Hidden Credit Liabilities: Role of the FCA

John McDonnell Excerpts

Tuesday 14th April 2026 Westminster Hall

[John McDonnell (Hayes and Harlington) (Lab)]

I beg to move,

That this House has considered hidden credit liabilities and the role of the Financial Conduct Authority.

I will explain the genesis of this debate, Sir Roger. I chair the all-party parliamentary group on investment fraud and fairer financial services. The group was established some years ago as a result of hon. Members being approached by constituents who had experienced scandals in the delivery of financial services and the failure of regulatory bodies to address their concerns. It was chaired effectively by the hon. Member for Harrow East (Bob Blackman), who has now gone on to greater things as the Chair of the Backbench Business Committee. I thank him for enabling this debate to take place.

The scandal that has come before our APPG is the use of hidden credit lines, which has caused such serious harm to so many small and medium-sized enterprises, and caused personal disasters for many individuals and their families. We have drawn on the evidence presented to us by constituents, specialist advisers and the reports of BankConfidential, a specialist whistleblowing service for banking staff. Put simply, the story commences with a large number of SMEs approaching their banks for a loan and some of the banks then attaching to the loan a derivative such as an interest swap, supposedly to protect the loan against the risk of interest rate changes, and establishing a hidden credit line.

Lorraine Morris, an expert and specialist derivative lawyer, gave evidence to us on what she found:

“My research confirms that, far from mitigating risk, these instruments were deliberately engineered to transfer significant, undisclosed, and uncapped risk directly onto the customer. The mechanism was the concealed creation of a credit-line liability, booked against the customer’s assets from day one. This contingent obligation was not a notional figure; it was a hard liability that directly impacted the customer’s credit grade”.

Generally, when such a loan is taken, there is an agreed loan-to-value covenant. According to Ms Morris, the application of the derivative and credit line mechanisms impacted on those covenants and

“pushed viable businesses into a state of artificial distress. The sale of products as ‘protection’ when their fundamental structure achieves the opposite is a profound and fraudulent misrepresentation.

It is a profound tragedy that these banking frauds have pushed individuals to the brink, resulting in devastating loss of life, ill-health and destruction of families. As a legal advocate for justice, I believe this affront to human dignity demands not only our deepest sorrow, but a relentless and unwavering pursuit of accountability.”

That is what we are about today.

To understand the behaviours of the banks more fully, we drew on the evidence provided by Ian Tyler, a former senior banking executive who has used derivatives since the 1980s to manage interest rate risk for some of the UK’s largest banks. I will quote Ian at some length. He explained:

“The fundamental truth that has been buried by the banks and the FCA is that when a bank executes an interest rate derivative, such as an interest rate swap, it is required by prudential regulation to mark a counterparty credit risk limit to cover the Potential Future Exposure. This credit limit is a hard credit limit as the exposure generates a risk weighted asset that requires the bank to hold capital in support.

All hard credit limits are typically included in a bank’s Loan to Value security covenant calculation and so the moment a customer executes a derivative their LTV % increases and this weakens their credit standing. This situation was made materially worse in…2008 when in response to the failure of Lehman Brothers, policy makers reduced Bank Rate to 0.5%. This…led to a material increase in the credit line marked for the derivative as both the Current Exposure and the Potential Future Exposure increased, pushing many SMEs into the position where their LTV % was in breach of their security covenant.

However, as the bank had invariably not told the customer about the derivative credit line, in clear breach of conduct regulation, the bank often forced a technical breach of loan covenant through some other mechanism and then transferred the business to their so-called Business Recovery Unit where most businesses were subsequently put into administration.”

Many in the Public Gallery would testify to that.

What was the motivation of the banks? Hidden credit liabilities generated huge up-front revenues, bonuses and commissions. Worse, when the financial crisis hit, they became a mechanism for destroying viable businesses, some already in breach of lending covenants on day one, because of the undisclosed liability that had been taken on. The potential financial upside was so significant that whistleblowers revealed that staff at the state-controlled NatWest Group were encouraged to send victory emails when they successfully brought down a business that could then be feasted upon, with the bank sometimes buying distressed assets directly from the victims of such frauds.

