Guto Bebb
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(11 years ago)
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Guto Bebb (Aberconwy) (Con)
I beg to move,
That this House considers the lack of progress made by banks and the Financial Conduct Authority on the redress scheme adopted as a result of the mis-selling of complex interest rate derivatives to small and medium businesses to be unacceptable; and notes that this lack of progress is costly and has caused further undue distress to the businesses involved.
I am surprised to be back here 15 months after the first debate on this important issue. I appreciate the Backbench Business Committee—the Chair is in her place—once again offering time to debate it. The first debate made a significant difference. Prior to that debate, the Financial Conduct Authority and the banking sector were refusing to acknowledge that there was an issue that needed to be dealt with. A few days after the first debate, that changed and a pilot scheme was announced.
Members who have followed this issue carefully are aware that the pilot scheme found that approximately 91% of cases investigated between July 2012 and January 2013 had a technical mis-selling, so the process has highlighted the mis-selling of these products. The House should take some comfort in knowing that securing the second debate has also resulted in a significant concession from the banking sector. Members of the all-party group on interest rate mis-selling have argued long and hard that the redress scheme had a central flaw, which is that the technical redress for the mis-selling of interest rate swap derivatives and the consequential losses were linked within the redress scheme. That gave the banks in question a significant advantage, because small businesses facing heavy cash-flow problems were inclined perhaps, under the scheme as it stood, to accept an offer of technical redress without fighting hard over consequential losses, simply because they were desperate for the cash.
As a result of the announcement of this debate last week, HSBC said on Tuesday that it was separating the technical redress from the consequential losses, and other banks have followed. My first call today, therefore, is for the rest of the banks involved in the redress scheme to follow HSBC’s and RBS’s lead. It is several months too late, perhaps, but it is the right decision, and we want to see the other banks following.
Mark Tami (Alyn and Deeside) (Lab)
Does the hon. Gentleman agree that the FCA is still dragging its feet and that this has gone on for far too long? I am helping Ged Fitzpatrick, who has a care home in north Wales and who recently suffered a heart attack. I am sure that that had something to do with the stress of this process, which has gone on for far too long.
Guto Bebb
Bully-Banks surveyed its members and found that the health impact on them had been significant. I accept that the FCA still has ground to make up, but despite its stating in September that linking both payments was the right thing to do, I am pleased that yesterday it welcomed the decision to separate them. I would rather see a sinner repent, even late in the day, than no changes whatsoever.
Mr Speaker
We all look forward to the publication of the right hon. Gentleman’s thesis on this subject, but in fact I think we have just heard it.
Guto Bebb
I accept the right hon. Gentleman’s point. This is clearly an important step forward, however, and we should take comfort from the fact that this place can influence the behaviour of the banking sector. I will be discussing consequential losses later in my speech.
It is fair to say that the 91% finding in the pilot scheme has been replicated in the work done within the redress scheme. The figures released by the FCA in August and September on the individual performance of banks—something for which the all-party group called—have clearly shown that 93% of cases in the redress scheme involved actual mis-selling. So again we have proved that there is an issue that needs to be dealt with.
Mr Graham Stuart (Beverley and Holderness) (Con)
I echo the praise from the right hon. Member for Blackburn (Mr Straw) for my hon. Friend. Does he have sympathy, as I do, for companies with more than 50 employees that are not financially sophisticated and which were mis-sold these products, often as a condition of loans to do business, but which now find themselves described as the sort of people who should have been able to see through the sophistry and misrepresentation of the salesmen of these products?
Guto Bebb
My hon. Friend mentions the sophistication test, and I will be coming to that; it is indeed something that concerns me and the all-party group.
We have found consistently that banks are admitting a mis-sale in about 93% of cases. Had we found, in the consumer mortgage market, that 93% of mortgages had been mis-sold, would we have allowed nine months to pass between those findings and the situation we now face? We have to ask the question: is it right that these businesses should be treated differently because they are small businesses, when we have found that there has clearly been mis-selling?
Steve Brine (Winchester) (Con)
I have many constituents, some of whom are outside this place today, whose businesses are in limbo while they wait for this interminable delay to be sorted. They are unable to press on and employ the people they want to, to grow their businesses, pay their taxes and help to grow the economy, which is what we all need to happen. That is the bigger point in this debate: the impact on the wider economy.
Guto Bebb
My hon. Friend makes an important point, which those on the Front Bench need to take seriously. These businesses have been unable to invest because they simply do not know whether they are financially feasible. Time and again, I have heard stories of people with investment plans who, rather than implementing them and growing their businesses, have been closing elements of their businesses, making staff redundant and just trying to survive.
