Interest Rate Swap Derivatives

Shabana Mahmood Excerpts

Thursday 24th October 2013 Commons Chamber

[Shabana Mahmood (Birmingham, Ladywood) (Lab)]

I congratulate all the Members who secured this debate, and I also thank the Backbench Business Committee for giving further time for this important issue to be discussed on the Floor of the House. I also want to put on record my recognition of the tremendous work done by the all-party group on interest rate swap mis-selling. Its efforts in campaigning on this issue since it first came to light last year have made sure it remains at the top of the political agenda. I should mention in particular the hon. Member for Aberconwy (Guto Bebb) for his leadership of that group and his willingness to run with this issue. He opened the debate with a powerful speech touching on all the different elements of the redress scheme, which have been causing problems to small businesses throughout the country. He reminded the House that the banks were telling us they cannot promise that the date for full redress will be much before 2015, despite having spent £300 million and recruited around 3,000 staff to deal with this problem. The number of claims settled to date is pitifully small. The record on that is nothing to write home about and it needs to be dealt with urgently.

The Chair of the Backbench Business Committee, my hon. Friend the Member for North East Derbyshire (Natascha Engel), made a fine speech. She reminded the House that the imposition of a blanket moratorium on payments would concentrate the minds of the banks and press them towards resolving the claims businesses have made more swiftly. She also made the important point that much of the language the banks are using in their correspondence with businesses and Members of Parliament on this issue is not easy language, and that means there is a danger of the same kind of confusion arising as that which led to this scandal in the first place.

The hon. Members for Wyre Forest (Mark Garnier) and for Aberconwy reminded the House that in the last 48 hours some banks have moved to decouple the issue of consequential losses from technical redress, and I will return to that point.

My right hon. Friend the Member for Wolverhampton South East (Mr McFadden) reminded the House that this scandal has further corroded and damaged trust between banks and their customers and drew a parallel with previous scandals, including the PPI scandal, which certainly should concentrate minds. He also reminded us that hedging and insuring against risks is not in and of itself wrong, and he is certainly right about that, but there has to be full understanding as to what these arrangements involve, and we must make sure that when they are entered into, it is done in a way that is suitable for both the companies getting involved and the banks.

My hon. Friend the Member for Llanelli (Nia Griffith) told us about the tragedy of good and very successful businesses who have been caught up in this scandal and the real fear felt by small businesses in seeking redress and how that can act as a barrier to them exercising their full rights under the redress scheme. They worry about admitting something has gone wrong because of what that might mean for their future relationship with their bank. That was an important point to put on the record.

My hon. Friend the Member for Edinburgh South (Ian Murray) reminded us again of the link between this scandal and the corrosion of people’s trust in the banks and how that has followed on from the PPI scandal and the manipulation of LIBOR. He also said that this all feeds into a sense that the banks, who are supposed to be on the side of small businesses—and who clearly need small businesses as much as small businesses need them—have not appeared to be behaving in that way and that needs to be dealt with forthwith.

Many Government Members, including the hon. Members for Poole (Mr Syms), for Bury North (Mr Nuttall), for South West Devon (Mr Streeter) and for Romsey and Southampton North (Caroline Nokes), made points about the snail’s pace of this scheme, which I will return to in a few moments. Those points were well made, and I hope they are being heard. On the speech by the hon. Member for Tiverton and Honiton (Neil Parish), I will not get into whether David felling Goliath is mythological, biblical or something else, but the analogy was well made and the symbolism of it will resonate outside this House.

It is clear from today’s contributions that the businesses caught up in this scandal, including businesses in my constituency that are following this debate closely from a place not very far away, have suffered terribly; we have heard distressing stories of injustice, bankruptcies, job losses, marriage breakdown, homelessness and, in some cases, death. Today’s contributions have rightly reminded the House that for all the debate about process—that is incredibly important and we have to get it right—there is a human cost, which should not be forgotten.

