.
I would also like to highlight the case of another of my constituents. The case of Mr Roy Myers has been mentioned on the BBC, and it has features common to many of the other cases we are hearing about. Roy owns the outstanding O’Grady’s hotel in Redcar and the Victoria pub in Saltburn. He is not naive; he has owned other pubs and hotels, and formerly had a responsible job in Her Majesty’s Revenue and Customs. He had negotiated a loan and was presented with a base rate swap agreement to sign on the very day when he simply expected to sign for the loan. No proper selling took place and he was given no options. It was never properly explained to him that he was locked in for 10 years and that there could be huge exit costs. Mr Myers had previously bought and sold businesses and paid off loans, and he never expected to be locked in like this because of a financial product.
Damian Collins
My hon. Friend mentions that the exit costs had not been properly explained. Does he share my concern about this issue, as my constituent is in a situation where what were called “negligible” exit costs ended up being worth more than 50% of the value of the loan?
Ian Swales
I thank my hon. Friend for that comment. He raises an important point that is true of many of the cases we are talking about today.
To be fair to the banks—not a phrase I expect to hear a lot in this debate—I have pointed out to Mr Lilley and Mr Myers that people in their position may have considered a fixed rate term product had it been offered at the time. So some of the loss figures we are now talking about may be a bit misleading, as they can be calculated only with hindsight and, in effect, constitute a one-way bet. Mr Lilley did in fact make small gains through rate hedging in the very early months of his contract, but these products remain toxic. Clear discussions should have taken place at the time as to whether the borrowers wanted variable or fixed rates.
Many small businesses such as those I am discussing are reluctant to challenge their lenders on these specific issues, as they do not want to put their bank facilities at risk. The Financial Ombudsman Service rarely upholds complaints, so their only recourse is a litigation process, which, obviously, serves only to incur more costs. Bankers seem to be working for themselves first and for their clients second. We heard just a few weeks ago about Goldman Sachs referring to its clients as “muppets”. This world of over-complicated products and dodgy selling has to stop.
A small business person should be able to rely on a bank to work in their interests, and not be seen as a sales channel to another part of its organisation. We should not expect business people to be personally expert in these kinds of products, nor should they have to pay separately for a financial adviser. We should also remember that accountants—and I am one—may not be allowed to give advice on these kinds of products unless they are also registered as financial advisers. So these products have clearly been designed to make money for the banks, which, by definition, means extracting more money from the small and medium-sized business sector. Some of these products are no more appropriate for small businesses than they would be for a household mortgage. Banks are surely worried about their reputations, and I have been very happy to name and shame HSBC today. Banks can recover their reputation by dealing constructively and generously with those affected, rather than engaging in continuous and expensive litigation. Special consideration should be given to those such as Mr Lilley, whose arrangement, made in November 2006, would almost certainly have breached the FSA suitability regulations introduced in November 2007. I agree with the hon. Member for Wolverhampton North East (Emma Reynolds) on the urgency of dealing with this problem, given that Mr Lilley’s arrangement is six years old in five months’ time.
I salute my constituents’ bravery in coming forward and hope that more will do so. I hope also that right hon. and hon. Members will support the recently announced FSA investigation. Finally, I hope that the Minister will act swiftly on the FSA’s recommendations and take another step to stop such predatory activity by banks in our vital SME sector.
Jonathan Edwards (Carmarthen East and Dinefwr) (PC)
Diolch, Mr Deputy Speaker, I am grateful to you for the opportunity to speak. As others have done, I congratulate the hon. Member for Aberconwy (Guto Bebb) on his hard work and on securing this debate on the Floor of the House.
Two constituents have visited my surgeries to highlight the problems they have endured as a result of these complex products. I shall not pretend to understand how they work, but the end result has been devastating for my constituents’ businesses. I am therefore glad to learn today that the FSA is to investigate and the Treasury Committee has interest rate swap products on its radar.
What strikes me in the cases brought to my attention is the aggressive manner in which the products were sold to businesses, often by bank managers who had been dealing with the businesses for some years. It is clear to me that local bank managers were under orders to sell the products, without themselves understanding what they were selling. Relationships with local businesses are built up over a number of years, so those businesses would have trusted their local bank manager. After the initial meetings, specialist teams were brought in to process the deal. The business men who came to see me in my surgery said that they felt under enormous pressure to sign up to the deal. They were told that only a small window of time was open to them to take what was deemed to be the opportunity of a lifetime.
I suspect that what we are seeing is the unholy mix of retail and investment banking. The job of a local bank manager is to pursue boring banking, but it is clear that, in this instance, they were selling products they would not normally be associated with, resulting in disastrous consequences for the businesses that entered into the deals.
The products were sold as offering protection in the event of interest rate rises. In the pre-crash years, that would have been a concern to any household or business that was taking out a large loan, so it is easy to understand why the products would be attractive to many businesses. In his recent statement on banking reform, the Financial Secretary to the Treasury equated them to a fixed rate mortgage, but my understanding of a fixed rate mortgage—I hope I am right, because I have one myself—is that the loan repayment stays constant for the duration of the loan term, which certainly is not the case with these swap products. As interest rates fell following the financial crash, businesses’ repayments started to increase enormously.
Sad to say, after two years in this place I have morphed into an arch-cynic. It seems to me a huge coincidence that heavy selling of interest rate swap products started in 2006 and 2007. In the case of Barclays, it is clear that the investment arm was pushing the products on the retail bankers. I am interested to know whether the FSA or the Treasury Committee, as their work proceeds, will be able to find out whether local bank managers were working to commission to identify clients who could be targeted to sign up to the products.
Financial planners are clever people. They would have been more aware than anyone that their own recklessness was about to end in the bust of all busts in 2008. They would surely have been aware that the obvious policy response of the central bank to such a crisis would be to ease monetary policy so that interest rates fell; and that the loan repayments of anybody signed up to these products would increase significantly. For the bank, of course, its customers’ misfortune would be good news, as the extra repayments would enable it to recapitalise after the crash. Even better, as has been the case with my constituents, with businesses going bust the banks would have assets to sell for even greater profit. In my view, this makes the complete separation of retail and investment banking an imperative. The recent commitment in the White Paper to creating separate accounting units will not be enough. If my reading of the White Paper is correct, these products are actually exempted.
My constituents had initially agreed to a normal standard loan agreement with the bank. They did not understand the implications of signing up to these products, especially the exit fees. As the Monetary Policy Committee lowered interest rates, their repayments reached an unsustainable level at nearly double what they had been under the normal standard loan arrangements. On the invitation of their local bank manager, they met officers from Barclays Capital. They were completely unaware that their business was being transferred from the local bank to the investment arm. Every time they queried the terms of their loan with Barclays, they were hit with enormous fees, which furthered their business’s spiralling financial problems. They inform me that the local bank manager was unable to deal with their queries, despite charging the fees.
From the evidence I have received from constituents on these products, it is clear that profitable businesses have been mis-sold products by their banks. I look forward to reading the findings of the FSA and the Treasury Committee. I will finish by saying that I associate myself completely with the proposals put forward by the hon. Member for Aberconwy.
Mark Garnier (Wyre Forest) (Con)
I, too, would like to add my name to the long list of people who will be congratulating my hon. Friend the Member for Aberconwy (Guto Bebb) on securing not only the debate, but a great deal of support from the outside world and a community that has been badly affected by these events.
I suspect that we are now at the beginning of what will amount to yet another large mis-selling scandal. I completely endorse the comment of my hon. Friend the Member for Aberconwy that the last thing we need is the spectacle of bus loads of ambulance-chasing lawyers charging across the countryside looking for businesses that have been mis-sold these products. It is incredibly important that we try to resolve the problem before members of the legal profession take advantage of it as an opportunity to feather their nests. These events come at a time when small businesses are struggling to make sales and win orders and contracts. It is a time when the banking system is adding yet another problem to small businesses. It is something we need to try to resolve.
These products, which really amount to caps and collars, should have been relatively straightforward products. They should not be dissimilar to a fixed rate mortgage. Rather than being like a fixed rate mortgage stating that the customer will pay 3% or 5% for five years, for example, they should have stated that the customer would pay between no less than 3% and no more than 8% over a five-year period or whatever. In that respect, such a product would have been a very straightforward cap and collar.
The problem is that the products were written before this period of super-low interest rates. Of course, interest rates have since fallen well below the collar, so the products are not actually cap and collar products; they are cap and noose products. Rather than holding the interest rate at the lower level, the noose has the effect of bouncing the interest rate up, thereby creating a higher rate than the customer would otherwise have expected and, in some cases, than they would have paid at the rate of interest in the first place.