Mr Jim Cunningham (Coventry South) (Lab)
The hon. Gentleman mentioned the situation facing small businesses. Does he agree that some small companies are afraid to challenge their banks because their loans could be cancelled?
Guto Bebb
That concern has certainly been raised, but I keep receiving assurances from the banks that that is not the case. I want to take those assurances at face value and would still recommend that anybody who has been sold one of these products should undoubtedly go and talk to their banks. If the banks are unsympathetic, they should come and talk to their MPs, because we can and should intervene.
Stephen Mosley
Is it not the case that some customers do not know that they have been sold swap agreements? Some people have been sold hidden swaps and do not know about it. Does my hon. Friend not think that the banks have a duty to inform customers themselves if they sign people up to such agreements?
Guto Bebb
I am grateful for that intervention. I will come to hidden swaps later—“embedded swaps” is the technical term; “hidden swaps” is a fairer way of describing them—because they are a big issue and we need to address them.
The setting up of the redress scheme was the reason why we called this debate. It has taken months to reach an agreement to ensure consistency across the 11 banks involved. Originally we were told that Christmas was the deadline for completion. However, at this point in time there are 30,000 businesses in the cohort—I think that that figure is an underestimate, because of embedded swaps, for example, and the way the sophistication test works—so frankly the Christmas target will not be met.
Guto Bebb
Before I take any further interventions, it is worth making this point. I was recently involved in a mediation meeting with one of the banks and one customer, whom I cannot name, even with parliamentary privilege, apparently. The bank in question made it clear that it could not promise a date for paying redress before 2015. As such, although the intention of achieving consistency is correct, we have to put pressure on the FCA to ensure that we move at a faster pace.
One of the big frustrations felt by the businesses affected and the APPG is that since the pilot scheme was completed, the banks involved have spent upwards of £300 million on the administration of the scheme and recruited up to 3,000 people to deal with it, yet by the end of September only 32 businesses had been offered redress, to the total value of £2 million. I understand the complexity of getting this right, but it is simply not good enough for the banks to be spending that much money and for the businesses that need redress not to be getting it.
Mr Mark Prisk (Hertford and Stortford) (Con)
I am grateful to my hon. Friend for giving way; he is doing a fantastic job. It is becoming clear to businesses in my constituency that, in the absence of any penalty after the current agreement—which, of course, is voluntary—the banks are just playing for time.
Guto Bebb
That is an important point—that the banks are possibly playing for time—which I think will be touched on in other speeches in this debate. As for the ability of businesses to try to get compensation through litigation, it is important that they take action to protect their positions. The redress scheme is a step forward. It is not working perfectly, but I would still advise businesses to protect their position from a legal point of view.
Mr Heath
I thank the hon. Gentleman for giving way and for his work. He said earlier that he could not name his constituents or the bank involved, but I will certainly name Chris and Angela Hays, whom I am trying to help, and the Royal Bank of Scotland. Is it not the case that we have seen a double whammy? We have seen a big bank using a scam on its customers and then using every device to prevaricate and procrastinate to avoid paying the money that those businesses need to survive.
Guto Bebb
Hon. Members have made their feelings about that intervention very clear; we all share that frustration.
The FCA and the banks have made it clear that the suspension of swap payments is a concession that has been offered, but as yet only 1,000 businesses have been offered the opportunity to suspend payments. A key message that this debate needs to send out is that if a business wants to request a suspension, it has to be in financial distress. Some banks are stating that a business requesting a suspension is admitting to being distressed and therefore needs to go into special measures. Any small business would be loth to find itself dependent on a team of specialists from its bank’s restructuring department. We need to ensure that a suspension of payment can be offered without the need for a business to go into special measures with its bank.
The delays are the reason that we called this debate, but I also want to highlight other concerns that have been expressed about the redress scheme. I have touched on some of them in response to interventions. A key issue is the sophistication test. I acknowledge the need for such a test. Huge businesses can derive benefits from these products, and they will have the sophistication and expertise to understand what they are being sold. However, there is concern about the decision to introduce a sophistication test as part of the redress scheme.
Anyone who takes out a swap in excess of £10 million will be excluded from the scheme because they will be deemed to be sophisticated. The FCA has found that a key aspect of mis-selling involves banks over-hedging loans taken out by businesses. In other words, a business might have a loan facility of £5 million but a hedge in excess of £10 million. In such a situation, the fact that the bank was guilty of mis-selling would provide it with protection within the redress scheme. That is unacceptable. We need a greater degree of flexibility on the issue of sophistication.
