Financial Conduct Authority Redress Scheme

Steve Rotheram Excerpts

Thursday 4th December 2014 Commons Chamber

[Guto Bebb]

I could not agree more. Put simply, the regulator should be regulating its own redress scheme. It is simply not good enough for the FCA consistently to say that the decision has been approved by the independent reviewer if there are doubts about their behaviour.

[Steve Rotheram (Liverpool, Walton) (Lab)]

I, too, congratulate the hon. Gentleman on bringing this issue to the House’s attention. The only thing that is consistent and transparent is that the banks that caused the financial crash are profiting from selling products such as interest rate hedging products, which were bought by a company in my constituency, the Flanagan Group, and have caused it great difficulty. Does the hon. Gentleman think it is right that the banks should be profiting as a result of mis-selling products?

[Guto Bebb]

Of course not. The whole reason behind establishing the redress scheme is to try to deal with the wrongdoing of the banks. My concern is that the scheme has not succeeded as expected.

--- Later in debate ---

[Paul Farrelly]

Indeed, not only have the banks failed but the regulators have failed to show their teeth. Indeed, in the recent judgment on Crestsign the courts have only added to the uncertainty, and it behoves the Government to try to clear that up.

DK Motorcycles runs the largest motorcycle showroom in the country, selling high-value items from a single premises. It is a partnership, owned by father and son Derek and Kevin Neesam—hence the DK. At the time of the refinancing in 2008, it had a bookkeeper but not a specialist finance director. Ewan, the general manager, joined later and now looks after finance, as well as running the showroom. By no stretch of imagination could DK be called “financially sophisticated” in a world of complex derivative products. However, by dint of employing up to 75 people—both full and part time—and having a business turnover of £20 million, it failed two of the FCA’s tests. In response to the pilot, the FCA admittedly amended some of its tests, but no flexibility was applied to the turnover test. As I pointed out to the FCA, that caught different types of businesses indiscriminately and left businesses such as DK bracketed together with the likes of BP or BT as so-called sophisticated, and therefore with no help against predatory banks such as RBS.

There was a further iniquity in the redress scheme, as the campaigning group Bully-Banks has repeatedly pointed out, because under the scheme, banks have a get out. Notwithstanding the tests, if they can offer evidence that a business was financially sophisticated, it would be excluded from the review. However, there was no reciprocal ability for businesses like DK—a father and son partnership that just happened to be successful and passionate about selling motorbikes—to offer evidence suggesting the contrary.

I did not get a reply directly from the chief executive of the FCA. Instead, at the end of June 2013, a reply came from Christina Sinclair, then acting director of retail banking in the supervision division. The reply did not tell us any more than we already knew, and it still stressed DK’s ability to lodge a complaint with RBS directly. Ms Sinclair singularly missed the point made by DK and many other businesses that, given their experiences so far, they were frankly petrified of making a formal complaint for fear that the bank would pull the plug on the business. From what I have seen of RBS, they were right to be frightened.

In the interim, DK, like me and all hon. Members in the Chamber, had seen the Tomlinson report and all the stories about the global restructuring group into which DK had been shunted. At the end of last year, DK finally found alternative bankers who were willing to take a proper, unsullied credit decision, but as a parting shot, RBS, in the form of their so-called relationship manager, the inaptly named Vicky Smart of the global restructuring group, said it did not want any of DK’s business any more and withdrew crucial direct debit support for DK’s customer finance arm. Fortunately, DK managed to overcome that apparent act of spite and the new bank put alternatives in place. RBS has continued to deal with DK in that way, refusing any meetings about redress and insisting on communicating through lawyers.

[Steve Rotheram]

It will be cold comfort to DK that the sorry tale my hon. Friend outlines is almost a mirror image of what has happened to a business in my constituency. I am sure other hon. Members will extol the virtues of companies that have also fallen foul of RBS. As I suggested to the hon. Member for Aberconwy (Guto Bebb), does my hon. Friend think that it is a disgrace that the very banks that caused the financial crash benefit from selling sophisticated derivatives to organisations that did not fully appreciate what they were getting into?

[Paul Farrelly]

It is indeed a disgrace. RBS has form not only outside the House, but inside it. The Chair of the Treasury Committee recently said that the bank had misled it. He said:

“If this is how RBS deals with a parliamentary committee, how much can customers and regulators rely on it to be straightforward with them?”

--- Later in debate ---

[Mr Brown]

I thank the hon. Gentleman for that intervention. As I continue this sorry tale, he will see that the business went into litigation on this issue.

[Steve Rotheram]

We have heard the word fear on a number of occasions in this debate. Companies such as the Flanagan Group felt fearful of what the banks might do, but fearful, too, of the reputational damage that might have occurred from an external view of the company. Does my hon. Friend think that this is an appropriate way for banks to act?

[Mr Brown]

We all believe in the role that banks have in our day-to-day lives, whether as individuals, households or businesses. We need to think there is an element of trust. What we have discovered, however, is that there has been far too much mistrust. In addition, some senior people had no idea what their banks were doing. They allowed their managers to carry on selling products, while having no idea of their complexity. One person who worked for Barclays and sold some of these products came to meet me. He was in the Penrith area and decided to come and speak to me about my constituent. He told me that on being introduced to the products, which he was about to sell to customers, he asked his seniors, “What if this or that question is asked?” He was told just to move on, because there were no answers.

