Interest Rate Swap Derivatives

David Nuttall Excerpts

Thursday 24th October 2013 Commons Chamber

[Mr David Nuttall (Bury North) (Con)]

I pay tribute to the sterling work of my hon. Friend the Member for Aberconwy (Guto Bebb) who secured this debate, and I thank the Backbench Business Committee for granting it time to take place.

The sale of interest rate hedging products to small and medium-sized businesses that simply wanted a loan from one of our high street banks is nothing less than a national scandal. Let me say straight away that I know there are many hard-working, decent and honest people involved in our banking industry, who will be as horrified as everyone else at what happened with the sale of these products. With the sale of interest rate hedging products, however, banks allowed their desire to make a profit to override the need to be open and transparent with their customers. The sellers of those financial instruments blinded customers with a snowstorm of financial gobbledegook. They presented a complex and risky financial product as something that, if people signed up to it, would be to their benefit. In reality, nothing could be further from the truth.

Small companies in my Bury North constituency have been affected, and I want to outline briefly one particular case—understandably, and for obvious reasons, many constituents are reluctant to allow their cases to be made public. Lavender Hotels owns and runs a small chain of hotels in north-west England. In January 2007, it took out a loan from Barclays to finance the purchase of another hotel. A couple of months later, the bank—which Lavender Hotels had banked with for more than two decades—suggested that it fix its interest rates on the grounds that no one could predict where interest rates were heading.

The bank mentioned rate fixing, collars and caps, and stressed that those were not a profit earner for the bank but merely designed to give the customer protection. The bank told the customer that the agreement could be transferred to another bank, and that it would not create any obstacle to changing banks. Although the term “rate swap” was initially used, it was quickly replaced by the term “fixing”, suggesting that the bank was fixing the interest rate, rather like a fixed-rate mortgage. The term “fixing” certainly suggests certainty, not risk, which I submit was misleading.

That initial meeting with the relationship manager was followed by a further meeting with a salesman—although he was never described as such—who amplified the fears of rising interest rates. At no point was any explanation given of the penalties that would be payable if the customer wanted to terminate the agreement. The bank did say, however, that to fix a cap or collar an upfront fee would have to be paid, which could be as much as £20,000. Since most customers thought that such charges were excessive, they decided to go with an interest rate swap agreement that meant that if interest rates went up, no charges would be paid at all. The salesman never explained that he would be earning commission on the deal. Indeed, it was stressed that it was just a service that Barclays was providing for the benefit of its customers.

The managing director of the company agreed to fix—as he thought—the interest rate of around 40% of the company’s total loans. When interest rates started to reduce, what should have been good news turned into a nightmare and the amount that had to be paid back to Barclays rose dramatically. When the company sought a loan to purchase another hotel the following year, it was forced to enter into a 10-year rate swap. The managing director said:

“I was put in no doubt that had I not agreed the rate swap I would not have been granted the loan.”

By 2010 the customer had discovered that the interest rate swap agreement did indeed create a problem if they wanted to change banks, and the company was told it would cost over £95,000 to exit the agreement. The company had no alternative but to agree to its loans being re-priced. It had been misled into being tied unnecessarily to Barclays by a financial product that was inappropriate and that I believe had been mis-sold.

The managing director told me:

“Since the publicity surrounding the mis-selling of rate swaps, and my further investigation into the practice, I feel cheated. What has angered me the most is that my trusted manager, with whom I had developed such a strong relationship, lied in respect of the potential profitability of these rate swap deals to Barclays.”

As a result of those agreements, my constituents have lost hundreds of thousands of pounds, but despite the problems caused by interest rate swap agreements, Lavender Hotels is surviving and progressing well. The company is ahead of target and continues to trade profitably. It would, of course, be doing even better had it been able to trust its bank, and not been penalised by it because of a totally unsuitable financial product.

These companies are suffering and need help now. The redress scheme is progressing too slowly and must be speeded up. Livelihoods are at stake; those companies need action and they need it now.