Interest Rate Swap Derivatives

Bob Stewart Excerpts

Thursday 24th October 2013 Commons Chamber

[Sir Gerald Howarth (Aldershot) (Con)]

I join everyone else in congratulating my hon. Friend the Member for Aberconwy (Guto Bebb)—and also my hon. Friend the Member for Wyre Forest (Mark Garnier), whose banking career was much more distinguished than my own—on initiating this debate. I hope that the message will go out to the British people, and particularly to small businesses, that Parliament understands their grievances and is prepared to be robust in addressing them. We look to the Government to be equally robust in their response to the debate.

I want to raise the specific case of Pacer Marine, a boat business that provides chandlery services and sells day boats, rigid inflatable boats and the like. It is located just 10 minutes from junction 4 of the M3, so if any of my right hon. and hon. Friends would like to take advantage of that business, they should please do so. The principals of the business, Dennis Davis and his son Kevin, are constituents of the Secretary of State for Health, my right hon. Friend the Member for South West Surrey (Mr Hunt), but their business is located in my constituency. My right hon. Friend is as concerned about this matter as I am.

Pacer Marine moved in 2005. Mr Davis and his son had previously been renting premises, but they found a place to buy in Aldershot. They went to their bank for a normal commercial 25-year mortgage, but that was not available. Dennis Davis has described his discussions with NatWest:

“The bank were fairly aggressive from the start. Our 2 corporate managers came along to see us, then told us about the hedging/rate swap, and that they would only give us a ten year fixed mortgage with a further 5 years. We wanted a 20/25 year term. They charged us a greater rate than normal although we challenged them on it. The main reason for the hedge/swap was because, in their words, they said rates never go down. Well, as we all know now, they did. They then at another meeting introduced a third person who did the deed. Because of the position we were in we agreed to it, but we had always felt that we had been mugged.”

I have done an interest rate swap deal, so I know that they are extremely complex. One wonders what on earth the Royal Bank of Scotland was doing trying to present this sort of opportunity to a very small business.

The documentation provided by RBS is interesting. Part of the background it gave included this statement:

“Loan serviceability is tight…so there is a ‘condition of sanction’ that an interest rate management tool be put in place to protect you from variable base rate”.

Protecting interest rate liability is a perfectly sensible issue to discuss, but we should note that this was a condition of sanction. In a market update, the bank interestingly pointed to all the reasons why interest rates were unlikely to go down and more likely to go up, yet the memo acknowledged:

“There were mixed views from you on base: you saw the possibility of cuts of between half to 1%”.

The bank was recognising the concerns of the customer, but actually trying to make the case that the customer was likely to be wrong and that interest rates were more likely to go up so that the hedging proposal could be put to him.

The person involved was an employee of another part of RBS, so his interest was to make the most money for his unit by exploiting the uninitiated customer and flogging him business that he did not understand. I asked Mr Davis, “Why did you go into this? Did you consult a lawyer.” He responded by saying:

“We trusted the bank. Our business is boat chandlery, not financial wizardry. We thought we were getting the best advice from them. We never thought we would have to go to Peckham Market and deal with a bunch of Del Boys.”

That was how the people in the business felt about it.

Both my right hon. Friend the Member for South West Surrey and I raised this issue with Stephen Hester in June 2012. Needless to say, we got some sort of reply from something called “Group Executive Office”, whoever those people are, but the matter remains unresolved to this day, notwithstanding the fact that when I visited my constituent at the end of August or the beginning of September, they were due to have a meeting with RBS to go through the process which, as many right hon. and hon. Members have mentioned, moves at a snail’s pace. Two months on, we are no further forward. This is an absolute disgrace. We have to be clear that although the banking system and the banking business are important to the prosperity of the United Kingdom, the banks have a lot to answer for.

[Bob Stewart (Beckenham) (Con)]

I was really taken by what my hon. Friend the Member for Harrogate and Knaresborough (Andrew Jones) said: perhaps the FCA should stop all repayments to banks until these problems are sorted out, certainly in specific cases. That might help the constituent of my hon. Friend the Member for Aldershot (Sir Gerald Howarth).

[Sir Gerald Howarth]

Several measures have been suggested during the debate and I hope that the Government will respond to them. I hope, too, that the FCA will respond more robustly than it has up to now.

My hon. Friend the Member for South West Devon (Mr Streeter) mentioned a meeting with Mr Chris Sullivan. Interestingly, he wrote to my right hon. Friend the Member for South West Surrey:

“As a Group, we are committed to the fair and timely treatment of our customers”—

what a fantastic and admirable sentiment!

--- Later in debate ---

[Neil Parish (Tiverton and Honiton) (Con)]

It is a great pleasure to see you in the Chair, Madam Deputy Speaker. I congratulate you. I also congratulate my hon. Friend the Member for Aberconwy (Guto Bebb) on opening the debate, and congratulate him and his Committee on all the work they have done.

In mythology, David felled Goliath. [Hon. Members: “It is in the Bible!”] It is in the Bible, but it is also slightly mythological. [Hon. Members: “It happened!”] If Members have absolute proof, that is fine. Anyway, I want to make a serious point. We have seen a banking sector that has used corporate lawyers and all its muscle and might to ensure that it can take on small businesses.

This is what small business is up against. People can call me cynical if they like, but much of this selling of swaps was going on in 2006 and 2007, when interest rates were 5.5%, but by 2009 they had dropped to 0.5%, and I believe that many of those banks knew that interest rates were going to fall. Why were they so keen to go out and get everybody tied up in these swaps? Under the terms of the swaps, the higher interest rate could probably be capped at around 6.9%, but if they started to fall below 4% or 3%, people immediately got clobbered for huge amounts of money. It was therefore very much in the banks’ interests to get people into these schemes. That is where I do actually say that what went on was criminal. That is why we expect our great Minister, along with the FCA, to do something about this. The fact that only 32 or 33 cases in the whole country have been dealt with is an absolute scandal.

[Bob Stewart]

My hon. Friend referred to the Bible. Does he agree that this would be called usury or robbery in the Bible?