Mr John Baron (Basildon and Billericay) (Con)
Would my hon. Friend also accept that the banks have made these processes unduly complex, which has resulted in delays in addressing the issues? In the case of one company in my constituency, it has taken the bank 16 months just to recognise the fact that the company was unsophisticated, to use my hon. Friend’s language. That is clearly unacceptable.
Guto Bebb
I agree that 16 months is a very long time. Even when cases are accepted into the redress scheme, they seem to be taking a long time. The banks would argue that businesses need to engage with them, but I believe we still need to look carefully at this matter. The sophistication test should be more flexible, and the discrepancies that I have described need to be acknowledged.
Another discrepancy involves the asset value. A business could be excluded from the scheme because of the asset value that it holds. In effect, it could be argued that a business that had been lucky enough to invest in property at the right time should be excluded from the redress scheme because of that piece of luck. If the asset value had increased to a certain level, that could result in the company being excluded from the scheme.
There is also a lack of consistency. In some cases, the banks are ignoring the sophistication test because they believe that a customer would fail it and therefore be eligible for the redress scheme. Instead, they are moving the customer straight into the assessment of redress. If they can ignore the sophistication test in some cases, where is the consistency? A member of the all-party parliamentary group argued strongly on behalf of a constituent who had a £12 million swap and, lo and behold, the constituent was subsequently allowed to become part of the redress scheme. That was an excellent result for that business, but again, where is the consistency? The FCA needs to look carefully at the sophistication test.
My final point on the sophistication test is that, if a business spends six months waiting to be assessed, those six months will be lost in regard to the statute of limitations for taking legal action. The FCA needs to recognise that, because it is potentially dangerous for the businesses concerned.
A further concern relates to the alternative products on offer. It has been said time and again that if these complex products are unsuitable, it cannot be right to introduce a redress scheme in which a swap can be substituted by a slightly less complicated swap. It is also important to note that a business will be offered an alternative product only if it has failed the sophistication test—that is, if it has been deemed to be unsophisticated. I find it difficult to understand how any alternative product other than a cap could possibly be suitable.
Another reason why the cap is the obvious alternative product is that if businesses had been told clearly of the cost of the products they were taking on board back in 2006-07, they would have seen that a cap would have offered them significantly better value for money. Why was the cap not offered? Probably because of the financial imperative of the banks to sell something more complex and more rewarding. It is thus important to highlight the fact that having a complex derivative rather than a cap as alternative product is a real concern. If businesses have been classified as unsophisticated, that issue should be recognised and we should try to ensure that we provide a cap as the only acceptable alternative product.
Richard Fuller (Bedford) (Con)
My hon. Friend mentions the omission of information from the sales process; does he also accept that the information needed was introduced late and that only opinions were offered? What was really going on was a sophisticated sales process to dupe people who may have been financially unsophisticated for the financial benefit of the banks. Does he believe that that should mean that the people in charge of that process should face criminal sanction, not just financial redress for their customers?
Guto Bebb
That is certainly a call that some of the organisations campaigning on this issue have made, and I am sure that other hon. Members and members of the all-party group will expand on that theme in their speeches.
We thus need to look carefully at the alternative product issues. It is fair to argue that businesses might have been looking for interest rate protection, but it is difficult to argue that they would have been tempted by an expensive product in 2006-07, when a cap offered such good value for money at that time. I am unpersuaded of the arguments for a complex derivative.
Richard Benyon
I am grateful to my hon. Friend. Many of these products were sold on the basis of a projection for interest rates to go up. There is a slam dunk case against some of these companies for showing a graph of projected interest rate rises when, of course, the opposite happened. Surely that should be a factor when it comes to whether or not firms’ were sophisticated about the product that was eventually sold.
Guto Bebb
I could not agree more with my hon. Friend. The expectations back in 2007 were that interest rates would go down, yet there were numerous examples of bank sales teams informing businesses that they needed to protect themselves against a rising interest rate scenario—contrary to the information that the banks themselves had.
Another key call is why there is no appeal process within the redress scheme. There would be much more confidence in that scheme if there were an appeals process. I understand that the Financial Ombudsman Service offered to provide an appeals service, but the offer was rejected by the FCA. It would give some comfort without complicating issues too much if, for example, assessors working for one bank in the redress scheme were able to provide an appeals process for another bank in it. That may not be perfect, but it would help to avoid over-complicating what is already a complicated redress process and it would give businesses the confidence that there is an appeal process and that they can turn to somebody else to argue their case. We should be very concerned about having a redress scheme without any appeal process, as it goes against the principle of natural justice, while opening up the door to litigation, when the whole point of the redress scheme was supposed to be to avoid litigation.
