Interest Rate Swap Derivatives

Debate between Mark Garnier and Richard Fuller

Thursday 24th October 2013 Commons Chamber

[Mark Garnier]

I will try to explain the issue as simply as I can now.

Imagine a second-hand-car dealer. He may buy a dodgy motor on his own books and try to make as big a turn as he can, but he risks not getting his money back. Now imagine a car dealer with a valuable vintage car who aligns a seller and buyer at exactly the same time. He takes a turn with no risk at all, and that is how a swap behaves. Now imagine that, having lined up that trade, he takes the money from the buyer, so has a contractual agreement with them, and agrees a sale with the seller. However, on the way to deliver the car, he writes it off in a crash and is not insured. He still has liabilities on both sides—he still has to deliver a car to the buyer and has to pay the seller. That is the mess that the banks are in. They have caused themselves a massive car crash and have to look after the other side of the trade.

We are fully aware of the losses to the banks on the financial redress scheme—plus, obviously, the consequential loss scheme as well. We have heard about how much has been put aside, and there will be debate about whether that is the right amount or not. However, we have heard nothing yet about the value of the liability on the other side of the swap—the liability to institutions, most likely to be pension funds, that still needs to be honoured. That has implications for the stability of the banks and shows why it is important for banks to keep the redress scheme running for as long as possible.

[Richard Fuller]

rose—

[Mark Garnier]

I see that my hon. Friend wants to intervene, but may I develop my point?

The financial redress scheme has a specific value, based on a number of factors—including, crucially, interest rates and time. Similarly, time to run is a key component of the value of the other side of the swap. With interest rates so low, the longer the time to run, the higher its value to the customer and the higher the liability to the bank. As a result, we get a built in incentive for the banks to delay settlement for as long as possible. With each day that goes by, the liability on the other side of the swap is reducing.

Harry Wilson, of The Daily Telegraph, has put in freedom of information requests to the Financial Conduct Authority to find out exactly what the loss on the other side of the trade will be. Amazingly, nobody seems to have the answer. It seems inconceivable that the banks would not have the information. Any derivatives trading room team, especially on a swaps desk, will have detailed information on the extent of the liabilities; they have to know that. Even if the swaps team does not, the risk or treasury department should know it—loads of people should know it. It is extraordinary that nobody is coming forward with the information.

The issue has been dragging on for far too long. Too many businesses have failed as a result of it and it is likely that too many more have fallen into that twilight zone of bad forbearance by banks, which sometimes keep otherwise dead institutions alive simply because it is in their interests.

I spent the best part of the last year on the Banking Commission considering the matter. It is worth noting that this crisis happened before the Banking Commission, the financial crisis and the rest of it. However, today the banks have to prove that they have moved on, that they should now be allowed to come into polite society and will do the right thing by the consumer.

Financial Services (Banking Reform) Bill

Debate between Mark Garnier and Richard Fuller

Monday 8th July 2013 Commons Chamber

[Richard Fuller]

I am grateful for that intervention. A lot in the commission’s recommendations reflects the seriousness with which it considered that point, and rightly so. In the intervening 12 months, I have dealt with constituents whose businesses have been put at risk because of the fraud of interest rate swap mis-selling and whose lives have been rent asunder by payment protection insurance mis-selling, and the Government have also taken action on the fiddling and fixing of LIBOR. Beyond that, some of us have been dealing with regulatory failures on Equitable Life. My view is that jail for such bankers and for those responsible is the only fair outcome for the victims of those scams. Despite the intervention from the hon. Member for Edmonton (Mr Love), I must still ask where justice is to be found for the victims of those crimes in the recommendations and in the amendments tabled today.

Banking is full of honest and decent men and women. As my hon. Friend the Member for North East Cambridgeshire (Stephen Barclay) said, one of the attractions of new clause 2 is that it focuses like a laser beam on the individuals who are responsible and culpable. If we fail to do that and those people do not go to jail, where is the justice for all the other people who work in financial services honestly on behalf of their clients every day?

It is not a habit of this House to consider retrospective legislation, but I want to mention that in a minute. First, let me ask the Minister a couple of questions. In the senior persons regime and the actions that would be covered by new clause 11, the focus is on named individuals at the top. As we saw in the interest rate swaps, a lot of the decisions made by the senior ranks at the banks were translated into budgets and business plans and transferred down through the hierarchy of the banks. Perhaps the Minister, when he considers the issue of conduct, could answer the question of how those extensions beyond the senior persons regime will be handled.

[Mark Garnier]

I am grateful to my hon. Friend for his comments about my contribution to the Parliamentary Commission on Banking Standards. He raises a number of points and as the chairman of the sub-panel that considered below board level corporate governance I can say to him that the management structures of banks are so fiendishly complex that there is little way that the senior managers of banks can translate their wishes all the way down to the bottom. Other evidence gave reasons why the senior management in banks can effectively set up what amounts to an accountability firewall, thereby putting wilful ignorance between them and the activities that go on in the front line and absolving themselves from any responsibility for any misconduct at the bottom end of the bank. That is a very serious issue.

[Richard Fuller]

I am grateful for that intervention, but I do not want to attempt to get into the debate that the commission has considered thoroughly and much more knowledgably than I would be able to do.

The House does not frequently indulge in passing retrospective legislation, but if the senior persons regime is appropriate, is there merit in applying it retrospectively, if only in the form of an exercise through which to judge the conduct of those involved in financial services—in the banks and elsewhere? Whether that took the form of a self-audit conducted by the financial institutions themselves, or further work for the banking commission, to the extent to which that would be feasible, it would be welcome.