The Economic Secretary to the Treasury (Miss Chloe Smith)
We have had a very fine debate this afternoon and I congratulate my hon. Friend the Member for Aberconwy (Guto Bebb) on securing it and moving the motion. He will be pleased to learn that I will leave him a few minutes at the end so that he can complete the job. My hon. Friend the Financial Secretary, who is in Istanbul on Government business, is disappointed to miss the debate, but I shall endeavour to do the best job I can in his stead.
I have listened to and considered carefully what hon. Members have said today and will try to respond to as many Back-Bench points as possible. I suggest that it is not really a day for a great political answer. Instead, I want to talk about some of the detail of what is happening in this instance. To name but a few of the contributions that have been made, we heard a passionate contribution from the hon. Member for Wolverhampton North East (Emma Reynolds) and we heard from my hon. Friend the Member for Staffordshire Moorlands (Karen Bradley), who explained the issue in terms of tea and strawberries—I wondered whether to intervene to ask her what would happen if someone liked tea and strawberries together, but today is a day for much more serious material.
My hon. Friends the Members for Finchley and Golders Green (Mike Freer), for South Derbyshire (Heather Wheeler) and for Ceredigion (Mr Williams) really underlined one of the main points. Through no fault of their own very fine brains, even they found some of these issues hard to comprehend in their constituency surgeries. I think that that is because of some of the complexity of the products available. Perhaps my hon. Friend the Member for Staffordshire Moorlands could explain it to them with the aid of tea to help it all go down well.
The House needs to be reassured that the Government have taken this issue extremely seriously. The FSA, as the independent regulator, is responsible for determining the appropriate regulatory response, but today I can update the House on what the FSA is doing and when it will be doing it by, and I will respond to a few further points that have been made today.
To return to the products, however, I should note that these interest rate products are designed to reduce a business’s vulnerability—in theory—to interest rate fluctuations, but they can be very complex products, ranging from relatively simple interest rate caps to interest rate swaps and, then, to both simple and structured collars. The bulk of those products were sold, alongside loans, to businesses between 2005 and 2008, the trouble being that since then interest rates have been very much lower and businesses that took out such products have found themselves paying much higher rates than the base rate. A growing number of small and medium-sized enterprises have come forward to claim that they have been mis-sold such products.
Another real telling point from today’s debate was the number of times that hon. Members repeated the call for anonymity on behalf of their constituents, and that really brings home the seriousness with which we need to take the subject and, of course, the serious consequences that businesses are facing.
Since the issue first came to light, the Government have been working closely with the FSA and have assisted it wherever possible. The authority, as some Members will know, began its initial survey of the issue back in March, and that initial work pointed to concerns, certainly about the suitability of some of these products for SMEs, and about some of the sales practices involved.
There was evidence in some cases of over-hedging—of the products lasting longer than the duration of the loan they were protecting, to which hon. Members have referred in examples; and in some cases there seemed to be incentives for staff to sell more of the more complex products.
As a result, the FSA agreed to carry out a more in-depth review into alleged mis-selling. That is now well under way, and I shall make the House aware of what I think is a positive point: the FSA will be able to report its findings at the end of this month—at the end of June. I wholeheartedly welcome the review, and the Government are awaiting its conclusions, but I think that hon. Members will welcome those results coming forth at the end of June—perhaps earlier than some had expected, given their comments today.
In taking forward the review, the FSA has gathered further information from banks and carried out more than 100 interviews with small businesses in order to establish for its findings the robust fact base that one would expect. It does require detailed analysis, and I will set out in a little more detail the issues that the FSA’s review is likely to cover.
Under the banking conduct of business sourcebook rules, banks simply cannot sell products that are not appropriate for a customer without warning them, so the FSA, in addition to exploring further the questions on over-hedging and on sales incentives which its initial work revealed, is seeking to establish whether the sales of those products were appropriate for small businesses, as they might not have understood how they would operate. I acknowledge the point, made by some hon. Members today, that we need to recognise, in their words, that some business customers are not sophisticated—and that is absolutely right. If such a situation has occurred, it is a concern.
The Financial Services and Markets Act 2000 already requires the FSA to have regard to the different degrees of risk in different investment, and to the differing degree of experience and expertise that consumers have. We are adding to that in the Financial Services Bill, and that is very important, as hon. Members have said today.
The FSA’s review is also going to establish a clear understanding of banks’ sales practices, including whether they were advised sales or non-advised sales, and whether the downside risks were clearly communicated orally as well as on paper.
The review will also look at break costs, which several businesses suggest were not disclosed to them when they purchased the product, and it will also attempt to establish whether the banks told customers explicitly or otherwise that the hedging product was a requirement of the loan, an issue that I know many hon. Members have raised today.
In answer to some of the key points that have been made today, the desire for banks not to treat adversely or to punish those who make complaints has come up repeatedly, and it is one of the hard-hitting points that will stay in the mind from today’s debate. I share hon. Members’ serious concerns about that; banks should not be able to treat customers unfairly in that way. The examples that hon. Members have been giving do not seem consistent with the principle of treating customers fairly. The Government want to be assured that those making complaints will not be punished as a consequence. When the FSA produces its report, I am sure that we will be able to go into more detail with the evidence in front of us.
Damian Collins
If the FSA report finds that the products may have been mis-sold, will there at least be the chance for businesses to break out of the agreements or for there to be a moratorium on payments while individual compensation claims are analysed?
Miss Smith
I hear that point, which has been made a number of times today. It is not my place to pre-empt the findings, not least because the FSA is an independent regulator and because the results and evidence have not yet come together.
However, I assure the House that not only will my hon. Friend the Financial Secretary be listening very carefully to that request, but the FSA already has a powerful toolkit to deal effectively with any potential mis-selling. That can include powers to establish industry-wide or single-firm redress schemes, which comes from the Financial Services and Markets Act 2000; to refer the banks to enforcement; to use supervisory measures; and to obtain redress for consumers through the use of restitution powers.
I want to leave enough time for my hon. Friend the Member for Aberconwy to return to this debate. I come back to the point about the SMEs that have been affected; that is the powerful point that has come out today. Hon. Members have spoken deeply about the difficulties faced by small businesses in their constituencies. The Government are helping small businesses in difficulty in other ways: there are HMRC’s “time to pay” arrangements and advice and information through the Business Link website and other far larger points throughout the economy.
I echo the words of the shadow Minister, the hon. Member for Wolverhampton North East. I encourage any business that believes it was mis-sold one of the products to contact the FSA if it has not already done so, and to give as much information as possible about its case. The report is coming back at the end of June, so I advise such businesses to be swift. That will help the FSA to continue to develop its understanding.
The Government are fully aware of the issue. I am grateful to hon. Members present for putting flesh on the bones. I hope that I have provided the House with some reassurance on what the FSA is doing, the range of the FSA’s powers and the closeness with which the Government have worked with the FSA. We must allow the review to run its course, but we should all look forward to its findings.