Financial Conduct Authority Redress Scheme

Lord Bellingham Excerpts

Thursday 4th December 2014 Commons Chamber

[Mr Mark Williams (Ceredigion) (LD)]

I would say it is a pleasure to speak in this debate, Madam Deputy Speaker, but I wonder whether it really is. We have had three of these debates so far and, sadly, they have been enriched by the experiences right across the country of our long-suffering constituents. My contribution will be no different in bringing some of those experiences to the attention of the House, but I particularly wish to address the issue of fixed-rate loans—tailored business loans, as they are known in some quarters—how dangerous and toxic those products are, and how they remain excluded from the FCA review, an anomaly that should be addressed.

First, however, it would be remiss of me not to congratulate, again, my hon. Friend the Member for Aberconwy (Guto Bebb), the all-party group he founded and Bully-Banks. I shudder to think where we would be without him and those who were galvanised into founding Bully-Banks to push the agenda forward. It would be churlish if I did not at the start of my contribution acknowledge, as my hon. Friend did, the record of the redress scheme in so far as it is a redress scheme, but today’s motion clearly spells out our sense of disappointment. More than that, it highlights our feelings about the inertia, helplessness and heartbreak expressed by many of the small business owners who have been mis-sold these products in the cases we are all dealing with.

I have spoken in this Chamber before about one business in my Ceredigion constituency, and I will do so again. I can see at least two or three former Aberystwyth students here who will know the business in question. The asset-rich farms, hotels and pubs in my constituency, which is dependent on agriculture and tourism, were very clearly targeted by the banks. There was a time when the trickle of cases that came into my surgeries reached torrent proportions. There were many, many cases of people coming to see me. Clearly, the policies had a direct impact on the employment base of my constituency, reliant as it is on seasonal trade. If there is the prospect of three or four large hotels closing down in a constituency, it is a very serious matter.

I have mentioned the case of Mr Mansel Beechey, the licensee of the Hen Llew Du Public House in Bridge street, Aberystwyth, and I want to continue to use his example. The fact that it is an unresolved case speaks volumes. He made a complaint to the bank about the mis-sale of his tailored business loan, an unregulated product, back in April 2012. It took Clydesdale and Yorkshire Bank well over six months to respond to that formal written complaint and, despite the efforts of my office facilitating meetings with some of its most senior personnel, the matter remains unresolved. Dither, delay and prevarication are the watchwords of its game. Its most recent excuse was that matters could not be progressed because of staff leave. That was at the beginning of September. Let us not forget that I am talking about an iconic and once successful business—one that had a future—being put in jeopardy. The fear is that the bank seeks to put this matter into the long grass.

I refer now to the commendable work of the Treasury Committee, which conducted a brief inquiry into this matter. We heard evidence from Mr David Thorburn and Debbie Crosbie of the Clydesdale and Yorkshire Bank. The hon. Member for Dundee East (Stewart Hosie) raised the matter of the TBL sales process and asked Ms Crosbie:

“If a customer is able to identify that that process did not happen, that that warning was not explicit, that would count as a mis-sell would it, in terms of your review?”

Ms Crosbie replied in the affirmative. She said:

“We believe that once you examine that process, and find that it had not been carried out in accordance with what we had agreed is appropriate, we would absolutely redress a customer and we have done so on a number of occasions.”

Ms Crosbie also stated that

“the customer gets a fixed payment for a fixed period of time and that payment will never change as long as the customer does not want to terminate the agreement early.”

That is the mis-match between what we are told by managers, the experience of the Select Committee and the practice on the ground for Mr Beechey and his family.

Given the recent press coverage concerning the National Australia Bank, the parent bank, issuing a profit warning to Clydesdale and Yorkshire Bank and linking the bank to an imminent disposal, it is not surprising to learn that this bank drags its feet in addressing mis-selling issues with potentially dire consequences for some of our constituents. It serves its purpose to do so, often allowing the customers—my businesses in Ceredigion—to teeter on the brink in the hope that Her Majesty’s Revenue and Customs will then move in and finish them off.