The result is that these products are far more complex than they would normally have been. I declare a history of serving as a compliance officer for an FSA-regulated firm before being elected to this place. We used to spend a huge amount of time ensuring that we classified our clients properly to make sure that the products that were sold were aligned with the abilities. I fear that what is happening here is that we have a misalignment of customer classification. There are salesmen who are not experts in the products and do not know a huge amount about them, and they are selling them to customers who are clearly not experts in the products at all. Under these circumstances, a huge problem is brewing.
The Chair of the Treasury Committee mentioned the fact that in yesterday’s Sub-Committee meeting we met Adair Turner, who assured us that he would go to great lengths to investigate the whole process. Subsequently, I asked Martin Wheatley, the other witness and director of the FSA’s conduct business unit, whether the authority will be looking into the whole business of misclassifying clients as well as salesmen, and he said that without a shadow of doubt it will be specifically doing so, so I sincerely hope that we will reach a speedy resolution on that issue.
Ian Swales
The hon. Gentleman makes the powerful point that we do not expect small business owners to be experts, but that their accountants are not often experts, either. The people whom they deal with who will most often be experts are their bankers, so where does he feel that small business owners should get their independent financial advice from?
Mark Garnier
That is an incredibly important point. We live in an ever-increasingly complex world, and banks are competing against each other to come up with more and more sophisticated products that appear to be user-friendly, such as simple fixed rate mortgages. But as products become more complex there are more hidden elements in the contracts that people sign, such as in the one under discussion, whereby in a completely unforeseen period of super-low interest rates, business owners have to pay what amounts to a fee to buy themselves out of the contract’s residual value.
People then get into very complex calculations to try to understand what is going on, and the economic value of, and internal rate of return on, the contract. That is when things go way above the pay grade of most people, apart from those specialists sitting in dealing rooms in Canary Wharf who really understand such stuff. So, as part of the banking review and the Financial Services Bill that is passing through Parliament, we need to look very carefully at the classification of customers and of salespersons in order to get back to the fundamental point that we have to match products to a customer’s ability to deal with them.
George Eustice (Camborne and Redruth) (Con)
I have seen cases in which, through a process of legal discovery, a very clear e-mail trail has shown banks wilfully deciding not to explain the disadvantages of such products and, sometimes, a complete mismatch between the length of their loans and the length of the product they were selling. Does my hon. Friend agree that this is not just about people not understanding the situation, but about an intention in many cases by people not to inform customers because they wanted the business for their own bank?
Mark Garnier
My hon. Friend has almost been reading my speech, because I am about to finish on that point.
There are mismatches of terms and objectives, and on this issue I have a fundamental problem with the banks. A bank manager used to be a customer’s friend, whom they could turn to for financial advice, who would look after them and who, much more importantly, had their interests at heart. The problem is that banks are now simply salesmen looking for another product to sell, and it does not quite matter to them what holistic package is being sold as long as an individual product is.
I simply do not understand why the banks are failing to get the message that they are breathtakingly unpopular. They have really made a pig’s ear of our economy and financial system, so why do they continue to do so—in the face of the public opinion? It does not make any sense, so I make this appeal to the banks: please take a look at this issue. If you have created what should be a collar and cap arrangement, but it turns out to be a cap and noose arrangement, negotiate with your customer, help them out, stop feeding solicitors lots of money and try to resolve it in order to get back to a situation where bank managers are people we can trust.
Mike Freer (Finchley and Golders Green) (Con)
I join the chorus of people congratulating my hon. Friend the Member for Aberconwy (Guto Bebb) on securing this debate.
I have to confess that I am a former banker—[Interruption.] At Barclays bank. I am not sure whether becoming a politician was a move up or down; I might try estate agency next. I worked for Barclays bank in both the corporate and personal sectors, where I had responsibility for a regulated sales force, and I still hold my financial planning certificate and certificate in mortgage advice and practice, so I, like my hon. Friend, have a healthy scepticism when customers complain about bank products, because often when things go well it is put down to their good fortune, but when things go badly it is put down to mis-selling.
I had a fairly healthy dose of scepticism when my constituents came to see me to complain about the products under discussion, but I was genuinely shocked and appalled when I found out what had been done to them. I want to raise the case of a widow who had a small buy-to-let property portfolio. She was interested in reducing her mortgage outgoings, or at least protecting herself from increases in interest rates. Technically, she falls outside the scope of the motion, Mr Deputy Speaker, but I hope that you will give me some latitude. HSBC, the bank that I want to name specifically, classified that widow with a small property portfolio as a business customer.
I expected my constituent to have been sold a capped or fixed rate mortgage product; I did not expect a high-risk interest rate swap, which I would normally have seen in the mid-market or large corporate sectors of the bank. I wrote to HSBC asking it please to send me the documentation that proved that it had established the process of knowing the customer and undertaken the required risk assessment that is absolutely necessary to prove that she was a knowledgeable customer or that her background and experience in other products matched the risk profile of the product that it was selling her.
I also asked the bank to show me the documentation, known as a “reason why” letter, showing why the product that it sold my constituent was the most suitable, rather than other products such as a fixed rate mortgage—or a capped mortgage, had one been available. I was absolutely, completely blown away when I received a telephone transcript. The customer was not sold the product in a face-to-face meeting at which the options were explained; she was sold it over the phone.
I want to read out a couple of snippets from the transcript. The bank manager—or the clerk—said:
“It’s actually…a reducing loan so that implies that it will be coming down over time.”
A bank manager should know that there is not an implication that the loan is reducing, but that it actually is reducing. The manager went on to say,
“and that’s at 1.75 as well and it says that’s reducing as well. So have you got a certain time period on interest only…?”
The bank manager clearly had no knowledge of the customer. I turn to a particularly juicy bit; the brains on the Treasury Front Bench might be able to elucidate it, but I certainly could not make head or tail of it. The client had asked about the ability to repay early, and the bank clerk said:
“How it works in real life, if you were locked in at the rate of 5.35 and after five years you’ve managed to clear all your debt but we’ve still got five years left to run, so you pay Carl”—
the relationship director—
“off all the debt which is fine but then we’ve got an agreement with the Treasury at 5.35.”
That is the treasury division of the bank, not Her Majesty’s Treasury. The clerk went on:
“What happens then is we would look at what the five year rate was, the last five years that you’ve got remaining, and if that five year rate was at six per cent, well then your rate of 5.35 would look good if you like so we would pay you something if you were going to unravel the fixed rate deal. But the converse could also be true, that if the five year rate was down at four per cent and your rate was 5.35 you’d have to pay to unravel it effectively. So the thing with a fixed rate you only fix the debt that you…the core debt you really think you’re going to have…if you thought you’d clear it you wouldn’t want to lock yourself in”.
I hope that hon. Members understood that, but even with my somewhat limited banking background, I was completely bemused. Having read that, I saw that there was no evidence at all that the bank had done its due diligence. There was no questioning to see what my constituent’s attitude to risk was and no evidence of the reason that product was the most suitable in the armoury of the bank.
In my opinion, HSBC had simply circumvented all the regulations and requirements to know the customer by treating my constituent as a business customer, although even business customers would expect better than what my widow constituent received at the hands of HSBC. I see no evidence in the paperwork that my constituent’s circumstances matched the product that was sold. I am appalled that a product as complex as an interest rate swap was sold over the phone—let alone to a customer with no knowledge of financial markets at all.
I have no doubt that all HSBC’s public affairs teams will be crawling all over this debate. I therefore call on the bank to put my constituent back where she was before she entered into this arrangement, or at least to put her into a product that is most suitable for her.
The banks are currently brushing off complaints and telling customers to go to court, but few customers have the reserves to do so. How can a widow living in Hampstead Garden Suburb take on the world’s local bank? I support this excellent motion.
Mr Gary Streeter (South West Devon) (Con)
I, too, congratulate my hon. Friend the Member for Aberconwy (Guto Bebb) on his very powerful opening of this debate.
I wish to raise the specific case of London and Westcountry Estates Ltd, a company that owns several business parks all over the south-west and is now in administration as a direct result, I believe, of the Royal Bank of Scotland imposing on it an interest swap arrangement that was never right for its business. In brief, the background is as follows. For many years, London and Westcountry had been a premier customer of RBS. Its directors were encouraged by the bank to expand. For example, in 2006 RBS approached London and Westcountry and encouraged it to add to its portfolio a large business park in Bridgwater, and it lent the company 100% of the finance required.
In July 2008, after the banks had caused the credit crunch, RBS insisted that if the company wished to have its borrowing facility renewed, it must enter into a swap arrangement on the basis of an alleged imminent threat of rising interest rates. In fact, independent analysis has demonstrated that even in July 2008 bank insiders did not really believe that to be true; it was simply a way of selling a product to make a profit on which huge bonuses were paid.
Neil Parish (Tiverton and Honiton) (Con)
Is it not time for the Financial Services Authority to use its teeth to put a lot of this right? Banks have abused people’s trust and forced them into these deals as a way of creating higher interest rates for their customers, whereas we want lower interest rates.