This scandal has highlighted shocking abuse of small and medium-sized enterprises; banks saw an opportunity in firms wanting to take out loans and they attached complex hedging products to them, in many cases giving the impression that this was a requirement of the loan itself. When interest rates plummeted, businesses were forced to pick up the punitive downside of the hedges. We know that in many cases banks had the option to cancel the loan. So, presumably, at any stage when interest rates might have gone up and the business would have benefited from having the hedge, the bank could cancel, but in the reverse situation the business could not exit the hedge when it became unfavourable to it without incurring punitive costs and charges. Not only was that an extremely unfair set of terms and conditions, but that behaviour violated the important relationship of trust between the banks and our small business community. Well run, long-established small businesses, which are the engine of our economy, have paid the price.

I will not rehearse the history of how we have got to the redress process that is in place, but suffice it to say that many concerns with this scheme require urgent action. I hope the Minister has heard all those points today and will take them away with him. I hope also that the FCA and the banks have been listening carefully to today’s debate. The biggest issue, about which we have heard a great deal today, is the time that this is all taking to resolve. Time is of the essence for the businesses concerned, yet figures show that banks paid out just £1.5 million in compensation in September, with 22 offers being accepted. That brings the grand total to a mere £2 million having been paid out, with 32 settled claims. In September, the chairman of the Federation of Small Businesses said:

“We are quickly losing confidence in the banks and the regulator as this scheme remains unbelievably slow.”

The initial target indicated for the redress scheme was six months. That time scale has already been missed, and it now looks as if it will be missed by a very large margin.

One of biggest issues with the redress scheme is the complete lack of a deadline for the process. Last month, my hon. Friends the Members for Nottingham East (Chris Leslie) and for Chesterfield (Toby Perkins) wrote to the chief executive of the FCA about the delay in compensation payments and requested that a strict deadline for settlement be imposed on the banks taking part in the scheme. Unfortunately, the imposition of a deadline has been resisted by the FCA. That is deeply disappointing, given the necessity of achieving a faster rate of progress for businesses that are in financial difficulty and the fact that the Federation of Small Businesses has indicated that some reviews of the interest rate swap products could be completed in as little as four to six weeks. I am sure the Minister will agree that firms that are due redress must receive it as quickly as possible if they are to survive; they need certainty and clarity so that they can plan for the future. Does he agree that a deadline would help matters? I hope he will respond to that point. Will he outline for us what he might do to bring that about?

We have seen some movement in the past 48 hours on the issue of consequential losses, which is very welcome. However, it is important that all the banks that have not signed up to the decoupling arrangement in respect of consequential loss and technical redress do so as quickly as possible. As this is now an evolving element of the redress scheme, will the Minister confirm that he will follow it closely to ensure that the evolving process will still allow for a fair assessment of consequential losses and that there is no risk that businesses will opt to forgo money they are owed in order to obtain compensation for their direct losses more quickly?

We also heard a lot about the suspension of payments, an issue about which many hon. Members have been writing to banks in our capacity as constituency Members of Parliament. Clearly, there is some inconsistency in the way in which the suspension of payments is being applied. Will the Minister undertake to do whatever he can to ensure that the suspension of payments applies wherever it is necessary? Will he consider the threshold? Will he eliminate the requirement for the business to go into special measures, as that is clearly holding some people back?

A huge amount of data have been published by the FCA on its website, which is helping Members of this House to assess the progress of this scheme. However, I wonder whether there is scope for some of those datasets to be expanded, particularly to give Members more information about what is happening to businesses in financial distress and businesses in administration, so that there is no incentive for banks not to bother dealing with them, as we have heard discussed today.

Small businesses are the lifeblood of our economy; they account for about half of private sector turnover, employ millions of people and make up 99% of UK enterprises. They deserve to be treated better by our financial institutions, and to be supported and protected more effectively by both the regulators and the Government. I hope that the Minister can provide some much-needed assurance, and that the FCA and the banks take on board all the points made by hon. Members today.