Financial Conduct Authority Redress Scheme

Guy Opperman Excerpts

Thursday 4th December 2014 Commons Chamber

[Guto Bebb]

I entirely agree. The argument has been that as the reviewers are independent the FCA can have full trust in them, but in view of the inequitable outcomes reported to us and the information provided by the whistleblower who used to work in the independent review team on RBS, there is clearly much merit in the appeal process that I have identified as a way forward. I cannot think of any arguments against such a simple way forward.

[Guy Opperman (Hexham) (Con)]

I suggest that there is middle ground on that point. Ministers would probably be nervous of encouraging excessive litigation and the escalation of legal costs, but it is not beyond the wit of man for an independent mediator to be brought in to address key cases, as is tried in other parts of the dispute resolution system.

[Guto Bebb]

I accept that point, but I stress that if an independent reviewer of another bank has been approved by the FCA—the scheme is a voluntary, not a judicial one—I seriously do not think that going down such an avenue would create cost. The FCA’s current view is that if a client is not happy with a decision made by a bank and its independent reviewer, then it can resort to law, but the whole reason for establishing the redress scheme was to save small businesses that cannot afford to go to law.

I want to talk in detail about consequential losses. When the redress scheme was announced back in 2013, it was made very clear that the scheme was for consequential losses and interest payable. The Financial Services Authority, as the FCA then was, highlighted that consequential losses would be determined by reference to the general legal principles relevant to claims in tort or for breach of statutory duties.

I have already given the figures. It is more than acceptable and very welcome that £305 million has been paid out in relation to interest at 8%, but only £5 million has been paid out in consequential loss claims. Part of the redress scheme has therefore completely fallen down. I have seen case after case of well-argued and reasonable claims for consequential losses from businesses acknowledged to have been mis-sold and as a result to have lost millions of pounds in turnover, but when a detailed claim that will have cost a significant amount is made the response from the banks is a simple no.

--- Later in debate ---

[Mr Russell Brown (Dumfries and Galloway) (Lab)]

I congratulate the hon. Member for Aberconwy (Guto Bebb) on what can be classed as nothing less than sheer determination in continuing the battle for justice for so many businesses the length and breadth of the country.

I would like to think that we could use the words fair and equitable today, but this issue is anything but. I suspect that by the end of my speech I will have come to a point where I support the hon. Gentleman and the all-party group. We have all witnessed a lack of consistency and a deplorable lack of transparency. We look down on a situation that far too many business people have experienced, bringing them to their knees. Many have been broken. The fact that there is no appeal process is, quite frankly, unbelievable. People have been put in a “take it or leave it” situation and their plight is just not acceptable in this day and age.

The hon. Gentleman referred to the 10-year cap. This is a product that no one wanted: it was not sold to people, but forced on them. The campaigning group Bully-Banks yesterday put out a press release that sums it all up. It said that more than 90% of sales reviewed by the banks had been mis-sold. There is no argument: the banks’ conduct in selling these products was misconduct. Nothing could be clearer.

The first contact I had relating to this whole sad saga was about six years ago when a constituent came to see me. I have to admit that, not coming from a financial background, I had great difficulty in understanding what he was telling me. I have shared this experience with others in the House before. This was a guy who, along with his father, had worked for more than 20 years in the leisure park industry. Their bank, Barclays bank, had decided to set up a specific arm to offer products and loans to businesses for investment. After an approach from the bank, they decided to take out what turned out to be a hedge. After some time, they were then encouraged to change product. Some of the penalties involved with that product resulted in pressure to meet payments, and investment did not go into the business in the way they thought it would. They went from owning four leisure parks—one in my constituency and three in England —to selling them off one at a time, just to meet the bank’s demands.

Eventually, my constituent came to see me to make me aware that he was now under real pressure. I asked him whether he needed me to contact the bank, but that was the last thing he wanted. He was afraid to contact the bank and make it aware of just what a desperate plight he was in, in case it closed in on him.

[Guy Opperman]

Does the hon. Gentleman agree that the reason the FCA redress scheme needs reform is that there is no alternative? Like the hon. Gentleman’s constituents, my constituents who ran a bed and breakfast or a small and medium-sized enterprise could not go to the bank because of that fear. There is also an inability to go to law, because that would mean taking on a very large institution with deep pockets that they could not possibly hope to take on properly. The only way they can go forward is through the redress scheme, which has its deficiencies.

[Mr Brown]

I thank the hon. Gentleman for that intervention. As I continue this sorry tale, he will see that the business went into litigation on this issue.