Embedded or hidden swaps, which are currently excluded from the redress scheme, are another key issue to highlight and a matter of huge concern. If we think about it, a hidden swap is quite possibly worse because businesses were not even aware that they were also taking out with their fixed-rate loan an interest rate derivative product. The American author, James Riley once said:
“If it walks like a duck, and swims like a duck and quacks like a duck, then it must be a duck.”
The same point needs to be made about these hedging products. If the impact of an embedded swap is the same as the impact of a separate hedging product taken out with it, it is difficult to argue that the small businesses that were sold those products should be excluded because of a technicality relating to whether they are subject to the FCA regulations. I ask the Minister to respond on that specific issue.
A publican from Aberystwyth, Mansel Beechey, was sold one of these embedded products. I know Mansel very well because when I was a student in Aberystwyth, I was financially illiterate and used to cash cheques in the pub. I used to do that on a Wednesday evening and pay 50p for the privilege. On a Saturday evening, I would want to cash a cheque again, and Mansel would say, “Well, make it one for £30, and I will give you back what you gave me on Wednesday, only charging you the 50p once.” Mansel Beechey thus showed me more respect and consideration, in behaving properly towards me, than the bank that sold him the hidden swap showed to him. That business had been built up over a long period. If Mansel Beechey could show to me a degree of responsibility that had not been shown to him, there is clearly something wrong with our banking sector.
Mark Lazarowicz (Edinburgh North and Leith) (Lab/Co-op)
Will the hon. Gentleman give way?
Guto Bebb
I am afraid that I cannot take another intervention.
The issue of hidden swaps is important and needs to be addressed. We need to know why businesses to which they were mis-sold have been excluded from the redress scheme. Thousands of businesses have been mis-sold these products, banks have admitted that the products were mis-sold, and yet the redress scheme is not, as yet, performing as it should. I am not looking for a new scheme, but I am looking for changes, and much greater speed, in the scheme that we currently have; and I think that we need to address some of the exclusions, which are clearly unfair.
I became involved in this issue when a constituent of mine, Mr Colin Jones, came to see me. He claimed that he had been sold a complex product and that, as a result, his business had gone under. The last news I heard of Mr Jones was that he was homeless and living with his mother. He has lost absolutely everything, and because his business was a limited company, it is highly unlikely that even if the redress scheme highlights the fact that he was mis-sold the product and is in need of compensation, he will not benefit from that compensation personally. I think it wholly wrong for someone to lose his business not because he was a poor business man, not because he made a mistake, but because he was taken advantage of by his bank. Having listened to the trade calls, I am quite happy to say that publicly.
I am delighted to note the interest in the issue that is being expressed in the Chamber today, because I believe that businesses all over the country are looking to us to give a lead. I hope that the FCA and the banks will listen to what is being said, and I sincerely hope that the redress scheme will start to perform in the way in which it was expected to perform in January, rather than in the slow and bureaucratic way in which it has performed so far.
Guto Bebb
With the leave of the House, I should like to make a few concluding remarks. This has been a positive and necessary debate, and we have seen significant progress as a result of it. Members from across the House have made it clear that they want a step change in the progress made by the FCA review process. That is necessary; we need a significant increase in the number of businesses offered redress. There are real concerns about an expansion of the scheme. Speeches have highlighted the issue of embedded swaps and the concerns about the sophistication test, which I would like to discuss in further detail with the Minister in due course if I can.
The other pretty obvious thing from this debate is that we need the banks to provide support for the businesses while they wait to be reviewed. We want the banks to show forbearance and to understand that the difficulties faced by many businesses were created by the banks’ own mis-selling. No further businesses should be lost to the UK economy as a result of the mis-selling of these products, which were inappropriate in the vast majority of cases. This has been a positive debate, but we still need to see the proof of the pudding in the way in which the scheme delivers from now on.
Sajid Javid
May I tell my hon. Friend that I would be more than happy to meet him and other stakeholders to discuss this further?
Madam Deputy Speaker (Mrs Laing)
If the Minister has finished his intervention, the hon. Gentleman may conclude his speech.
Guto Bebb
I appreciate that offer very much, Madam Deputy Speaker.
Question put and agreed to.
Resolved,
That this House considers the lack of progress made by banks and the Financial Conduct Authority on the redress scheme adopted as a result of the mis-selling of complex interest rate derivatives to small and medium businesses to be unacceptable; and notes that this lack of progress is costly and has caused further undue distress to the businesses involved.