Interest Rate Swap Products

Debate between Geoffrey Cox and Mark Williams

Thursday 21st June 2012 Commons Chamber

[Mr Mark Williams (Ceredigion) (LD)]

I congratulate, as everybody else has, my hon. Friend the Member for Aberconwy (Guto Bebb) on securing this debate through the Backbench Business Committee and on the way in which he has led the campaign in this House and outside.

Two of my constituents who have been affected by this issue have said that when they got involved in the Bully-Banks campaign they took some comfort from the fact that many others were in the same position. As I have sat listening to the debate, what I have found most striking is that whatever part of the country or countries in the United Kingdom we come from, there has been an alarming commonality in the message we have presented to the House.

It would be dishonest of me to say that I understand every aspect of these products or the conduct of the banks. I have sat in constituents’ houses as they have poured out the details of what has happened to them, but that in itself has become an issue. If I, as a humble Back-Bench constituency MP, have struggled, why on earth should they be put in that position, especially when the people selling the products seem to have as confused a picture? The scale of the problem is alarming. I think we have seen only the tip of the iceberg and that, as this debate galvanises public opinion, we will hear about many more cases.

I want to reflect, as others have, on a constituency case. One business affected in my constituency is involved in refurbishing flats and letting properties out to students in the tourist and student town of Aberystwyth. My constituents secured a loan from the local bank, the agreement for which specified interest rate protection for a minimum of £800,000. However, at no point was that term clarified—at least, not until after the money had been borrowed. My constituents described to me how a Barclays Capital salesman was introduced to them as a “colleague” by their relationship manager at the bank, with whom they had built up a trusted relationship. We have heard about such cases repeatedly. My constituents already trusted their bank manager to do nothing detrimental to their business, but they did not realise, at the point of initiation, that they were getting involved in a sales process, and at no point was it presented to them as such.

[Mr Cox]

The hon. Gentleman is reciting experiences that are exactly replicated by those of constituents of mine. Indeed, more concerning is the fact that some of my constituents were invited to hotel receptions, for potentially hundreds of businesses to attend, where they received a sales approach like that of a timeshare salesman. My constituents were never told that the salesmen were earning profits from what they were selling and they were never given appropriate advice. Does he agree that the whole flavour of what is coming out of this debate is such that the Minister must now tell the House what prompt and immediate action and inquiry will be undertaken into what is increasingly a very grave scandal?

[Mr Williams]

I completely agree with my hon. and learned Friend: it is indeed a grave scandal. My constituents were not invited to hotels, but they had three meetings in their home. They also had several phone calls and were presented with the choice—if it could be called that—of three essentially similar complex derivative products, which, by their own admission, they struggled to understand and the risks of which were never explained. On many occasions my constituents asked whether they could get out before the end of the term, as they expected that they would need to sell property—an integral part of their business. They were advised to go for a longer term, as Barclays Capital would probably pay them to exit. Having borrowed the money and being unable to pay it all back at short notice if the bank decided to call in the loan, my constituents were presented with no options and felt as though they had no choice but to enter into the swap agreement, involving a rate swap for £750,000 over a 10-year period, at a rate of 5.67%.

The product was finally sold to my constituents in a trade call, although at no point were they told that a trade call had even commenced, and they certainly did not realise that it was legally binding. Understandably, they envisaged that, at some point, they would sign a contract to agree to an interest rate swap, but because they had already signed a customer agreement for private customers, the bank apparently had permission to sell the product to them in that way. Following the phone call, there was a faxed unofficial confirmation, which stated that legal papers would follow, but they did not arrive for two months.

The worry, as we have heard, is that such cases are being replicated across the country. My constituents understandably feel aggrieved that they were sold a product that was completely inappropriate for their business, in that it restricts them from selling property, despite the fact that flexibility to sell property within a few years is a main requirement for their business. They feel aggrieved because the arrangement ties them to a longer-term debt on which they cannot afford to make full capital payments, and because the risks were not property explained. They also feel aggrieved at the enormous breakage costs and at the fact that no explanation was offered of how those costs were calculated. The value of the swap is too high, and since capital payments began to be taken prematurely it has created severe cash flow problems for the business.

I have been in touch with the Federation of Small Businesses about this, although I did not need to do so, as it was already aware of the numbers of alarming cases elsewhere, many of which we have heard about in the debate. My constituents inform me that, in the years following the sales of swaps, banks have been guilty of compounding the problems of the SMEs that have them—alarmingly, in some cases particularly of those that have had the bravery to complain. That is acutely worrying.

There are many further points that need consideration, not least the issue of redress. The most powerful message that we can send out today is that the Financial Services Authority should speedily produce its report into the extent of the practices involved. At that point, I am sure that the House will wish to take the matter further. I think it was the hon. Member for Ayr, Carrick and Cumnock (Sandra Osborne) who mentioned the need for urgency, especially in the light of the six-year time constraint. My constituents face the prospect of having to take action by February next year. Theirs is a functioning business, and this House is supposed to support functioning businesses in these dire economic times. There is a phrase in Welsh, chwarae teg, which means “fair play”, and that is what is now needed.