There are too many examples of that, and some of those affected are with us in the Public Gallery. Alongside the banks’ predatory behaviour, there has also been a catastrophic regulatory failure, associated with a deliberate policy by the Financial Conduct Authority and, before that the Financial Services Authority, of siding with the banks and often with Treasury policy under successive Governments, rather than the innocent business owners who were being fleeced at the time.

The FCA has repeatedly and deliberately failed to act. I will give one example of participants’ experience from our all-party group. In November 2022, Lord Prem Sikka, Steve Middleton of BankConfidential and banking derivatives expert Ian Tyler, whom I have quoted, met the FCA to explain the hidden credit liability scandal in detail. They related what The Times assistant business editor James Hurley described across four articles as financial and accounting fraud, including theft from Ulster Bank fixed-rate loan customers, and all the hard evidence was shared. In our view, the FCA should have immediately launched an inquiry at that stage. Instead, it let the NatWest Group mark its own homework. When the bank concluded it had done nothing wrong, the FCA took no meaningful action, even deploying the astonishing argument that the fraud that had occurred was not criminal fraud.

The FCA’s unfitness for purpose is not a new observation for many of us here. On 1 February 2016, Conservative MP Guto Bebb led a Commons debate on the motion,

“That this House believes that the Financial Conduct Authority in its current form is not fit for purpose”.

Nothing meaningful came out of that debate or has happened since. In many people’s eyes, that has left the FCA still not fit for purpose, with Parliament having failed in its duty to fix it.

Where was the Treasury in all of that? The Treasury turned a blind eye and its motivation was simple. It needed the banks to do whatever was necessary to shore up their balance sheets after the global financial crisis, having already made the taxpayer bail them out. As I mentioned, where that has occurred the financial and emotional consequences for victims have been devastating in the extreme. The scale of the carnage has been horrific, with widespread forced insolvencies; suicides and early deaths; thousands of repossessions; and broken families. Many business people were made to believe that they had failed through their own fault, when in reality tens of thousands of businesses were deliberately targeted for insolvency.

[Mr Gregory Campbell (East Londonderry) (DUP)]

I congratulate the right hon. Member on securing this debate. As he referred to earlier, the conditions that pertained in 2008 and the financial crash have resulted in banks making massive changes, but the banks should not be allowed—or encouraged by the FCA in some instances, as he has outlined—to punish viable businesses rather than promoting those viable businesses and trying to pursue faulty loans, which is what they should be doing.

[John McDonnell]

That theme runs through many of the reports that we have had from constituents about the failure of the FCA to protect them—to ensure that regulation was implemented to protect them. There were also elements of almost turning a blind eye and collusion, and that is the reason for the anger that people feel.

Let me press on because the figures that we have heard in the past need to be challenged. As I said, many people thought that they had failed themselves, but in reality tens of thousands of businesses were deliberately targeted. Internal reports confirm that not 16,000, as claimed by the FCA, but 3 million customers were placed in NatWest’s non-core division, effectively a waiting room before being pushed into the notorious global restructuring group, or Lloyds’ equivalent business support unit.

There are so many examples, but I will give just one. Steve and Joan Finch spoke movingly at our summit last November. They took out what was meant to be a simple fixed-rate loan from Lloyds bank to buy Bredbury Hall hotel. Alongside that loan, the bank added the credit liabilities of a derivative, a swap, with a starting hidden credit liability of £1 million, rising to £3 million. Those undisclosed arrangements generated £179,000 in secret up-front commissions. A further £1 million was taken in fees when the bank processed the case through its so-called business support unit, widely criticised as an asset-stripping mechanism.

The business ended up there because undisclosed credit liabilities created a loan-to-value risk of 136%, against a permitted maximum of 70%. Despite being a thriving business, Bredbury Hall was manoeuvred into administration. Stephen Finch was bankrupted and the family had to raise £600,000 to pay off vulture fund Cerberus, to which the loan had been sold, to save their home.

Suspicious of what had happened, the Finches contacted Greater Manchester police with evidence of all three offences that had been committed under the Fraud Act 2006. The police took the matter seriously and investigated, but when they asked the FCA for technical assistance, the FCA refused, so last June the police closed the case, citing three reasons: lack of FCA assistance, insufficient resources for a complex investigation, and concern that examining the case would oblige them to investigate numerous similar ones.

