Interest Rate Swap Products

Mike Freer Excerpts

Thursday 21st June 2012 Commons Chamber

[Mike Freer (Finchley and Golders Green) (Con)]

I join the chorus of people congratulating my hon. Friend the Member for Aberconwy (Guto Bebb) on securing this debate.

I have to confess that I am a former banker—[Interruption.] At Barclays bank. I am not sure whether becoming a politician was a move up or down; I might try estate agency next. I worked for Barclays bank in both the corporate and personal sectors, where I had responsibility for a regulated sales force, and I still hold my financial planning certificate and certificate in mortgage advice and practice, so I, like my hon. Friend, have a healthy scepticism when customers complain about bank products, because often when things go well it is put down to their good fortune, but when things go badly it is put down to mis-selling.

I had a fairly healthy dose of scepticism when my constituents came to see me to complain about the products under discussion, but I was genuinely shocked and appalled when I found out what had been done to them. I want to raise the case of a widow who had a small buy-to-let property portfolio. She was interested in reducing her mortgage outgoings, or at least protecting herself from increases in interest rates. Technically, she falls outside the scope of the motion, Mr Deputy Speaker, but I hope that you will give me some latitude. HSBC, the bank that I want to name specifically, classified that widow with a small property portfolio as a business customer.

I expected my constituent to have been sold a capped or fixed rate mortgage product; I did not expect a high-risk interest rate swap, which I would normally have seen in the mid-market or large corporate sectors of the bank. I wrote to HSBC asking it please to send me the documentation that proved that it had established the process of knowing the customer and undertaken the required risk assessment that is absolutely necessary to prove that she was a knowledgeable customer or that her background and experience in other products matched the risk profile of the product that it was selling her.

I also asked the bank to show me the documentation, known as a “reason why” letter, showing why the product that it sold my constituent was the most suitable, rather than other products such as a fixed rate mortgage—or a capped mortgage, had one been available. I was absolutely, completely blown away when I received a telephone transcript. The customer was not sold the product in a face-to-face meeting at which the options were explained; she was sold it over the phone.

I want to read out a couple of snippets from the transcript. The bank manager—or the clerk—said:

“It’s actually…a reducing loan so that implies that it will be coming down over time.”

A bank manager should know that there is not an implication that the loan is reducing, but that it actually is reducing. The manager went on to say,

“and that’s at 1.75 as well and it says that’s reducing as well. So have you got a certain time period on interest only…?”

The bank manager clearly had no knowledge of the customer. I turn to a particularly juicy bit; the brains on the Treasury Front Bench might be able to elucidate it, but I certainly could not make head or tail of it. The client had asked about the ability to repay early, and the bank clerk said:

“How it works in real life, if you were locked in at the rate of 5.35 and after five years you’ve managed to clear all your debt but we’ve still got five years left to run, so you pay Carl”—

the relationship director—

“off all the debt which is fine but then we’ve got an agreement with the Treasury at 5.35.”

That is the treasury division of the bank, not Her Majesty’s Treasury. The clerk went on:

“What happens then is we would look at what the five year rate was, the last five years that you’ve got remaining, and if that five year rate was at six per cent, well then your rate of 5.35 would look good if you like so we would pay you something if you were going to unravel the fixed rate deal. But the converse could also be true, that if the five year rate was down at four per cent and your rate was 5.35 you’d have to pay to unravel it effectively. So the thing with a fixed rate you only fix the debt that you…the core debt you really think you’re going to have…if you thought you’d clear it you wouldn’t want to lock yourself in”.

I hope that hon. Members understood that, but even with my somewhat limited banking background, I was completely bemused. Having read that, I saw that there was no evidence at all that the bank had done its due diligence. There was no questioning to see what my constituent’s attitude to risk was and no evidence of the reason that product was the most suitable in the armoury of the bank.

In my opinion, HSBC had simply circumvented all the regulations and requirements to know the customer by treating my constituent as a business customer, although even business customers would expect better than what my widow constituent received at the hands of HSBC. I see no evidence in the paperwork that my constituent’s circumstances matched the product that was sold. I am appalled that a product as complex as an interest rate swap was sold over the phone—let alone to a customer with no knowledge of financial markets at all.

I have no doubt that all HSBC’s public affairs teams will be crawling all over this debate. I therefore call on the bank to put my constituent back where she was before she entered into this arrangement, or at least to put her into a product that is most suitable for her.

The banks are currently brushing off complaints and telling customers to go to court, but few customers have the reserves to do so. How can a widow living in Hampstead Garden Suburb take on the world’s local bank? I support this excellent motion.