Mr Streeter
My hon. Friend makes an important point. Thousands of people in this country, dozens of whom are in the Gallery, are looking to the FSA to put right some of the terrible wrongs that have been done in the past few years.
It turned out that the company of which I speak had been persuaded to enter into a swap arrangement for 10 years at a fixed rate of 6.4%. Although it had been told that the deal contained a break clause after three years, it transpired that that enabled only the bank to withdraw and not the customer. The company later learned that breaking the swap arrangement would incur a penalty that seemed to fluctuate on a daily basis but would total millions of pounds. This was not known to it at the time of signing the agreement. The way in which the swap was sold patently breached the terms of the financial regulations surrounding such transactions, as other hon. Members have said.
Interest rates subsequently plummeted in a way that nobody had forecast. We all know that if companies enter into a bad bargain, that is something they have to accept, but this was not just a bad bargain: the company was mis-sold the hedging product to further the interests of the bank, not the customer, and the detailed and complex terms were never fully explained to or understood by the directors of the company.
Jake Berry (Rossendale and Darwen) (Con)
The case that my hon. Friend describes is extremely similar to one that I am involved in, which also involves RBS. The company concerned has now gone into administration and the directors have exited. Does he agree that the long-term implication of a company becoming impaired when the bank has taken a haircut, as it were, is that when those involved try to set up businesses subsequently they are unable to borrow from the banks, with or without an interest rate swap, so there is a generational effect on business?
Mr Streeter
I completely agree that the effects of this mis-selling scandal will ripple down through the generations.
Interestingly, on several occasions London and Westcountry tried to ascertain how much profit the treasury branch of RBS made on entering into the swap arrangement, but that has never been disclosed. Once the recession began to bite and values of commercial properties plummeted, companies such as London and Westcountry began to struggle. A significant variation in the company’s loan-to-value calculation meant that it was in technical default of its loan agreement. It was worse placed than many companies because its interest rate was pegged at 6.4%. When the borrowing facilities fell to be renewed in 2011, RBS insisted that the interest rate would rise still further to 7.5%—a figure that it knew to be unsustainable. Sadly, the story does not end there.
In 2011, I became involved in trying to negotiate with RBS to find a solution to the difficulties. Not once throughout that time did the company default on any interest payments to the bank. Indeed, the company got its act together, reduced its overheads and increased its profitability. However, because of the loan-to-value challenges and because the RBS board had made a strategic decision to withdraw from commercial property, the London and Westcountry loan was bundled up with other troubled loans and sold by RBS to a new company, Isobel Assetco Ltd, 25% of which is owned by Blackstone, the US venture capital company, and 75% by RBS. That removed the potential bad debt from the RBS balance sheet. However, that £1.36 billion deal was done at a 30% discount, meaning that it was funded to the amount of £550 million by RBS or, indeed, by the taxpayer.
It seemed to us that RBS was dragging its feet in trying to resolve matters with London and Westcountry, while we were negotiating in good faith. The company was seeking to refinance its business with another bank, but RBS insisted on full repayment of the loans, plus the swap penalty of about £13 million. It simply would not budge. We subsequently found out why: that debt had been earmarked for the Blackstone transaction, and RBS had no interest in resolving it sensibly with London and Westcountry. RBS would not give London and Westcountry any discount, but it gave Blackstone a 30% discount. For a bank that is owned by the taxpayer, that is an utter disgrace.
It was like going from the frying pan into the fire. The hard-nosed American venture capitalists were not remotely interested in the company’s welfare, nor in its strategic importance to the south-west. They were interested only in making as much money as possible from the deal. Within weeks, despite my protestations and those of other Members of Parliament from the region, London and Westcountry was placed into a completely unnecessary administration. Its business parks are now being flogged off one by one at a fraction of their true worth.
We have a credit crisis triggered by the corporate greed of our investment banks; we have inappropriate swap arrangements sold to companies simply to make a fat bonus for bankers; and, in the case of London and Westcountry, we have an off-balance sheet sale to a US loan shark, funded by the taxpayer, resulting in the almost immediate administration of a successful company and asset stripping on a breathtaking scale.
I think that swap mis-selling will become as big a scandal as the mis-selling of payment protection insurance. We all know that banks must make a profit, but this was not about profit; it was about greed, pure and simple. I hope that the family behind London and Westcountry will successfully sue RBS for many millions of pounds. I will do all that I can to help them. As a taxpayer, I hope that we will be able to sell RBS one day, but the bank should certainly be making provision on its balance sheet for many millions of pounds in future claims for swap mis-selling.
I hope that the FSA investigation concludes that in the mis-selling of swaps, our banks have once again behaved disgracefully, and that they should compensate all their victims. That is the important thing. I hope that the individual bankers—and in the case of London and Westcountry, senior members of Blackstone—feel thoroughly ashamed of their disgraceful conduct and unbridled greed. I also hope that Ministers will hold the directors of state-owned banks to account and recognise that although the Government are keen to sell the banks, issues of justice and compensation must be dealt with first.
Karen Bradley (Staffordshire Moorlands) (Con)
I join colleagues in congratulating my hon. Friend the Member for Aberconwy (Guto Bebb) on securing this important debate. The many case studies that we have heard this afternoon are very familiar to us and I am sure that other colleagues have faced similar situations. I have, which is why I am taking part in this debate.
Before I come on to my constituent’s circumstances, it is probably worth setting out why I think that swap arrangements are not suitable to be sold to unsophisticated small business men. I do not mean that small business men are unsophisticated, but that they do not have an army of lawyers and accountants to advise them. At a basic level, a swap agreement is a gamble. Mr Deputy Speaker, the two of us could enter into a swap agreement this afternoon. I will happily buy you a cup of tea on the condition that you will buy me a cup of tea in three months’ time. I am gambling that a cup of tea will go up in price so that when you buy me the cup of tea, it will cost you more than the cup of tea that I buy you today. However, we could have a glut of tea and the cost could go down significantly. If so, I will have lost in that gamble. That is ultimately what a swap arrangement is.
Swaps can be very useful to businesses. As Wimbledon is coming up, let us take the example of a strawberry grower. The strawberry grower needs sun at the right time and could probably take out an insurance policy that the sun will shine, or they could find someone who thinks the sun will shine and is willing to take out a bet with them that it will. If the sun does not shine, and it rains, that individual would pay the strawberry grower for the rain and the strawberry grower would have money although he would have no strawberries to sell at Wimbledon. Alternatively, if the sun did shine he would have his strawberries to sell and he would pay the bet because the sun had shone. That is what swap arrangements are. Because they are a gamble, it has to be made extremely clear to individuals that that is what they are entering into. What I and colleagues have seen is that it has not been explained to people that they are taking a gamble.
That brings me to the case of my constituent, Mr Doug Wardle. Mr Wardle is a very successful local businessman who runs a number of businesses in my constituency. He has a very successful coach transport business and his name will be very familiar to people in Staffordshire Moorlands who see Wardle Transport vehicles going around. He also has Wardle Property and a number of other businesses. Back in 2006, he understandably wanted to expand his businesses and wanted a loan. He therefore went to his bank and entered into a loan arrangement whereby he borrowed £2.2 million, secured, he thought, against £3.1 million-worth of property. But there was a condition on this loan to expand his business, the travel part of which at one point employed 120 people. The condition was that he would enter into two interest rate swap arrangements—one each against two of his businesses. He was told that this would guarantee him a fixed interest rate and that he would be safe from interest rate fluctuations.
Mr Wardle was told that he would be paying 1.57% over base, which he thought was a very good deal. Even back in July 2006, that seemed like a very good deal. However, circumstances change and the financial climate changed. Unfortunately, by 2010, although his businesses were successful, Mr Wardle was having difficulty negotiating with his bank. He got to the point at which he had repaid his loan down to £1.25 million, so he had significantly reduced it, but the bank was not willing to move on the interest rate swap arrangements. That has caused Mr Wardle an incredible amount of stress and anguish, and he faces losing his home. He told me today that it has cost him £300,000 just to deal with the fees to the bank.
I have here the figures for the interest rate swap arrangements. The cost of buying out the swap arrangement is £180,000. Mr Wardle has been told that he will be paying 3.25% over three-month LIBOR—London interbank offered rate—not the 1.57% over base he thought he had, on a £1.25 million loan. I apologise for all the numbers. The amount he has to pay in interest a year is £111,752 with an additional £71,780 just to service the interest rate swap arrangement. I calculate that to be an interest rate per year of 14.7%. I do not think that when Mr Wardle entered into this arrangement he thought he was going to be paying 14.7% when the base rate is 0.5%. That is the problem. Mr Wardle is a very successful small business man. He has built up a number of highly successful businesses and he employs a lot of people, but how was he expected to understand that under this arrangement he could lose his home, having paid hundreds of thousands of pounds in fees, all because he was told by his bank, which he trusted, that he would be safe from interest rate fluctuations?