I very much concur with what my hon. Friend the Member for Aberconwy said about the changing attitude to HMRC as the debate on consequentials has moved on. Sadly, the reality here is that virtually all of Clydesdale and Yorkshire’s lending was done via tailored business loans on fixed rates and, as those products fall outside the scope of the FCA review, the bank has thus far avoided any effective redress scenario.

My hon. Friend the Member for Nuneaton (Mr Jones) and others have talked about our despondency—and the despondency of our constituents—over the role of the FCA. When the Financial Services Authority morphed into the FCA, we were assured that the new organisation would enforce rules and punish breaches and that it would focus on the behaviour of financial professionals. In short, we were promised that it would be a true watchdog. We have looked to the FCA to sort out this mess and to do so in a way that is both fair and timely, but that has not happened. As we have heard from other Members, the FCA has still not released comprehensive details of what constitutes a mis-sale. The agreement between the FCA and the major banks on which the review process is founded remains a secret agreement. Where is the transparency and fairness for these businesses that are so badly affected? Where is this protection for customers that is supposed to be at the heart of the FCA’s work?

[Mr Henry Bellingham (North West Norfolk) (Con)]

I have a business in my constituency that took out a fixed-rate tailored business loan, which had a hidden swap attached to it. The bank is trying to say that it is not regulated. Surely the key point is one of fairness and of putting all these people back in the position in which they would have been before.

[Mr Williams]

My hon. Friend is right. It is about fairness and the implications of these policies. Whether the policies were sold independently or hidden in a loan agreement, the implication has been the same. They were sold by the same people and so should be included in any future review.

The redress scheme has excluded a large number of people. Even before we drill down and thoroughly examine the scheme, it is hugely significant that a large number of businesses fall outside it. The scope of the scheme is too narrow and restrictive. It does not deal with the reality of what has gone on, which means that, as it stands, it will not change or reform bank behaviour or properly compensate people.

The scheme sets out that

the IRHP Review does not require customers to assess for themselves whether or not their sale was compliant.”

If, as the FCA insists, there is no requirement for disclosure, how can it ever be possible to tell whether the banks, in reaching a judgment, are relying on erroneous information, or, as I have frequently come across, deliberately not taking information into account?

If the review process is to be transparent and fair, why is the customer not given a chance to view the evidence that the bank puts forward in the review and, if they feel it to be necessary, to have the opportunity to comment on it? How does the FCA fail to see that there will always be suspicion and mistrust when the process is shrouded in secrecy, and customers are deprived of the opportunity to view the evidence submitted by the bank to the bank’s own review team?

We need to address the controversial matter of the offer of alternative products. As part of the redress, reviewers seem to be hellbent on suggesting that if my constituents had not taken out a particular type of hedging product, they would almost certainly have taken out something similar. Is it now really the case that providing customers with an alternative product as part of redress is actually a widely accepted or well-established principle?

Despite the brief and the impressive statistics, the FCA is still failing to address the issue of confidence; there remains a crisis of confidence in the banking industry. Many people, such as Mansel Beechey and my constituent in a related matter, David Grant of Llechryd, have deep misgivings about the industry, and this is not just a matter of justice; in communities such as mine, the small businesses that the Chancellor, the Deputy Prime Minister and the Prime Minister have said are so important to our economic recovery need action and assistance. If we do not act, we will fail many of our constituents, and it will be to the detriment of us all in terms of both justice and the economy.

--- Later in debate ---

[Mark Garnier]

The hon. Lady is absolutely right, and I shall return to that as I progress through my speech.

My first point is that there is little consistency between the banks in how they tackle the problems they have created. One of the FCA’s frequently asked questions is:

“Are the offers consistent between banks?”

Interestingly, its response reads:

“The independent reviewers report regularly to the FCA, both on the judgements they are making and how the banks are performing, and will regularly bring all the independent reviewers together to ensure consistency of approach. The FCA also collects data on the offers being made by each bank and we carefully consider any variances to ensure that the standards are being applied consistently.”

That in itself demonstrates that there is a huge amount of useful information that we are not getting a chance to see. It goes on:

“We also regularly select individual case studies to follow up with banks”.

The FCA is trying to be consistent, but cannot say that it is being consistent. We have heard on many occasions this afternoon about its not being consistent.

