Interest Rate Swap Derivatives

Chris Heaton-Harris Excerpts

Thursday 24th October 2013 Commons Chamber

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

I echo everyone else’s congratulations to my hon. Friend the Member for Aberconwy (Guto Bebb) on driving the campaign forward in such a passionate way. I also thank my hon. Friend the Member for Wyre Forest (Mark Garnier) for explaining to me something that I thought I understood and for proving that I did not in fact understand it—indeed, I am now worse off in my understanding of swaps than I was before he started speaking.

I am here because I want to talk about two constituency cases. Many Members have raised individual points, and each case seems slightly nuanced in different ways. My constituents simply went to their banks for a loan and came away with a product that they did not expect to come away with—a loan and a swap, or just a straightforward swap. In the first debate we had on this subject, I mentioned a constituency case involving a gentleman called Philip Derbyshire of Spirit Motors. He banks with Lloyds and was sold a product not just as a loan or a swap, but as a protection for his business—if he had subsequently sold his business or passed away, the product would have become an asset for him.

A number of people have talked about not understanding the product that was sold to them—that was well disclosed previously—but many were also unaware of the magnitude of the break cost or mark-to-market, as it is called. Banks said when the product was sold that they were unable to provide indicative figures for breakage costs, but it is absolutely obvious that this was not the case. The banks simply chose not to provide a scenario at that time. In the cases I have dealt with, my constituents took bank advice on what were very complicated products.

Mr Derbyshire has had an interesting time of late. He has been dealing with the lawyers from Lloyds, because he, like many others, had an interesting waiver—a disclaimer—in the hedge confirmation letters he received. Lloyds’s lawyers have denied all liability and hidden behind the waiver, which has a cash value in his contract of about £5,000, against a claim of well over £1 million. Slater and Gordon, Mr Derbyshire’s solicitors, have described the case of mis-selling by Lloyds as unbelievably shocking. Lloyds’s lawyers’ comments in response to Mr Derbyshire’s claim were quite interesting. They said that the account of the meeting at Mr Derbyshire’s home with a Lloyds representative was inaccurate and that he had “put a gloss on it”, vehemently denying that it had been asked whether Mr Derbyshire’s company was likely to breach any of the bank covenants at the end of the financial year, which ended on 30 November 2009. Mr Derbyshire completely contests this. He remembers the question with complete clarity—and I believe him completely—and his response to it. Indeed, in the end, Mr Derbyshire did not breach the terms of the covenants, but by then the damage from the waiver in the contract was done.

According to the Bully-Banks survey, 30% of Lloyds customers are classed as “sophisticated”, as my hon. Friend the Member for Romsey and Southampton North (Caroline Nokes) described. Mr Derbyshire has told me his level of education. He is a fantastic businessman; he might not have been the world’s most educated man. As such, he is ineligible, because he is “sophisticated” in financial matters for the purposes of the FCA review—obviously that is a matter of judgment on the part of his bank and himself. Mr Derbyshire has been a pressing individual. He wrote a personal letter, putting his case directly to the Lloyds chief executive—and of course, no one ever gets a reply to such a letter. Mr Derbyshire believes he has been treated with utter contempt by his bank—a bank that he used to have a huge amount of respect for and with which he had dealings for a long time.

The second case involves my constituent Mr Solanki, who owns Ashdown House residential care home, a small home that serves the aged local community with a specialised and dedicated dementia unit. Back in early 2006, he was approached by the manager of his bank, Barclays, who convinced him that, as interest rates were more than likely to rise, he should buy a 20-year interest rate hedging product to protect the business. The product was way beyond Mr Solanki’s technical understanding and abilities, so he was referred to an “expert” at BarCap, who convinced him that rates would rise significantly and that the product would protect him. Neither the BarCap salesman nor the bank manager explained the risks of the product; however, Mr Solanki was advised that it was transportable and easy to exit. Mr Solanki and the adviser never physically met—everything was done over the phone—which must in some way be non-compliant.

Soon after Mr Solanki had taken out the product, interest rates fell sharply, and we all know what happened from there. Because of the cost he was paying for the product, which ended up being more than the mortgage he had taken out on the business in the first place, he was unable to maintain the level and standard of the home. As occupancy fell, the company was forced to lay off staff and carry out patchwork repairs wherever possible. Much has happened since 2009, but essentially he is in a terrible place because of these awful products. Redress needs to happen; it needs to happen quickly.