Interest Rate Swap Products

Heather Wheeler Excerpts

Thursday 21st June 2012 Commons Chamber

[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.