There are so many other cases. One of the cases I have dealt with involved reading the last letter of a man who committed suicide in the hope that his insurance would pay out to save his family home. Many whistleblowers have courageously come forward. In fact, that is what led to the creation of BankConfidential. I will cite just one example: Mark Wright, a former Royal Bank of Scotland manager. One of our former colleagues, Norman Lamb, supported him. Mark provided internal evidence of the bank deliberately defaulting customers to improve capital ratios and targeting customers for debanking and insolvency. He even named the person who taught trainees how to forge customer signatures on bank documents. Mark experienced incredible levels of personal stress, and I congratulate him on his courage in coming forward, but the FCA failed to act.

The failure of the system to reform or to deliver justice and compensation to victims has been the outstanding theme of our discussions and debates as an all-party group. Numerous schemes, inquiries and reports were meant to deliver meaningful reform and provide victims of banking misconduct with access to justice and redress. We have had the Foskett panel, the Swift review of interest rate hedging products, the Cranston review, the Tomlinson report, the Project Lord Turnbull report by Sally Masterton, the parliamentary commission on banking standards and various Treasury Committee inquiries. The truth is that they have had little effect: victims remain out of pocket and meaningful reform still has not happened.

The result is that trust in the system has now been shattered. The FCA’s Financial Lives survey shows that less than half the public trust the financial sector and its regulatory framework. That is a damning indictment, and it is problematic particularly among SMEs, where we need business confidence to stimulate growth in our wider economy.

Let me conclude. The all-party group, having consulted so many experts, victims and constituents, has come to the conclusion that the only way forward is some form of royal commission or equivalent inquiry to address the deep structural flaws in the system and the widespread injustices that remain unresolved. We need to establish what happened and who was responsible; otherwise, there is a real risk of history repeating itself, and we cannot stand by and allow that to happen.

In the short term, we are demanding at least a specific inquiry into hidden credit and the role of the FCA. That inquiry must be fully independent, well resourced and—if it is to have confidence in it—judge led, and it must be granted statutory provision under the Inquiries Act 2005.

This all arose because many of us, as individual MPs, were approached by constituents who have suffered. We must remember that it is ordinary people who have been the victims of this tragedy, and some of them are with us in the Public Gallery. They have kept the flame of hope for justice alive, and I urge them to maintain their efforts and to continue to inspire us with their righteous indignation and justified anger. However, I do not want to be here in years to come—as we were in 2016—dealing with the same problems and with a system that is not fit for purpose, with more victims making representations to us. I hope today that the Government will accept there is a need for an independent inquiry, that we can present the evidence to it and that we can successfully reform the system to protect our financial services and, more importantly, the people—our constituents—who rely on them.

[Several hon. Members rose—]

--- Later in debate ---

[The Economic Secretary to the Treasury (Lucy Rigby)]

It is a pleasure to serve under your chairmanship, Sir Roger. I am grateful to my right hon. Friend the Member for Hayes and Harlington (John McDonnell) for securing this debate and for further airing these issues. As he mentioned, there has been a long history of parliamentary interest in these issues, over at least 14 years. That is for good reason, for not only are we deeply committed to justice and do we abhor injustice in this country, but SMEs are the lifeblood of our economy. The events of the IHRP scandal were completely wrong and abhorrent.

From a personal point of view, I cannot deny how hard it is to hear and read about horrific personal circumstances, not least those of the Glanville family, referred to by my hon. Friend the Member for Poole (Neil Duncan-Jordan); the Evans family, referred to by the Liberal Democrat spokesperson, the hon. Member for North Norfolk (Steff Aquarone); and the Lilley family, referred to by my hon. Friend the Member for Middlesbrough and Thornaby East (Andy McDonald). As my right hon. Friend the Member for Hayes and Harlington referred to, in some instances there are hideous personal tragedies, as no doubt may have been experienced by some of the people who are sat behind him in the Public Gallery today.

