Interest Rate Swap Products

Guto Bebb Excerpts

Thursday 21st June 2012 Commons Chamber

[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 Andrew Tyrie (Chichester) (Con)]

rose—

[Guto Bebb]

I will, of course, give way to the Chair of the Treasury Committee.

[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.

[Guto Bebb]

I agree wholeheartedly with the hon. Gentleman.

[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.

[Guto Bebb]

rose—

[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?

--- Later in debate ---

[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.

[Hon. Members]

Hear, hear.

--- Later in debate ---

[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.