Interest Rate Swap Products

Jonathan Edwards Excerpts

Thursday 21st June 2012 Commons Chamber

[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.