Interest Rate Swap Products

Glyn Davies Excerpts

Thursday 21st June 2012 Commons Chamber

[Guto Bebb]

Thank you for your guidance, Madam Deputy Speaker. I will refrain from taking any more interventions and finish my comments.

The figures from Bully-Banks illustrate the fact that businesses feel that they have been mis-sold such products. The final figure from Bully-Banks that is worth mentioning is that 75% of its members claim that the swap product was a condition of the loan agreement that they entered into. Some Members might say that the way forward is therefore for individual businesses to take legal action on that basis, but I have concerns about that. A solicitor said to me yesterday that the problem in England and Wales is that the law is far too bank-friendly. There is a concern that in many cases businesses that take legal action face costly cases before the banks finally settle and put in place a gagging order. It is also a concern that small businesses should be expected to fund their own cases when they are already in crisis

[Glyn Davies (Montgomeryshire) (Con)]

Will my hon. Friend take an intervention?

[Guto Bebb]

I will not take another intervention, due to the guidance from Madam Deputy Speaker.

Small businesses that have to take legal action also face the risk of losing the support of their banks. There are examples of loans being called in or overdraft facilities being taken away from businesses that are taking action. I therefore do not think that the way forward is necessarily to expect individual businesses to take action against the banks, unless we can have some certainty that the banks will not act in that way.

The scale of the problem is significantly greater than we have accepted to date. Today the Law Society Gazette gives the figure of about 4,000 businesses affected, with about £1 billion-worth of potential claims. In my view that figure is probably an underestimate, so the scale of the problem should be taken seriously.

Let me state what I am calling for from this debate. It is very easy to have a debate in which we all highlight our concerns about individual businesses and our belief that the banks have behaved badly, but this House has a responsibility to try to offer a solution. We need to encourage the Financial Services Authority to move more quickly to a resolution of this issue. It needs to inform the banks that, for example, they have an obligation and a responsibility to act fairly with their clients. We also need some transparency from the banks about the exact size of the problem. We know, for example, that between 2006 and 2010 the banks engaged in significant amounts of swaps. Some of them might have been completely legitimate, but quite a few were sold to small businesses.

Those small businesses are feeling under pressure from their banks, so my specific request today is for the Minister to call on the FSA to give written assurances that the banks will not adversely treat any business that makes a complaint. We live in a country governed by law. If a business wants to make a complaint, it should not be subject to undue pressure from its bank. In the same way, if a complaint has been made to a bank or the FSA, the bank should refrain from foreclosing on that business. Those are my short-term requests for the Minister. In the long term, I think it is crucial—

--- Later in debate ---

[Emma Reynolds (Wolverhampton North East) (Lab)]

I, too, would like to applaud the hon. Member for Aberconwy (Guto Bebb) for delivering such a fantastic speech. I want to tell the House about a similar case in my constituency. It is the case of Guardian Care Homes, and it has already been mentioned by my right hon. Friend the Member for Wentworth and Dearne (John Healey). The company’s headquarters are in my constituency, but it employs about 900 staff in 30 care homes across the country. Small and medium-sized enterprises such as these need to be supported, rather than exploited.

I recently met members of the senior management at Guardian Care Homes, and I was shocked by what they told me. In 2007, they were sold two interest rate swap products, which were taken out against existing loans that had been taken out to improve the business model and to improve the care homes. They also said that the bank that sold them the products told them that this was a condition of getting the original loans, and that the products would protect them against interest rate rises. They were not informed of the dangers and financial implications of interest rate falls, however. According to Guardian Care Homes, the bank did not at any point during the sale of those swaps fulfil its obligation to explain that such costs could be incurred.

Guardian Care Homes also discovered that the swaps that had been sold to them vastly exceeded the original terms of the loans, by 10 and 15 years respectively, which made things incredibly difficult for the company in the long term. An independent study of this specific case recently described the bank’s behaviour as reckless, and a complaint has been made against the bank. It beggars belief that banks were requiring SMEs to take these products alongside loans, and I look forward to hearing the Minister’s response to these points today.

Even if the case involving the company in my constituency had been a one-off, it would have been extremely worrying, but there appear to be hundreds, if not thousands, of SMEs in the same situation. I am sure that we shall hear of cases in other right hon. and hon. Members’ constituencies later. Anecdotal evidence from SMEs suggests that, in many cases, swaps were bought without the companies having received any legal advice on their nature. The banks have a duty when selling financial products to ensure that the products and the risks involved are identified to businesses, and that there should be no coercion involved. I have written to the bank in question and requested that no punitive measures be taken against the company in my constituency while the complaint is ongoing.

[Glyn Davies]

The scale of this problem is far greater than we are being told. I have two examples in which the people I have spoken to are not going to take action. They have other clients and they are afraid to take action because they fear that they will be punished and that future relationships could be damaged. This is a huge problem, and we are seeing only part of it.

[Emma Reynolds]

I totally agree with the hon. Gentleman. I would very much like to hear from the Minister today whether the Government have a grasp of the scale of the problem, as it is certainly significant.