My example concerns not one of my constituents but someone else who came to see me and involves how the banks treat businesses that have gone into insolvency. Clearly, any insolvent business will have an insolvency practitioner winding up that business. It is a tragic time, but somebody has to come in and do it. In the event of an insolvency, the banks are involved both as a creditor, as they have lent money to the business in the first place, and as a debtor, as they owe redress and in many cases consequential losses to the business. Some banks behave quite well. HSBC is a reasonably good example and recognises that the insolvency practitioner is duty bound fairly to distribute the assets of an insolvent business to a wide range of creditors. To that end, HSBC will pay what is owed under the redress and consequential loss scheme into the insolvency practitioner’s funds and then put in a bid for what it is owed from the original bank loan. The insolvency practitioner therefore makes a correct and fair assessment of who is owed what, and in some cases HSBC will get back not just less than it lent but less than it would have got back had it done what RBS does.

RBS is a frequent flyer in this debate, so I shall have a go at it, too. I am told that RBS will offset what it owes by way of redress and consequential loss against what it is owed by way of repayment of the loan. Therefore, although it is still owed money by the bankrupt business, it is owed less than it otherwise would have been, and when RBS seeks to limit its losses at the expense of other creditors’ owed money, those creditors will lose money as a result of RBS’s mis-selling. That is just plain wrong.

It is also wrong that some loans have been left outside the redress scheme. Those who took on tailored business loans, otherwise known as hidden or embedded swaps, have had exactly the same financial problem but for a technical reason are outside the regulated arena. Under article 85 of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001, due to some pretty technical reasoning, if a loan looks like a duck, swims like a duck and quacks, it is in fact a donkey. Some pretty smart lawyers have looked at that and the inescapable fact is that the legislation was written in a way that allowed many businesses to be mis-sold swaps in an area that is unregulated.

The FCA’s frequently asked questions talk about these so-called commercial loans, stating:

“Commercial loans generally fall outside the regulatory remit of the FCA and we therefore cannot direct the banks to set up a review of these products”.

That might possibly be so, but is not the act of an FCA member’s selling any product to an unsophisticated customer a regulated activity that therefore falls under the FCA’s remit?

[Mr Bellingham]

I agree entirely with my hon. Friend. Many of these businesses are not large concerns—some are SMEs and some are micro-businesses—and one could not describe some of the proprietors as highly sophisticated business people. As far as they were concerned, they were mis-sold these fixed-rate tailored business loans with the hidden swaps attached to them. Some have been dealt with very quickly by the banks, but others have not and the banks have just ignored them completely.

[Mark Garnier]

My hon. Friend makes an incredibly important point. The point of the regulator, the FCA, is to protect unsophisticated consumers, but it has manifestly let down the consumers who subscribed.

The paragraph in the FCA briefing note continues:

“The FCA has received legal advice supporting this view”—

about article 85. It goes on to say that the Treasury Committee has carried out scrutiny of that advice. I am a member of the Treasury Committee and I think it is worth putting on the record just what that constitutes.

The Treasury Committee asked the regulator on many occasions for sight of the legal advice on these embedded swaps and on many occasions it said no. We asked whether we could send our legal advisers around to have a look at the advice on our behalf, but it continued to say no. We had a public evidence session with the chief executive officer and chairman recently and questioned them about the issue again. The answer they gave was that they were not prepared to let us see the advice as it was confidential. We pressed them on whether we could send our legal team to have a look at it and they answered that they needed space from Parliament to conduct their activities.

The regulator is answerable to Parliament. Although I am sympathetic to the submission that the regulator cannot have every confidential document shown to all hon. Members, who may well then tell the press, the CEO and chairman simply cannot say that they need to be excused one of their most fundamental duties—that of answering to us here in this place. In the end, we pressured them to relent and our legal adviser looked at the advice they had been given, and in fact they were right. But this is a sorry story of the regulator not understanding its duties and its constitutional place as answerable to Parliament.

In any sort of resolution scheme, it is inevitable that some people will feel well treated and others hard done by. One of my constituents was entitled to redress but felt that he did not need it, because he had bought exactly the product that he wanted and expected and he thinks it unfair on other people that he should seek redress when he took what he thinks was a fair deal. But he is unusual. I have constituents who have been completely and totally rolled over by the banks. Consequential loss offers are derisory for businesses that have taken a lifetime to establish and just a few telephone calls by mis-incentivised relationship managers to destroy. There are no consequential loss payments for reputations destroyed, or for goodwill wasted and track records smashed.