To that end, I thank and acknowledge my hon. Friends the Members for Poole, for Southgate and Wood Green (Bambos Charalambous), for Liverpool West Derby (Ian Byrne), and for Middlesbrough and Thornaby East, and the hon. Members for Strangford (Jim Shannon) and for Brecon, Radnor and Cwm Tawe (David Chadwick)—the latter knows I struggle sometimes to pronounce the name of his constituency; I hope he thinks I had a decent go—and the spokespeople from other parties for their contributions to the debate. They have shared experiences of those they represent and broader views, and in doing so, they have been clear about the deep sense of injustice and harm felt by many businesses that were affected by these issues—I know of the same in my own postbag.

Not least because of the correspondence I have had and what we have heard today, I recognise that some businesses remain deeply dissatisfied with the operation of the original redress scheme and that its conclusions continue to be strongly contested. Although there have been a number of reviews and pieces of litigation, as I will come to later, the main redress scheme for IRHP resulted in over £2 billion paid in total to thousands of affected businesses.

It was undeniably unsatisfactory that the overall response to these issues has been piecemeal and complex, and the process was very often slow and frustrating to deal with. However, I am told that the IRHP redress scheme was conceived as a means of providing redress within the legal and regulatory constraints of the time. That time was more than 10 years ago, and some instances of the subject matter that we are discussing today go back around 25 years.

Clearly, I was not part of the Treasury in 2012, nor were Labour in government—the party of the shadow Economic Secretary to the Treasury, the hon. Member for Wyre Forest (Mark Garnier), were in government for the last 14 years—so I want to set out the current Government’s understanding of the framework within which decisions about the redress scheme were taken at the time. The constraints, in so far as they concern regulatory oversight, reflect the constitutional settlement that underpins the UK’s regulatory system, with which I know hon. Members are familiar.

I would imagine that we would all wholeheartedly agree with the hon. Member for Southgate and Wood Green that regulators should at all times act with integrity and independence. Indeed, partly with that point in mind, I say that the Treasury does not have the power to direct the FCA to intervene in individual cases or to investigate matters that fell outside the regulatory perimeter that applied at the time—I am not sure that is what my right hon. Friend the Member for Hayes and Harlington is asking the Treasury to do at this point in any event.

The Treasury also does not have investigative or prosecuting powers of its own. I am sure hon. Members are aware that the independence of the FCA and the Financial Ombudsman Service is fundamental to our constitutional settlement. The separation between the Treasury and the wider regulatory authorities is not a technicality; it is, in theory, a safeguard for businesses and for consumers.

I acknowledge the argument that the Government should act independently of the regulator and the regulatory system and look again at this issue with fresh eyes using their own statutory powers. Given the many reviews of these issues, the independent and broad-based redress schemes over more than a decade, the successful prosecutions, convictions, judicial reviews, and other investigations, the question that the current Government must ask is whether steps to reopen these issues now will lead to better or different outcomes, and, importantly, more redress for those affected.

There are questions as to whether this Government would have made the same decisions if confronted with the same problems as the previous one—and if our decisions would have been different or indeed more or less effective. Without prejudice to the gaze of the shadow Economic Secretary to the Treasury, I am sure that most of us would like to think not only that might we have dealt with the situation rather better, but that in a best-case scenario regulation and supervision would have been designed such that none of these issues would have arisen in the first place. That goes right to the root of why we are all here today, and indeed critical regulatory changes were made following this scandal. However, this Government inherited a set of decisions, conclusions, judicial findings, judgments and levels of compensation that were delivered some time ago.

Several hon. Members, including the hon. Member for Strangford, a consistent champion of his constituents whose specific points I will come to shortly, and my hon. Friend the Member for Hexham (Joe Morris), who articulated Catherine and Nigel’s heartbreaking story very well, have spoken about hidden credit lines or contingent obligations. Those are clearly very serious allegations, and it is right that they are treated seriously. For the reasons I have set out, where issues relate to the conduct of regulatory firms, they are for the FCA to consider using its statutory powers, evidence base and judgment—with that judgment being independent, again for the reasons that I have set out.

In the light of the independence that we have been discussing, I should say that the FCA firmly refutes the claims made in the BankConfidential report—which I have here—about the nature and impact of the credit lines that we have been discussing. It also refutes the allegations of collusion and regulatory failure which have been referred to today.