Caroline Lucas (Brighton, Pavilion) (Green)
I am almost reluctant to interrupt the hon. Lady because she is making such an eloquent case and is giving a very useful economics lesson at the same time. I have been contacted by a number of my constituents who have been badly burned by these toxic products. Does she agree that the experience she describes of the small business person in her constituency, Mr Wardle, is being repeated right across the country? Indeed, there will be many cases that we do not know about because many people are loth to speak out against their bank for fear that they will have problems with their business reputation. Does she agree that the issues we are discussing are probably the tip of the iceberg, which makes action even more urgent?
Karen Bradley
I absolutely agree with the hon. Lady. I called Mr Wardle this morning, before mentioning his name. I was happy to speak about him anonymously, because I understand that he is in a difficult position. Hon. Members in all parts of the House have expressed concerns about their constituents, and I agree that there must be many other cases of small business people who do not want to come forward and might not even realise that they could approach their MP. They do not want to raise the topic, although they are, frankly, being bullied by the banks in such situations.
I again congratulate my hon. Friend the Member for Aberconwy. I support the motion and I hope that we shall see some action very soon.
Peter Aldous (Waveney) (Con)
I am grateful to my hon. Friend the Member for Aberconwy (Guto Bebb) for raising this important issue and for campaigning on it with such determination.
I wish to draw attention to a case study concerning a medium-sized business in my constituency, setting out its experiences and seeking to draw some lessons from them. At this stage, the business wants to remain anonymous, as it is seeking to resolve the matter with its bank without recourse to legal action and it does not wish to prejudice those negotiations.
In 2005 the business entered an interest rate hedging transaction that ran for five years. At the outset, taking into account the immediate outlook for the economy and for interest rates, there was some logic to such an arrangement. In May 2008 the bank contacted the business, recommending and urging it to renew the arrangement for another five years, even though the agreement was not due to expire until 2010, more than two years away. During the ensuing three to four months, the customer continued to receive correspondence and telephone calls from the bank encouraging renewal.
At a meeting on 15 August 2008, the matter was discussed more fully. Subsequently, on 29 October, more than two months later, my constituent sent an e-mail to the bank advising it that he did not wish to renew the agreement. On 4 November he received a contract from the bank for signature. The bank told him it was confirmation of the verbal agreement reached on 15 August. Under pressure, not wishing to upset a business arrangement with his bank that had been in place for many years and at a time when the economic outlook was uncertain and the customer was keen to keep on good terms with the bank, he signed the agreement.
Earlier this year, my constituent decided, having sold a property, to bring the agreement to an end, so he contacted the bank to establish the cost of doing so. He was advised that that would cost more than £72,000. Up to today, the whole arrangement has cost him £162,000 in interest charges, which are predicted to have risen to £200,000—40% of the value of the loan—by the end of the arrangement in September 2015.
I have three observations on that chain of events. First, in whose interests was the bank acting? Its own or its customer’s? Why did it put pressure on him to renew the agreement when there was no need to do so for another two years, until 2010? In 2008, taking into account the outlook for interest rates and their likely future movements, there was no incentive or reason for the customer to rush to renew. It would have been much better to see what would happen over the following two years. Any independent adviser acting in the company’s best interest would have advised it to do that. In my view, the bank’s actions were dictated purely by its own self-interest rather than the best interests of its customer.
Secondly, the bank appears to have been incompetent at best, and at worst to have adopted underhand tactics in putting pressure on the customer to renew the agreement. Obviously what happened at the meeting on 15 August is subject to disagreement, but I personally accept my constituent’s version of events. Surely the best practice for the bank to have pursued would have been to take its customer through the arrangement step by step at that meeting and, if there was a verbal agreement, to produce a contract immediately and not two months later. A further meeting should have taken place, to go through the contract line by line, until the customer was fully aware of the implications before signing. The fact that the bank did not send the contract for two months, and only did so because it received an e-mail from its customer indicating that he did not wish to proceed, shows it in a very poor light.
Thirdly, there is a clear failure by the bank to provide full, independent and impartial advice that sets out the pros and cons of the transaction, in particular the cost of breaking early. If my constituent had been aware of all those factors, he would not have renewed the arrangement.
I am keen to give other hon. Members the opportunity to state their case, so I will conclude with two points. First, this whole matter needs to be addressed straightaway and given high priority by the FSA, and a framework should be put in place for cases to be investigated quickly with proven claims settled immediately. We do not want this scandal to drag on for years, because that could undermine the very businesses on which the economic recovery needs to be built.
Secondly, we need a banking system that is regulated and run in a way that prevents such conflicts of interest. In the case I have described, the bank was clearly acting in its own interest rather than that of its customer.
George Eustice
Does my hon. Friend agree that if banks encourage their customers to take up such products, they should not then be allowed to provide them through one of their subsidiary companies? That would be one way of creating a division.
Peter Aldous
I agree entirely with my hon. Friend—a dog cannot serve two masters. The two acts of advising a customer and selling a financial product must be completely separate and provided by organisations that are independent of each other and not related parties.
I support the motion and look forward to hearing from the Minister about the Government’s proposals for achieving a prompt resolution to yet another bank selling scandal.
Heather Wheeler (South Derbyshire) (Con)
I thank my hon. Friend the Member for Aberconwy (Guto Bebb) for securing this debate. The mis-selling of interest rates has affected people in many of our constituencies, including mine. One of my constituents, the owner of a geo-environmental company, wanted to take out a long-term fixed rate product. He wanted a portion of that loan to be paid off as and when he had the capital to spare, with no penalties. He also wanted a period of low interest or interest-only repayments to assist with cash flow as the company embarked on a further phase of expansion. To me, that appears pretty reasonable.
NatWest—a bank that has newly entered this debate—offered my constituent what he thought he was looking for at the time and a product that fulfilled his core requirements. He was given the option of fixing the interest rate by entering into an interest rate swap agreement with the investment banking arm of RBS—that wonderful bank that we have again heard about today. He was given a complicated document but believed that it represented a mechanism for fixing the interest rates. He was given a loan of 1% above base rate but his agreement had no expiry date and, in conjunction with the interest rate swap agreement, provided an effective fixed rate of 6.19% for 10 years.
In January 2009, when interest rates were falling and looked as if they would remain low, my constituent was referred to RBS global restructuring group. He inquired whether he could break the fixed rate interest agreement because it was costing his company dearly. It became apparent, however, that he could do so only if his company incurred a large financial penalty, which at the time totalled £175,000—equivalent to 19.4% of the original loan. A break clause was written into his agreement, but it could be acted on only by NatWest, and the punitive break fee meant it was totally impossible for my constituent to refinance with another bank.
In September 2010 as part of a review of my constituent’s loan, RBS increased the lending margin by 1% to 2%. That increased the interest rate to 7.19%, which made a mockery of the fixed rate that had been promised back in 2007. Interest rates were at an historic low of 0.5%, but my constituent was effectively denied the opportunity of taking advantage because he was locked into his IRSA.
Damian Collins
Does my hon. Friend agree that the high cost of such exit arrangements means that the banks are profiteering from small businesses that operate on tight margins, and does not in any way reflect the true cost of the refinancing to the bank?
Heather Wheeler
Absolutely; that scandal has emerged from today’s debate.
In January 2012, my constituent was informed that, because his debt to RBS included the fee for breaking the IRSA agreement, the cost of the loan had increased further to a mind-boggling 23.8% of the loan—approximately £215,000. He was also informed that, even if he sold his property to repay the loan in full, the IRSA would still exist, because it was a separate product from the original loan, and that the agreement would last for 10 years. That clearly was not fully explained to my constituent, who runs a small business with a healthy turnover of £2.5 million and employing 30 people. He is not a financial expert; he trusted his banks, both NatWest and RBS, to provide him with advice on a flexible fixed rate product, as he requested.
Mr David Burrowes (Enfield, Southgate) (Con)
My hon. Friend mentions trust. In everything we have heard today, has there not been a complete absence of trust? I think, not least, of a constituent of mine and their RBS relationship manager. Our relationships are based on trust and clear communication, but there was none of that. A simple loan developed into 20 swaps, which led to his losing £5 million, and this once-proud business man has now lost his business, which has broken him. He is a broken man, because of the unaccountable lack of trust in banks such as RBS.
Heather Wheeler
That is a salutary lesson The banks have lost the trust of the country, and, having listened to all the stories today, we now understand why. I feel great compassion for my hon. Friend’s constituent.
The matter was not explained to my constituent, who feels strongly that if the IRSA had been explained properly, he would have understood the true cost of breaking the agreement, and instead would have opted for a variable rate or approached an alternative lender. Where was the bank’s duty of care?