--- Later in debate ---

[Sir Edward Garnier (Harborough) (Con)]

I begin, as have others, in congratulating my hon. Friend the Member for Aberconwy (Guto Bebb) on initiating this debate. It is sad, as he said, that this is the second or third time he has had to bring this matter to our attention either on the Floor of the House or in Westminster Hall. He has plugged on, and my constituents and I are very grateful to him.

I have no doubt that all who contribute to the debate will mention constituency cases. It is right for us to do so. I had originally intended not to mention my constituents’ names or the name of the bank with which they had to grapple because I thought it unfair, but since the hon. Member for Newcastle-under-Lyme (Paul Farrelly) and other hon. Members have already mentioned the bank and because I think the bank is big enough to look after itself, I shall not shrink from doing so.

My constituents, Bob and Stephanie Hamblin, are directors of a small property company called Hybeck Estates, which they founded in the early 1990s. Their companies had banked with RBS for many years since the 1980s, and they entered into first one and then a second lending arrangement. Sixty years ago, it might have been seen as somewhat unorthodox, but in the conditions that operated in the 1990s and the early part of this century, such arrangements have become increasingly usual, if not wholly orthodox.

All went well until about 2006, when the bank decided that the Hamblins and their company needed to restructure its existing hedging arrangements, and the bank recommended replacing the second loan arrangement with a swap, a collar or a knock-in collar on the basis that this would reduce the company’s quarterly premium payments. On 16 February 2006, the bank sold the Hamblins a £3.5 million, 10-year amortising base rate collar.

In August 2012, the company submitted a complaint regarding the sale of the replacement collar in the context of the interest rate hedging product mis-selling review, and submitted further written evidence on 28 January this year. The complaint was essentially that the replacement collar was unsuitable for the company because of the risks involved—risks that were never adequately explained by the bank. The bank should have allowed the company to continue with the protection of its earlier arrangements, which would have protected it against the possibility that interest rates would rise, without exposing it to the risks inherent in the new replacement collar.

On 1 July this year, the bank wrote a letter to the company, containing the bank’s provisional offer of redress. It acknowledged that in the course of the sale of the replacement collar, the explanations it had provided to the company, initially in a crowded pub,

“in respect of the features, benefits or risks of alternative products did not comply with the standards agreed with the FCA.”

The bank’s failure to explain the

“features, benefits or risks of alternative products”

also extended to the appropriate alternative strategies, which were not explained at all. The company’s desire for premium reduction could have been satisfied in a number of simple and risk-free ways—but they were not. The risks were simply not explained. The second cap—the earlier lending arrangement—exposed the company to no risks at all, but the new one exposed it to potential losses of more than £950,000 in the event of interest rates falling. That risk was not disclosed to the company; neither was the fact that, as a consequence of the liability incurred via this collar, the company’s flexibility to refinance with another bank would be seriously impaired.

It seems reasonable to draw the inference—I am sure others would concur on the basis of their own constituency experiences—that the bank’s poor sales practices were driven by the additional profit it could make by putting the company into this new vehicle. Derivatives pricing experts calculate that the expected net gain to the bank on the day of the transaction was over £43,000, and it incidentally cost the Hamblins and the company £0.33 million to extract themselves from it this year. The replacement collar, furthermore, is in serious breach of the 7.5% rule announced by the FCA at the outset of the review. This collar exposed the company to potential losses of very nearly £1 million—equivalent to 27% of the amount notionally hedged, which is almost four times higher than the stated 7.5% maximum.

Given these circumstances in which the bank has acknowledged that it neither explained the risks of the new collar, nor offered any of the simple premium-reducing strategies outlined above, the bank’s conclusion that the company

“would have chosen a vanilla collar in any event”

is clearly absurd.

Here we have a company that has been in the property business for some little while, and a director of that company who knows something about—indeed, quite a lot about—the financial services industry, but is not an expert on hedging. To suggest that he would expose himself, his wife and his company to a product that would place them in such dire jeopardy is absurd. Nevertheless, the bank has concluded—through its internal review process, which has been validated by the FCA’s independent review system—that they are not entitled to redress. The bank has made an admitted mistake and has caused admitted consequential loss, but it has said “You would have bought one of these anyway, so we will not pay you any compensation.”

[Guy Opperman]

I am following the case of my hon. and learned Friend’s constituent with interest, because it is very similar to cases that I have encountered in my constituency. If, like me, my hon. and learned Friend has met senior managers at RBS—the bank that is involved in both our constituents’ cases—he will know that while they are very keen to resolve these cases, the middle managers who are dealing with the individual claims that are being assessed seem incapable of accepting the principle that they were at fault and are to blame. The Government ought to make it clear to senior management at RBS that they must ensure that there is true accountability in their own organisation.