The long and short of this tale is that the banks eventually moved in with a team of administrators. I approached the administrators to tell them that I thought what was going on was wrong and that if my constituent went to court he would win his case. The administrators made out that they had to carry on with the business they had been pulled in to conduct, and they went ahead with it. My constituent owed the bank £1.2 million, of which £900,000 was bank charges—an absolute disgrace. As I said to the hon. Member for Hexham (Guy Opperman), my constituent went to court and he won the case. But that matters for nothing. Gone is more than 20 years of a family working together to build a business that was going reasonably well but went badly wrong when they were encouraged to take out products that they did not really understand, and which those selling the products did not really understand either.

I want briefly to mention another, more recent, case relating to another constituent in the far west of my constituency, down in Stranraer. This is a really tragic case. People and businesses do not just have problems with the banks. There are other issues lying in hiding too and some relate to Her Majesty’s Revenue and Customs. This gentleman told me:

“For the last 6 years I have been a victim of the mis-selling of an IRHP SWAP Termed Business Loan.”

The last three years, in particular, had been very difficult. He had been fighting off the bank that had been battling with him because it would not accept that it had mis-sold him a product. I could tell from the number of occasions I met him over the last three years that this was really getting him down. It got to the stage where he had to sell off his mother’s family home of some 44 years. He had remortgaged his own home, incurred legal costs of over £8,000 and had put the family business of over 54 years standing in real jeopardy.

My constituent was eventually on the receiving end of a phone call from the bank to say that it was about to make him an offer within a two-month period, which it has now done. However, that offer of some £76,000 goes nowhere near to meeting the cost to him as a family man who had done nothing else but work morning, noon and night for such a sustained period of time that he missed his family growing up. The offer put him under real pressure. On the second last occasion he came to see me, he was seeking advice but knew in himself that he was being forced to “take it or leave it”, as I mentioned before. The advice from the bank was that this was a “full and final” offer, with no recourse to consequential losses.

Had my constituent not got involved in this loan, he would have been building up his business, but it actually suffered. He wanted to develop the business and the properties he had available for rent. All that was put on hold, however, because he was struggling to meet the bank’s regular demands. My constituent has had to go to Revenue and Customs to strike a deal, agreeing that he would pay the bulk of the VAT he owed and that between now and the end of February everything would be cleared.

--- Later in debate ---

[Cathy Jamieson]

My hon. Friend once again puts forth his points coherently. I am sure the Minister is considering her response. We must always look for unintended consequences. Did the review pull in all possible situations? Perhaps it could pull in more if the Minister is of a mind to look at things slightly differently.

Non-advised sales perhaps strayed into advice. The FCA describes non-advice sales as ones in which

“no personal recommendation is made and you leave the customer to decide how they wish to proceed.”

There is an analogy with other generic advice. If someone recommends that a person should buy household contents insurance without mentioning a specific insurer or policy, and if the recommendation is unconnected with the sale of a contract, that would not fall within the definition of advice. The FCA is clear that sales staff should avoid making personal recommendations, and therefore giving advice. It states that sales staff

“should confirm that the decision is the customer’s and that the”

salesperson “cannot give them advice.” The problem in many of the situations we have heard about today appears to be that sellers actively recommended and even promoted IRHPs to customers. My hon. Friend the Member for Newcastle-under-Lyme (Paul Farrelly) outlined that in some detail, as did my hon. Friend the Member for Dumfries and Galloway. There were devastating consequences for businesses and lives in those situations.

I have criticised the sales-driven culture—the culture of targets, rewards and incentives—in the past. The banking sector will say that it is trying to address that culture and to move to a different approach, but the reality is that the culture was imported into retail banking from the more speculative areas of investment banking, where the risks were greater and the rewards higher. It simply was not appropriate for many of those small businesses and customers. Some of the overt incentives to sell such products, whether or not they were in the customer’s interest, have been removed, but I continue to worry. I want the Minister’s assurance that we are on top of the situation, and that there is no indirect pressure on staff to sell those products. We need to continue that culture change in our banks. That has to come from the top and go right through to the bottom.

On the perceived problems with the FCA scheme, the scheme was supposed to ensure that small business customers who were mis-sold products received an offer of fair and reasonable redress as soon as possible. The FCA tells us that more than 99% of redress offers have been communicated to almost 17,000 small businesses. More than £1.5 billion has been paid out in redress so far, including £300 million in compensation for lost opportunities. However, I think it would be fair to say, given the debate this afternoon, that it is evident that people still have concerns about the scheme’s shortcomings. I hope the FCA will take that into consideration, with support from the Minister. Customers who purchased caps that place a limit on interest rate rises are not included in the scope of the review, unless they have complained to the bank during the course of the independent review and are non-sophisticated customers. Other types of hedged loans were not included in the review process either.

My hon. Friend the Member for Newcastle-under-Lyme mentioned the case of Crestsign v. NatWest, illustrating the difficulty that some small businesses have experienced in getting redress from banks. The judgment in the case concluded that the bankers

“did not show themselves worthy of the trust that was placed…but unfortunately for Crestsign, the common law provides…no remedy because the banks successfully disclaimed responsibility for the advice they gave on the suitability of the swap, which was negligent but not actionable.”

In this case the bank managed to successfully argue that, since it did not owe its customer any duty of care, it had no obligation to pay compensation. We can see why people are concerned. The bank was able to argue its case after the event and was not held to account on whether it should have sold the product in the first place. Worryingly, the independent reviewer KPMG—independent reviewers are a crucial part of the FCA redress process—seemed to agree with the verdict. Does the Minister think that appeals need to be looked at?

I argued at the start of my speech that what we really need is cultural change.

[Steve Rotheram]

Will my hon. Friend give way?

[Cathy Jamieson]

I apologise, but I am at the limit of my time.

Will the Minister please address the lack of an appeal process? Will she address tax treatment by HMRC and look at having a review of compensation levels? I look forward to hearing what she has to say.