It is not only a lack of clarity that makes these agreements so concerning. For another constituent of mine, the complaint is who is selling these products. Back in 2006, he wanted a loan to develop a garden business. He approached his bank manager and was advised to take out an IRSA to guard against rising interest rates to protect his business. His bank manager admitted, however, that he did not fully understand them himself, so arranged for a specialist to come from NatWest to advise my constituent.
Neil Parish
Does my hon. Friend think that, in many cases, bank head offices put huge pressure on local managers to sell these products, which local managers actually have no knowledge about?
Heather Wheeler
That is becoming clearer and clearer as this debate goes on and as more and more constituents come out and tell us their stories.
Two advisers visited my constituent and went through all the advantages of an IRSA, but they did not mention any possible downsides or advise him to take specialist independent advice about the IRSA. He was also told that he could not get a loan if he did not take out the IRSA, giving my constituent very little choice over the matter and putting him under considerable pressure to accept. It has since become apparent to him that the so-called advisers were just sales people from the bank set on selling him this product, regardless of any consequence to himself or his business.
To my constituent’s knowledge, he having researched the matter, only two companies in the UK at the time were qualified to give advice, but both belonged to large City firms that would have been beyond his budget. My constituent is now left with a product that will have cost him £200,000 by the end of this year alone. I think we would agree that this is a considerable sum for a garden centre. He has had to make several redundancies, as well as personal sacrifices, to remain solvent, and his business is clearly feeling the ramifications; the turnover, which was £2.2 million at the time, has dropped, with the marketplace as it is, to below £2 million.
Furthermore, it is evident that banks are not taking claims of mis-selling seriously. Another constituent of mine, the owner of a motorcycle company, has had a long banking relationship with Lloyds. In fact, they used to use Lloyds to buy stock rather than property, and had loans from it for many, many years. It was important that they had this strong relationship with their bank, yet, since they fell into the trap of buying an IRSA, incurring huge costs, the bank appears to have little interest in dealing with the matter satisfactorily. In February, my constituent’s solicitor sent a letter of claim to Lloyds; it is now June and he is still waiting for a reply.
The situation needs investigating further. Constituents have written to me on this issue about three of the top banks—NatWest, RBS and Lloyds TSB—so the situation is far-reaching and needs to be dealt with. These heavyweight banks are effectively taking advantage of small business owners’ lack of financial expertise, bombarding them with the idea that they must enter into such agreements to get a loan. Indeed, this could be one of the biggest financial scandals to come to light since PPI. The agreements need to be made more transparent, so that people are fully aware that such products have significant break costs and are viewed as separate from the loans that the individuals concerned originally wanted to take out.
I urge the Minister to take steps wherever possible to support small and medium-sized enterprises and to ensure that where there is widespread misconduct against them, as in my constituency of South Derbyshire, appropriate action is taken to support them. I look forward to hearing her concluding remarks and hope that she will take my constituents’ cases on board.
Mr Mark Williams (Ceredigion) (LD)
I congratulate, as everybody else has, my hon. Friend the Member for Aberconwy (Guto Bebb) on securing this debate through the Backbench Business Committee and on the way in which he has led the campaign in this House and outside.
Two of my constituents who have been affected by this issue have said that when they got involved in the Bully-Banks campaign they took some comfort from the fact that many others were in the same position. As I have sat listening to the debate, what I have found most striking is that whatever part of the country or countries in the United Kingdom we come from, there has been an alarming commonality in the message we have presented to the House.
It would be dishonest of me to say that I understand every aspect of these products or the conduct of the banks. I have sat in constituents’ houses as they have poured out the details of what has happened to them, but that in itself has become an issue. If I, as a humble Back-Bench constituency MP, have struggled, why on earth should they be put in that position, especially when the people selling the products seem to have as confused a picture? The scale of the problem is alarming. I think we have seen only the tip of the iceberg and that, as this debate galvanises public opinion, we will hear about many more cases.
I want to reflect, as others have, on a constituency case. One business affected in my constituency is involved in refurbishing flats and letting properties out to students in the tourist and student town of Aberystwyth. My constituents secured a loan from the local bank, the agreement for which specified interest rate protection for a minimum of £800,000. However, at no point was that term clarified—at least, not until after the money had been borrowed. My constituents described to me how a Barclays Capital salesman was introduced to them as a “colleague” by their relationship manager at the bank, with whom they had built up a trusted relationship. We have heard about such cases repeatedly. My constituents already trusted their bank manager to do nothing detrimental to their business, but they did not realise, at the point of initiation, that they were getting involved in a sales process, and at no point was it presented to them as such.
Mr Cox
The hon. Gentleman is reciting experiences that are exactly replicated by those of constituents of mine. Indeed, more concerning is the fact that some of my constituents were invited to hotel receptions, for potentially hundreds of businesses to attend, where they received a sales approach like that of a timeshare salesman. My constituents were never told that the salesmen were earning profits from what they were selling and they were never given appropriate advice. Does he agree that the whole flavour of what is coming out of this debate is such that the Minister must now tell the House what prompt and immediate action and inquiry will be undertaken into what is increasingly a very grave scandal?
Mr Williams
I completely agree with my hon. and learned Friend: it is indeed a grave scandal. My constituents were not invited to hotels, but they had three meetings in their home. They also had several phone calls and were presented with the choice—if it could be called that—of three essentially similar complex derivative products, which, by their own admission, they struggled to understand and the risks of which were never explained. On many occasions my constituents asked whether they could get out before the end of the term, as they expected that they would need to sell property—an integral part of their business. They were advised to go for a longer term, as Barclays Capital would probably pay them to exit. Having borrowed the money and being unable to pay it all back at short notice if the bank decided to call in the loan, my constituents were presented with no options and felt as though they had no choice but to enter into the swap agreement, involving a rate swap for £750,000 over a 10-year period, at a rate of 5.67%.
The product was finally sold to my constituents in a trade call, although at no point were they told that a trade call had even commenced, and they certainly did not realise that it was legally binding. Understandably, they envisaged that, at some point, they would sign a contract to agree to an interest rate swap, but because they had already signed a customer agreement for private customers, the bank apparently had permission to sell the product to them in that way. Following the phone call, there was a faxed unofficial confirmation, which stated that legal papers would follow, but they did not arrive for two months.
The worry, as we have heard, is that such cases are being replicated across the country. My constituents understandably feel aggrieved that they were sold a product that was completely inappropriate for their business, in that it restricts them from selling property, despite the fact that flexibility to sell property within a few years is a main requirement for their business. They feel aggrieved because the arrangement ties them to a longer-term debt on which they cannot afford to make full capital payments, and because the risks were not property explained. They also feel aggrieved at the enormous breakage costs and at the fact that no explanation was offered of how those costs were calculated. The value of the swap is too high, and since capital payments began to be taken prematurely it has created severe cash flow problems for the business.
I have been in touch with the Federation of Small Businesses about this, although I did not need to do so, as it was already aware of the numbers of alarming cases elsewhere, many of which we have heard about in the debate. My constituents inform me that, in the years following the sales of swaps, banks have been guilty of compounding the problems of the SMEs that have them—alarmingly, in some cases particularly of those that have had the bravery to complain. That is acutely worrying.
There are many further points that need consideration, not least the issue of redress. The most powerful message that we can send out today is that the Financial Services Authority should speedily produce its report into the extent of the practices involved. At that point, I am sure that the House will wish to take the matter further. I think it was the hon. Member for Ayr, Carrick and Cumnock (Sandra Osborne) who mentioned the need for urgency, especially in the light of the six-year time constraint. My constituents face the prospect of having to take action by February next year. Theirs is a functioning business, and this House is supposed to support functioning businesses in these dire economic times. There is a phrase in Welsh, chwarae teg, which means “fair play”, and that is what is now needed.
Chris Heaton-Harris (Daventry) (Con)
Thank you for calling me to speak in the debate, Mr Deputy Speaker. I appreciate the opportunity as I did arrive late. I have come directly from the Defamation Bill Committee, but I hope that I shall not defame the banks too much as I talk about this scandal that they have been perpetrating. I shall test the Enoch Powell theory of public speaking today; if it is true, this is going to be a blinder of a speech.
I congratulate my hon. Friend the Member for Aberconwy (Guto Bebb) on securing the debate. The quality of all the contributions, raising constituency cases as I intend to do, has shown me that this scam, which has been taking place for a long time, is a massive one of ginormous scale that requires firm action as soon as possible. I also congratulate the Backbench Business Committee, which has yet again come up trumps in calling a debate that our constituents would like to hear, and that probably would not have been heard in normal circumstances under previous mandates.
I will try not to repeat the points that other Members have made, but I want to give some details about a couple of cases in my constituency. I also want to press the Minister on the matter and issue a call for action. My hon. Friend the Member for Staffordshire Moorlands (Karen Bradley) gave the House a description of the swaps. I was a small business man before I entered politics, and I can understand how those businesses were caught by this scam. The relationship that they have with their bank manager—and perhaps with their relationship manager, as we have heard—is all important, or it certainly was until these products started to be sold. It was a relationship based on friendship and trust. It was understood that products were being bought and used, but it was always felt that independent advice was being offered and that the bank would put you right all the time. That has been completely lost with the sale of these interest rate swap agreements. Something really bad happened back in 2003-04 when all this started to happen.