I was a member of the Parliamentary Commission on Banking Standards. We looked hard at how the regulator could drive better standards in the banking industry. There should be incentives for better behaviour, and banks are working on making their staff perform to higher ethical standards, but for every carrot there must be some sort of stick. If it is possible for banks to be fined for fixing LIBOR and forex benchmarks and for mis-selling insurance products, why have those banks who have destroyed so many businesses been allowed to choose their own form of redress with no further financial penalty?

I am baffled why the regulator has set up a redress scheme that is voluntary, has just one opportunity for appeal and is not being reviewed or assessed. Surely, it is right that people who are unsatisfied can have an independent appeal assessed by the Financial Ombudsman Service. A special unit could easily be set up at the FOS, funded by the banks, to give one last chance of appeal to those small businesses that fall outside the FOS’s remit but inside the redress scheme. I am also baffled why the regulator will not publish the terms of reference and the agreements between the regulator and the banks on how the scheme is managed and run and what is expected of it all. That lack of transparency can only lead to mistrust in the system and the regulator. I am also concerned that the regulator is so reluctant to share with agents of the Treasury Committee legal advice on whether embedded swaps are regulated.

With so many people left destitute and impoverished by what has happened, it is wrong that no one has been brought to account over this. Until such time as fines are levied and front-line staff guilty of mis-selling brought to book, confidence in the banking sector and the regulator will struggle to improve and standards may languish at an unacceptable level.

The last sentence of the motion before us calls respectfully for the Government to consider a review of this whole process and the conduct of the regulator. I urge my hon. Friend the Economic Secretary to the Treasury to look carefully at whether to hold an independent review of this whole regrettable scheme.

--- Later in debate ---

[Andrea Leadsom]

I will certainly write to the FCA about all the cases raised in the Chamber today—and I will expect a reply.

[Mr Bellingham]

The key point is that some of the commercial loans—fixed-rate tailored business loans with hidden swaps—are not taken seriously by some banks. Indeed, some people in the FCA are saying that those loans are not regulated, so it would be very helpful if she looked at that point with the FCA.

[Andrea Leadsom]

Tailored business swaps were provided by largely Yorkshire and Clydesdale bank, which has voluntarily agreed to look at redress in a similar way to that in which the interest rate swap redress scheme works.

I want to move on because there is another debate to follow. Let me address some of the questions raised by my hon. Friend the Member for Aberconwy. He asked why some banks are not splitting the original loss and the consequential losses, and he pointed out that the amount of redress paid is inconsistent between banks. He mentioned the fact that a particular whistleblower says that banks have pressurised independent reviewers to serve the banks’ interests rather than those of the SME, and argued that the FCA is not showing the bank-by-bank redress numbers. He asked whether we should set up an appeals process for reviewers to look at each other’s banks’ reviews, and spoke about the lack of payment of consequential losses beyond the 8% that is normally provided. He addressed the issue of HMRC’s tax treatment of redress and of whether embedded swaps should be included. I want to run through those issues very quickly.

I can assure my hon. Friend and all Members that the FCA has been determined throughout the process to get to the bottom of this. Occasionally, Members might think that the FCA is not interested or not keen to resolve the matter, but that could not be further from the case. In particular, the FCA carefully considers any variance in redress offers to make sure that standards are applied consistently. It selects individual cases for review based on feedback from customers, campaign groups and MPs to ensure these have been dealt with fairly. Independent reviewers report regularly to the FCA, both on the judgments they are making and on how the banks are performing, and independent reviewers regularly meet each other to ensure a consistent approach to assessing claims.

My hon. Friend referred to the agreement between the FCA and the participating banks. As I understand it, this agreement sets out the principles of how the review should have been undertaken. I understand, too, that the FCA is prohibited from releasing these agreements by confidentiality restrictions. I can assure Members, however, that I will write to the FCA and ask for clarification, bearing in mind Members’ desire to have that made public if possible.