With reference to the independence of the courts, in a series of cases, the courts have made findings in relation to disclosure, and Jonathan Swift KC referenced those findings as settled legal context, concluding that the FCA acted lawfully in defining the scope of the IRHP redress scheme. It is true that past regulatory reviews were conducted within the scope of the powers available to the regulator at that time and within the regulatory perimeter that Parliament had set. It is of critical importance that the wider regulatory framework has now changed.

However, before I come to that, I want to address the previous redress scheme in more detail. I recognise that many of those represented here remain deeply dissatisfied with how that scheme operated and that its conclusions continue to be strongly contested. I do not intend to in any sense minimise or underplay any of that frustration, which is clearly very strongly felt. While I understand that the process at the time regarding that redress scheme was slow and sometimes no doubt deeply frustrating, it was established with the intention of delivering redress within the legal and regulatory constraints that applied at that time. One such constraint related to tailored business loans. Most business lending fell outside the scope of the FCA and therefore beyond its powers to compel redress. We cannot extend regulation retrospectively. Indeed, even outwith these current issues, reopening past decisions would create significant legal uncertainty and risk that could affect the availability and cost of finance for SMEs today.

Although I appreciate it is known by those here, I should note that subsequent reviews, and ultimately the courts, considered whether the regulator had acted lawfully in setting the scope and perimeter of that scheme, and concluded that it did. I mention that because it is an important consideration in any assertion that it is for the current Government to seek to reopen these issues.

I referred to a different regulatory environment from that existing now. I will briefly explain why our regulatory landscape is now better. Since 2019, the vast majority of SMEs, around 99%, have been able to bring complaints to the Financial Ombudsman Service. That was a direct response to the gaps exposed by earlier scandals, including those we have talked about today. The ombudsman now provides a far wider safety net for small and medium-sized businesses than existed during the period under discussion.

In addition, the senior managers and certification regime has transformed accountability in financial services. Senior individuals can now be held personally responsible for the way that firms treat SME customers, whether activity is regulated or unregulated. That cultural shift, which stems from both of those, is profound. It did not exist during the years that Members have understandably focused on today.

Today’s debate, like other parliamentary activity on the same topic over a long period, some of which I have reviewed for this debate, has highlighted the serious and clear injustices that some businesses suffered and the impact that had. The current Government obviously cannot undo the harm that has already occurred, more is the pity, but nor can we, or should we, override independent decisions taken by the courts within the legal framework that applied at the time.

I want to address this directly, hard as it may be to hear. I understand that my right hon. Friend the Member for Hayes and Harlington wishes me to commit today to opening a full judge-led public inquiry into these issues. I do not wish to downplay the seriousness of the matters we have discussed today, but the Government do not believe that a full public inquiry would be the right course to take. I say that with reference both to the long history of reviews, prosecutions, redress schemes and judicial reviews, which would all require unpicking to some degree, and importantly, to the changes to the regulatory landscape that were made subsequently, as a result of the gaps that this scandal exposed.

I want to be clear that the Government are instead focused on ensuring that the regulatory landscape is fit for purpose and on supporting SMEs to grow with confidence, improving their access to finance and ensuring that the financial services sector operates to high standards that command trust. We are backing that commitment with real action, with record support for the British Business Bank and reforms that strengthen accountability without undermining growth.

We are committed to robust regulation to international high standards, so that we have a strong financial services sector. Those ought not to be intentions but the bedrock of the financial services system. That is why access to redress for SMEs has been widened so significantly and why accountability at the top of financial firms is now personal and enforceable. It is also why the regulatory perimeter continues to be kept under careful review, deliberately and responsibly.

The hon. Member for Strangford referred to discretionary commission arrangements.

[John McDonnell]

There are only a few seconds left. I have heard the Minister’s arguments. I fully agree on the independence of the FCA from Treasury, but that does not mean that we must accept the FCA as infallible. In other instances where separate organisations have made mistakes, the Government have intervened. I understand that the Minister is not convinced this morning, but will she meet the all-party parliamentary group on investment fraud and fairer financial services, so that we can take her through the report with our experts to convince her that there might be a different way forward from the one she is setting out this morning?

[Lucy Rigby]

My right hon. Friend has pre-empted my offer. To be direct, yes, I will come and meet his APPG to listen further. I hope I have successfully communicated this morning that the Government do believe—

Motion lapsed (Standing Order No. 10(6)).