Two of my constituency cases are happy to be named and others are not. My constituency is full of vibrant small businesses. In one case, Mr Benyon has two companies: Oastlodge Ltd and Hallway Estates Ltd. Oastlodge had been with Lloyds bank for over 35 years, and Hallway for just over 10. In 2004, Oastlodge was taking out a large loan and was advised to take out a swap. This would have increased overall borrowing costs—the right questions were asked of the person trying to sell the product—so the company requested not to enter. In 2005, Lloyds came back with an offer for a swap where the bank would halve interest margins on all existing loans. The offer was in writing. A business man confronted with having interest loan costs halved is likely to be interested in taking up the offer. In 2006, the company was sold a further swap, on the basis of reducing the overall cost of borrowing and saving even more money.
In 2008, Oastlodge and Hallway were offered several more swaps, and one in particular was highlighted. All the benefits were listed in great detail, but none of the downsides; neither was any information provided on potential breakdown costs. It was also explained in writing that
“there would be no risk to borrowing costs trailing higher”.
The previous swap had been for 10 years; the new ones were for 20 years—far longer than the duration of the loans at the time. The swap was signed up to, with the companies knowing full well—or, at least, thinking they did—that there was a ceiling on the borrowing costs.
In 2009, the companies were informed, when their loans were up for renewal, that their lending margin was going to double. They complained that the bank was reneging on a deal, but were told that there was nothing formally agreed. The bank could, however, sell them another swap to reduce borrowing costs until 2013. They now had no choice but to enter the new swap at a cost of about £200,000 a year.
While they were making their complaint, the companies discovered that the swap was not a relationship with the bank they thought they were dealing with, as it had been sold on in the financial markets. Other Members have highlighted this. The companies took legal and financial advice but, despite having a good case, were wary of risking the extra costs of taking the bank to court. In fact, my hon. Friend the Member for Aberconwy is their last best hope, and I suspect that that is so in many other cases, too.
George Eustice
One problem many businesses have is that when they decide they want to take legal action against a bank, they often find that many of the law firms that might appear to be the natural ones to turn to have effectively been bought off by the banks through things called permanent retainers and through the approved panels. Some of the best litigators in the country are thus often barred from acting against the banks.
Chris Heaton-Harris
I did not know that, and I thank my hon. Friend for raising it.
Lloyds bank has denied any wrongdoing whatever, claiming that the margin reduction was not necessary for the duration of the swap, and it hides behind the small print that says, as we heard earlier, that any advice given was not, in fact, “advice”.
Matthew Hancock (West Suffolk) (Con)
Does my hon. Friend agree that his constituency case is like that of many across the country in that the question of duration is the problem? A very successful business in my constituency was offered a loan of five years and a swap of 10 years; the mismatch between the two time periods is likely to cause a huge jump in costs as the loan runs out in a few months’ time, with five further years of swap, which the company did not need, remaining to match off the initial loan.
Chris Heaton-Harris
My hon. Friend is right. My constituents are in exactly the same position.
There is, at least, provision for my constituents to break the swap, but doing so would cost them a cool £1 million. They have complained to the financial services ombudsman, asking for compensation and asking for the original swap margin to be reinstated at its 2006 level or, alternatively, for the swap to be torn up so that they can keep their existing margin. They have been advised that the 2008 swap was mis-sold and inappropriate for their business, and they are discussing the details of that with the financial services ombudsman.
In 2008 Lloyds sold another of my constituents, Phillip Derbyshire, an enhanced collar—or, as it was described by my hon. Friend the Member for Wyre Forest (Mark Garnier), an enhanced noose. It has cost him £1.275 million, about 75% of his pension pool. He is 64 years old. Both the FSO and the Financial Services Authority are unable to assist him, and Lloyds claims that there has been no wrongdoing. My constituent claims that the circumstances of sale were
“tantamount to a sting operation under duress”,
and I completely believe him.
Richard Fuller (Bedford) (Con)
Does not the abuse of trust that my hon. Friend is describing give rise to another fear—that the FSA will roll over and talk about changing the rules while missing the critical issue of compensation for people who have suffered, which is what the House wants to see?
Chris Heaton-Harris
I entirely concur with my hon. Friend, and I shall end my speech by making the same point.
Lloyds repeatedly referred to the product that it was selling to my constituent as “a protection”, both orally and in writing. The downsides were simply not explained. My constituent was told that if he sold his business or died, the product would be an asset. All that was independently witnessed, because he is quite a savvy man. He was told by an independent banking consultant that the product was totally inappropriate to his needs, and that it was beyond the level of his financial sophistication to understand it. He is now looking into whether he can sue Lloyds.
Does the Minister agree that it is wrong for banks to make loans contingent on the purchase of other financial products such as IRSAs? Where are we with this issue now? What conclusion will be reached from the debate? We have seen the motion, and we have heard from many Members in all parts of the House who want to see forthright action by the Treasury and the FSA, and compensation for their constituents. Can the FSA be persuaded to move faster? As for compensation, there is an absolute need for it.
This is a scandal and a scam. It is finished now, but we need to ensure that it never happens again.
Mr Marcus Jones (Nuneaton) (Con)
It is a pleasure to follow my hon. Friend the Member for Daventry (Chris Heaton-Harris), and I congratulate my hon. Friend the Member for Aberconwy (Guto Bebb) on securing what is, for many of our constituents, a vital debate.
In the short time available to me, I want to explore the methods used by one bank to sell an interest rate swap product to a business in my constituency, explain the disadvantage that that subsequently caused to the business, and discuss what more can be done to help businesses that feel that such products have been mis-sold to them. I have been asked by the business involved not to divulge either its name or that of the bank, because the business fears that that would prejudice its position in relation to the bank.
Anecdotal evidence seems to indicate that the business was persuaded and cajoled into taking an interest rate swap product by high-pressure sales tactics. There was what could almost be described as a pincer movement between the small businesses relationship manager and the capital arm of the bank, which clearly set out to persuade the business that converting a loan to an interest rate swap product was absolutely the right thing to do. The relationship manager told the business that it was the best option, because interest rates would go in only one direction: up.
Members have mentioned fixed rates. The business feels that the product was sold to it in a similar way to the way in which a capped-rate mortgage is sold. However, when my constituents asked what would happen if interest rates fell, the question was not answered with a proper explanation and a warning. The employees of the bank simply said that there was no prospect or possibility of a reduction in interest rates, given their historic low at that point.
The capital arm of the bank pitched the product in what I can only describe as a Del Boy-esque fashion—as if Del Boy was selling saucepans to a housewife at the market. The capital arm contacted the business and persuaded it that the product in question was fantastic and was usually available only to far larger businesses, but that as this business was such a good customer of the bank it could have the same deal. The capital arm then continually contacted the business—it did so almost daily—to explain that day’s special interest rate and to tell it the time was now or never to pick up that special deal. To compound the situation, while this was never discussed, the business was under a lot of added pressure and believed it needed to keep the bank sweet. It was the time of the onset of the credit crunch and the business feared the other accounts and facilities it had with the bank would not be serviced if it did not take the bank’s advice.
Mark Menzies (Fylde) (Con)
My hon. Friend eloquently describes the same situation as that suffered by hoteliers, shopkeepers and restaurateurs in Fylde and Lytham St Annes. These are not naïve people, but they believed what they were told by their bank relationship manager and they were misled. We must urgently address this issue.
Mr Jones
My hon. Friend is absolutely right. We are talking here about small businesses that do not have experience of these banking products, and they should never have been led down this route without very strong warnings explaining what they were taking on. The business in my constituency that I have mentioned feels precisely that way, and the consequence of all this is that it is now paying double what it would have paid if it had kept to the more traditional lending arrangements it initially had with the bank.
This business estimates that it has spent between £150,000 and £200,000 in extra fees and extra interest—on the friendly advice of its bank. As a direct result of the interest swap loan, it has struggled to repay its loan as interest rates have fallen. The bank said there was nothing it could do to help. Eventually, after being contacted on a number of occasions, the bank finally allowed the business to convert to interest-only payments, but that comes with its own consequence, because the capital is not repaid, leaving a legacy that eventually has to be dealt with.
It can be argued that these are commercial business-to-business relationships, and that any small business should have taken further advice, and that would be my usual view. However, often these businesses were put under great pressure by their bank, which was aggressively selling the product in question and advising its customer to take it, and there was usually a wider business relationship as well, involving other banking facilities. There appears to me to be a clear conflict of interest, therefore. There is also the question of how suitable these products are for small businesses.
