Interest Rate Swap Products

Chris Heaton-Harris Excerpts

Thursday 21st June 2012 Commons Chamber

[Chris Heaton-Harris (Daventry) (Con)]

Thank you for calling me to speak in the debate, Mr Deputy Speaker. I appreciate the opportunity as I did arrive late. I have come directly from the Defamation Bill Committee, but I hope that I shall not defame the banks too much as I talk about this scandal that they have been perpetrating. I shall test the Enoch Powell theory of public speaking today; if it is true, this is going to be a blinder of a speech.

I congratulate my hon. Friend the Member for Aberconwy (Guto Bebb) on securing the debate. The quality of all the contributions, raising constituency cases as I intend to do, has shown me that this scam, which has been taking place for a long time, is a massive one of ginormous scale that requires firm action as soon as possible. I also congratulate the Backbench Business Committee, which has yet again come up trumps in calling a debate that our constituents would like to hear, and that probably would not have been heard in normal circumstances under previous mandates.

I will try not to repeat the points that other Members have made, but I want to give some details about a couple of cases in my constituency. I also want to press the Minister on the matter and issue a call for action. My hon. Friend the Member for Staffordshire Moorlands (Karen Bradley) gave the House a description of the swaps. I was a small business man before I entered politics, and I can understand how those businesses were caught by this scam. The relationship that they have with their bank manager—and perhaps with their relationship manager, as we have heard—is all important, or it certainly was until these products started to be sold. It was a relationship based on friendship and trust. It was understood that products were being bought and used, but it was always felt that independent advice was being offered and that the bank would put you right all the time. That has been completely lost with the sale of these interest rate swap agreements. Something really bad happened back in 2003-04 when all this started to happen.

Two of my constituency cases are happy to be named and others are not. My constituency is full of vibrant small businesses. In one case, Mr Benyon has two companies: Oastlodge Ltd and Hallway Estates Ltd. Oastlodge had been with Lloyds bank for over 35 years, and Hallway for just over 10. In 2004, Oastlodge was taking out a large loan and was advised to take out a swap. This would have increased overall borrowing costs—the right questions were asked of the person trying to sell the product—so the company requested not to enter. In 2005, Lloyds came back with an offer for a swap where the bank would halve interest margins on all existing loans. The offer was in writing. A business man confronted with having interest loan costs halved is likely to be interested in taking up the offer. In 2006, the company was sold a further swap, on the basis of reducing the overall cost of borrowing and saving even more money.

In 2008, Oastlodge and Hallway were offered several more swaps, and one in particular was highlighted. All the benefits were listed in great detail, but none of the downsides; neither was any information provided on potential breakdown costs. It was also explained in writing that

“there would be no risk to borrowing costs trailing higher”.

The previous swap had been for 10 years; the new ones were for 20 years—far longer than the duration of the loans at the time. The swap was signed up to, with the companies knowing full well—or, at least, thinking they did—that there was a ceiling on the borrowing costs.

In 2009, the companies were informed, when their loans were up for renewal, that their lending margin was going to double. They complained that the bank was reneging on a deal, but were told that there was nothing formally agreed. The bank could, however, sell them another swap to reduce borrowing costs until 2013. They now had no choice but to enter the new swap at a cost of about £200,000 a year.

While they were making their complaint, the companies discovered that the swap was not a relationship with the bank they thought they were dealing with, as it had been sold on in the financial markets. Other Members have highlighted this. The companies took legal and financial advice but, despite having a good case, were wary of risking the extra costs of taking the bank to court. In fact, my hon. Friend the Member for Aberconwy is their last best hope, and I suspect that that is so in many other cases, too.

[George Eustice]

One problem many businesses have is that when they decide they want to take legal action against a bank, they often find that many of the law firms that might appear to be the natural ones to turn to have effectively been bought off by the banks through things called permanent retainers and through the approved panels. Some of the best litigators in the country are thus often barred from acting against the banks.

[Chris Heaton-Harris]

I did not know that, and I thank my hon. Friend for raising it.

Lloyds bank has denied any wrongdoing whatever, claiming that the margin reduction was not necessary for the duration of the swap, and it hides behind the small print that says, as we heard earlier, that any advice given was not, in fact, “advice”.

[Matthew Hancock (West Suffolk) (Con)]

Does my hon. Friend agree that his constituency case is like that of many across the country in that the question of duration is the problem? A very successful business in my constituency was offered a loan of five years and a swap of 10 years; the mismatch between the two time periods is likely to cause a huge jump in costs as the loan runs out in a few months’ time, with five further years of swap, which the company did not need, remaining to match off the initial loan.

[Chris Heaton-Harris]

My hon. Friend is right. My constituents are in exactly the same position.

There is, at least, provision for my constituents to break the swap, but doing so would cost them a cool £1 million. They have complained to the financial services ombudsman, asking for compensation and asking for the original swap margin to be reinstated at its 2006 level or, alternatively, for the swap to be torn up so that they can keep their existing margin. They have been advised that the 2008 swap was mis-sold and inappropriate for their business, and they are discussing the details of that with the financial services ombudsman.

In 2008 Lloyds sold another of my constituents, Phillip Derbyshire, an enhanced collar—or, as it was described by my hon. Friend the Member for Wyre Forest (Mark Garnier), an enhanced noose. It has cost him £1.275 million, about 75% of his pension pool. He is 64 years old. Both the FSO and the Financial Services Authority are unable to assist him, and Lloyds claims that there has been no wrongdoing. My constituent claims that the circumstances of sale were

“tantamount to a sting operation under duress”,

and I completely believe him.

[Richard Fuller (Bedford) (Con)]

Does not the abuse of trust that my hon. Friend is describing give rise to another fear—that the FSA will roll over and talk about changing the rules while missing the critical issue of compensation for people who have suffered, which is what the House wants to see?

[Chris Heaton-Harris]

I entirely concur with my hon. Friend, and I shall end my speech by making the same point.

Lloyds repeatedly referred to the product that it was selling to my constituent as “a protection”, both orally and in writing. The downsides were simply not explained. My constituent was told that if he sold his business or died, the product would be an asset. All that was independently witnessed, because he is quite a savvy man. He was told by an independent banking consultant that the product was totally inappropriate to his needs, and that it was beyond the level of his financial sophistication to understand it. He is now looking into whether he can sue Lloyds.

Does the Minister agree that it is wrong for banks to make loans contingent on the purchase of other financial products such as IRSAs? Where are we with this issue now? What conclusion will be reached from the debate? We have seen the motion, and we have heard from many Members in all parts of the House who want to see forthright action by the Treasury and the FSA, and compensation for their constituents. Can the FSA be persuaded to move faster? As for compensation, there is an absolute need for it.

This is a scandal and a scam. It is finished now, but we need to ensure that it never happens again.