What action can businesses that find themselves in this situation take? As with any dispute of this nature, they can go to law, but as has been pointed out by many colleagues, the chances are that a business in this situation will not have the money needed up front to be able to take up a case against a bank, which is likely to be a huge multinational organisation. Also, as my hon. Friend the Member for Camborne and Redruth (George Eustice) rightly pointed out, there might be another conflict of interests in that some of the lawyers who might take on such litigation cases will have professional relationships with the bigger banks. That is also unhelpful.
George Freeman (Mid Norfolk) (Con)
I am grateful to my hon. Friend for giving way, not least as I now have the opportunity to add my name to those of the other Members supporting my hon. Friend the Member for Aberconwy (Guto Bebb) in raising this important issue. My hon. Friend has also given me the opportunity to highlight the case of Adcocks of Watton, a venerable old business in my constituency which has suffered terribly and whose case has recently featured on the BBC. Does he agree that whatever the whys and wherefores and the legal findings on the small print in the contracts, these wider cases are symptomatic of a deeper problem in our banking sector? The banks seem increasingly to have decided, in rural areas in particular, to make their money from charges and selling more glamorous derivative products, at the expense of backing small businesses and supporting growth on the high street, which is what we really want our traditional banking sector to do.
Mr Jones
I thank my hon. Friend for his comments. He is absolutely right to say that these products were not suitable for the type of business that he mentioned. As chair of the all-party group on town centres, I take a great interest in town centres and high streets. At this difficult time for them, the type of business that he mentioned can do without this type of additional pressure.
In the short time available to me, I wish to return to the recourse that businesses have and talk a little about the ombudsman and the Financial Services Authority route. Whether businesses take the ombudsman route, the FSA route or the route of going to law, one of the biggest problems small businesses face is that at the outset they have to divulge all the information about the particular case. They particularly have to divulge the information about the bank and a lot of information has to be gathered from the bank. As we have heard from hon. Members from across the Chamber, many small businesses feel that they are not in a position to do that because they feel that they will be prejudiced by that bank in relation to other loans and borrowing facilities that they hold with it. They find it difficult to move these things to other banks, because they may, for example, be in negative equity with property because of the economic situation.
So I wish to ask the Economic Secretary to the Treasury a number of questions. First, will she press the banks to give a clear and unambiguous commitment not to treat any complainant unfairly in other dealings between a business and a bank? Secondly, what steps will she take to persuade the banks to do the right thing at this point and support those small businesses that have been caught out by these products that have been inappropriately sold to them by the banks? Thirdly, will she write to the FSA to set out the concern of the House, to ask the FSA to expedite the work it is undertaking on this matter, to stress the importance of a thorough investigation with teeth and to ask it to look at the criteria that the ombudsman can use, because they are narrow at the moment for small businesses and the level of compensation is very low? I fear that if we do not do that at this point not only will the small businesses be disadvantaged, but we will also risk similar mis-selling scandals occurring in the future if the banks are not brought to account.
Chris Leslie (Nottingham East) (Lab/Co-op)
I congratulate the hon. Member for Nuneaton (Mr Jones) on the speech he just gave. We have heard some fine speeches from Members from across the Chamber, but I wish to pay tribute to the hon. Member for Aberconwy (Guto Bebb) for his speech, for which he definitely deserved the applause he received. This is one of those cross-party issues that shows that from time to time the House of Commons can come together to try its best to send a strong message to the Government and the regulators to try to get some action, in particular from the banks.
My hon. Friend the Member for Chesterfield (Toby Perkins) and I met people from more than 50 small and medium-sized enterprises a couple of weeks ago. We heard harrowing stories and felt that sense of injustice that so many hon. Members have expressed in their contributions. We heard about bankruptcies and the job losses that can follow, and about the human cost and the misery that have ensued. We are dealing with incredibly serious questions, and we deserve nothing less than a swift and serious response from the Government and from the financial services authorities.
Martin Horwood (Cheltenham) (LD)
I very much welcome the hon. Gentleman’s remarks and echo the sentiments of many hon. Members. I just wish to say that there may be more Members, like me, who have been prevented from speaking in detail by the sub judice rule today and that concern about this issue may be even more widespread than this debate has revealed so far.
Chris Leslie
That is a very good point, and, reading between the lines, we can see exactly the strength of feeling that the hon. Gentleman expresses.
Helen Goodman (Bishop Auckland) (Lab)
I do not know who my hon. Friend met, but I wonder whether the stories he heard were like that of my constituent Mr Les Wood. He borrowed £9,000 from HSBC and has since repaid £133,000 to HSBC—a totally disproportionate sum.
Chris Leslie
That story has been repeated time and again. For those of us who might have come across the problems in anecdotes related to us in our surgeries, today’s debate has revealed that they were not one-off cases; there was a pattern.
Let us remind ourselves of what the banks have been doing. They saw an opportunity in new firms ambitious to succeed and to grow, and in firms in need of loans to invest in new plant and processes. The banks sought to attach complex hedging products to the loans, allegedly giving the impression that that was a requirement of the loan—we have heard how many times businesses were told it was part of the package deal—and that credit could not be obtained otherwise. Small firms were told that the products were just insurance policies: the upside protections were emphasised, but the downside risks were hardly mentioned. Then, when the course of the economy took a turn—we will not go into that today—leading to interest rates plummeting over the past couple of years, the firms were forced to pick up the punitive costs of the downside risks of the hedges. The banks have profited significantly at the expense of small firms.
Today we have heard revelation after revelation of breathtaking abuse of the small firms that have been caught out—firms up and down the country, from chip shops to child care centres, builders to bed and breakfasts. I pay tribute to The Daily Telegraph business section, which has pursued this issue tenaciously. It highlighted the case of Adcock and Sons, a Norfolk electrical retailer that took out an interest rate swap on a £970,000 loan. The product, known as an asymmetric leverage collar, cost the business £2 for every £1 of benefit it offered. As The Daily Telegraph reported, what really rubbed salt into the wound was that the arrangement resulted in Barclays Capital profiting by £100,000.
This is not just a story of product asymmetry; it has many other facets. For example, as we have heard today, agreements are too often not made in parallel with the line of credit, but extend way beyond the end of the loan. Guardian Care Homes has been mentioned: it had two swaps whose term exceeded the loan by 10 and 15 years respectively—totally ridiculous. We have also heard about the punitive costs of servicing the swaps, and the back-breaking breakage fees—sometimes 50% of the total loan cost, averaging, we are told, about £1 million just to reverse out of the agreements.
Questions have been asked today about the competence of those selling these specialist products and the commissions that skewed their judgment. Banks were, at best, taking advantage of what we in the trade know as “information asymmetry”—in other words, unsuspecting customers and cunning banks—but at worst their behaviour was extortionate. Court action to try to obtain a remedy has not been easy: we have heard about gagging clauses in out-of-court settlements, where they have been made. Those problems are compounded by the fact that the clock is ticking on people’s right to complain and pursue redress.
In recent months, Opposition Members have done their best to raise these issues. In the Financial Services Public Bill Committee, we tabled amendments that would have given small firms better access via the FSA to the super-complaints power and stronger collective proceedings powers. The Financial Secretary, who is not here today—I think he is at a conference in Turkey—rejected the amendments, saying that he did not want to comment directly on interest rate hedges issues as they were a “matter for the FSA”. That response was not substantive, and I hope that the Economic Secretary can rise to the occasion today and respond seriously to the heartfelt concerns that have been raised in the debate.
The Government rejected other amendments we tabled to the Financial Services Bill on the need for a fiduciary duty of care for customers, both individuals and SMEs, when they are taking out these products. The Chancellor has rejected Vickers’ advice—it appears that the banking reform Bill will have nothing to improve customer protection. Vickers, of course, highlighted that in the ring-fenced retail arrangements we should be very careful about interest rate swaps, hedging and derivative products moving into what might be called the normal vanilla nature of banking. That is something all hon. Members might want to spend a little time considering when scrutinising the proposals set out in the White Paper that the Treasury has just produced.
I met FSA representatives yesterday and we talked about its supervisory investigation. I am told that it has been looking at a random sample of 50 or so cases in each of the banks. They have been listening to the tapes of some of the sales calls that took place and looking back at them. I am told that its target is to announce some action by the end of this month, which I sincerely hope it will do. Having listened to the debate and heard the strength of feeling on these questions, it occurs to me that any small businesses that have not yet complained or raised these issues with the FSA must do so as soon as possible. The FSA’s hotline number is 0845 606 1234. I hope that those firms will ring and let the FSA know, because it is our best hope at this juncture.
I am looking for four particular assurances from the Minister today at the very least. First, she and the regulators need to extract from the banks an assurance that no customer who complains will be treated adversely because of the complaint. There is potential for a sense of victimisation, and we need absolutely to get out of that space. Secondly, we should have a moratorium on foreclosures while the complaints of the customer concerned are being considered and their case is under review, because firms are going under and going into liquidation and bankruptcy every single day. We have to ensure that some backstop is put on the process.
Thirdly, we need agreement by the banks that customers who were sold hedges for longer than the term of the loan should have the right to cancel and move out of the breakage fee arrangement. Those are the minimum criteria we need. Also, banks should extend the statute of limitations, the sense that complaints have to be investigated within a particular time scale. The banks should show more grace in these circumstances.
Small businesses are the lifeblood of the British economy. They account for 48% of private sector turnover, employ 14 million people, have a turnover of £1.5 trillion, and of course they make up 99% of UK enterprises. They deserve to be treated better by our banks and to be supported more effectively by the Government. They certainly deserve the full backing of both sides of the House for an urgent solution to this serious problem.
The Economic Secretary to the Treasury (Miss Chloe Smith)
We have had a very fine debate this afternoon and I congratulate my hon. Friend the Member for Aberconwy (Guto Bebb) on securing it and moving the motion. He will be pleased to learn that I will leave him a few minutes at the end so that he can complete the job. My hon. Friend the Financial Secretary, who is in Istanbul on Government business, is disappointed to miss the debate, but I shall endeavour to do the best job I can in his stead.
I have listened to and considered carefully what hon. Members have said today and will try to respond to as many Back-Bench points as possible. I suggest that it is not really a day for a great political answer. Instead, I want to talk about some of the detail of what is happening in this instance. To name but a few of the contributions that have been made, we heard a passionate contribution from the hon. Member for Wolverhampton North East (Emma Reynolds) and we heard from my hon. Friend the Member for Staffordshire Moorlands (Karen Bradley), who explained the issue in terms of tea and strawberries—I wondered whether to intervene to ask her what would happen if someone liked tea and strawberries together, but today is a day for much more serious material.
My hon. Friends the Members for Finchley and Golders Green (Mike Freer), for South Derbyshire (Heather Wheeler) and for Ceredigion (Mr Williams) really underlined one of the main points. Through no fault of their own very fine brains, even they found some of these issues hard to comprehend in their constituency surgeries. I think that that is because of some of the complexity of the products available. Perhaps my hon. Friend the Member for Staffordshire Moorlands could explain it to them with the aid of tea to help it all go down well.
The House needs to be reassured that the Government have taken this issue extremely seriously. The FSA, as the independent regulator, is responsible for determining the appropriate regulatory response, but today I can update the House on what the FSA is doing and when it will be doing it by, and I will respond to a few further points that have been made today.
To return to the products, however, I should note that these interest rate products are designed to reduce a business’s vulnerability—in theory—to interest rate fluctuations, but they can be very complex products, ranging from relatively simple interest rate caps to interest rate swaps and, then, to both simple and structured collars. The bulk of those products were sold, alongside loans, to businesses between 2005 and 2008, the trouble being that since then interest rates have been very much lower and businesses that took out such products have found themselves paying much higher rates than the base rate. A growing number of small and medium-sized enterprises have come forward to claim that they have been mis-sold such products.
Another real telling point from today’s debate was the number of times that hon. Members repeated the call for anonymity on behalf of their constituents, and that really brings home the seriousness with which we need to take the subject and, of course, the serious consequences that businesses are facing.
Since the issue first came to light, the Government have been working closely with the FSA and have assisted it wherever possible. The authority, as some Members will know, began its initial survey of the issue back in March, and that initial work pointed to concerns, certainly about the suitability of some of these products for SMEs, and about some of the sales practices involved.
There was evidence in some cases of over-hedging—of the products lasting longer than the duration of the loan they were protecting, to which hon. Members have referred in examples; and in some cases there seemed to be incentives for staff to sell more of the more complex products.
As a result, the FSA agreed to carry out a more in-depth review into alleged mis-selling. That is now well under way, and I shall make the House aware of what I think is a positive point: the FSA will be able to report its findings at the end of this month—at the end of June. I wholeheartedly welcome the review, and the Government are awaiting its conclusions, but I think that hon. Members will welcome those results coming forth at the end of June—perhaps earlier than some had expected, given their comments today.
In taking forward the review, the FSA has gathered further information from banks and carried out more than 100 interviews with small businesses in order to establish for its findings the robust fact base that one would expect. It does require detailed analysis, and I will set out in a little more detail the issues that the FSA’s review is likely to cover.
Under the banking conduct of business sourcebook rules, banks simply cannot sell products that are not appropriate for a customer without warning them, so the FSA, in addition to exploring further the questions on over-hedging and on sales incentives which its initial work revealed, is seeking to establish whether the sales of those products were appropriate for small businesses, as they might not have understood how they would operate. I acknowledge the point, made by some hon. Members today, that we need to recognise, in their words, that some business customers are not sophisticated—and that is absolutely right. If such a situation has occurred, it is a concern.
The Financial Services and Markets Act 2000 already requires the FSA to have regard to the different degrees of risk in different investment, and to the differing degree of experience and expertise that consumers have. We are adding to that in the Financial Services Bill, and that is very important, as hon. Members have said today.
The FSA’s review is also going to establish a clear understanding of banks’ sales practices, including whether they were advised sales or non-advised sales, and whether the downside risks were clearly communicated orally as well as on paper.
The review will also look at break costs, which several businesses suggest were not disclosed to them when they purchased the product, and it will also attempt to establish whether the banks told customers explicitly or otherwise that the hedging product was a requirement of the loan, an issue that I know many hon. Members have raised today.
In answer to some of the key points that have been made today, the desire for banks not to treat adversely or to punish those who make complaints has come up repeatedly, and it is one of the hard-hitting points that will stay in the mind from today’s debate. I share hon. Members’ serious concerns about that; banks should not be able to treat customers unfairly in that way. The examples that hon. Members have been giving do not seem consistent with the principle of treating customers fairly. The Government want to be assured that those making complaints will not be punished as a consequence. When the FSA produces its report, I am sure that we will be able to go into more detail with the evidence in front of us.
Damian Collins
If the FSA report finds that the products may have been mis-sold, will there at least be the chance for businesses to break out of the agreements or for there to be a moratorium on payments while individual compensation claims are analysed?
Miss Smith
I hear that point, which has been made a number of times today. It is not my place to pre-empt the findings, not least because the FSA is an independent regulator and because the results and evidence have not yet come together.
However, I assure the House that not only will my hon. Friend the Financial Secretary be listening very carefully to that request, but the FSA already has a powerful toolkit to deal effectively with any potential mis-selling. That can include powers to establish industry-wide or single-firm redress schemes, which comes from the Financial Services and Markets Act 2000; to refer the banks to enforcement; to use supervisory measures; and to obtain redress for consumers through the use of restitution powers.
I want to leave enough time for my hon. Friend the Member for Aberconwy to return to this debate. I come back to the point about the SMEs that have been affected; that is the powerful point that has come out today. Hon. Members have spoken deeply about the difficulties faced by small businesses in their constituencies. The Government are helping small businesses in difficulty in other ways: there are HMRC’s “time to pay” arrangements and advice and information through the Business Link website and other far larger points throughout the economy.
I echo the words of the shadow Minister, the hon. Member for Wolverhampton North East. I encourage any business that believes it was mis-sold one of the products to contact the FSA if it has not already done so, and to give as much information as possible about its case. The report is coming back at the end of June, so I advise such businesses to be swift. That will help the FSA to continue to develop its understanding.
The Government are fully aware of the issue. I am grateful to hon. Members present for putting flesh on the bones. I hope that I have provided the House with some reassurance on what the FSA is doing, the range of the FSA’s powers and the closeness with which the Government have worked with the FSA. We must allow the review to run its course, but we should all look forward to its findings.
Guto Bebb
I thank the Minister for her update on the position of the FSA, which has moved significantly from its initial responses to my communications early this year; I respect the fact that it is moving in the right direction. However, it should be aware that Members on both sides will be looking carefully at its comments at the end of the month.
I also concur with the comments of the shadow Minister, who stated that the House can, at times, perform much better than it does at PMQs. This debate has been extremely positive. What has really pleased me is that contributions came from Members representing five political parties. There have been 14 excellent speeches and numerous contributions from Back Benchers stating that the issue is a concern across the country.
The issue has lain dormant for too long, and there is a real concern about the attitude of the banks towards the businesses. Even today, Members have said that they cannot name individual businesses because those businesses are scared of the banks’ taking action against them. That is a real concern. We need to move forward and to have transparency and openness. We need to identify the scale of the problem and the FSA needs to take a decision showing that as a regulator it has teeth and it will have an effect on the situation. I commend my motion to the House.
Question put and agreed to.
Resolved,
That this House has considered the matter of the mis-selling of interest rate swap products to small and medium-sized businesses; notes the work undertaken by the Financial Services Authority in this respect; and calls for a prompt resolution of the matter.