Interest Rate Swap Derivatives

Debate between Jack Straw and Pat McFadden

Thursday 24th October 2013 Commons Chamber

[Mr McFadden]

I do agree, but there is also the question of who gets that redress and who does not.

Underneath this sales culture, we found that instead of a culture of a duty of care to the customer there was—characterised by the combining of products, often a simple product with a complex one—a culture of “buyer beware” that put the responsibility for fully understanding and being aware of all this in the customer’s lap, with, in many cases, the bank showing a lack of responsibility.

[Mr Straw]

I entirely endorse what my right hon. Friend has said. Does he accept that what made the banks’ behaviour even less acceptable is that such was the complexity of the swap products that often—and to my certain knowledge in a case that I have dealt with—the person providing the loan from the bank had no proper understanding of how the hedge product was going to work?

[Mr McFadden]

That is a really important point. Having heard the speech by the hon. Member for Wyre Forest, I wonder how many of the people selling these products would have been in a position to explain the consequences to their customers. I think we know the answer.

Products were being sold, allied to another product, that may or may not have been suitable for the person buying them. The customer may or may not have fully understood what they were buying, but they were left fully with the consequences of having bought it, to the extent that we had the situations highlighted in this debate whereby the banks pursued customers to such a degree that they were put out of business. We should recognise that hedging is not always wrong, and trying to insure against risks is not always wrong, but a degree of understanding is important. People have to understand what they are buying and the product has to be suitable for them. When the lifetime of the hedging product is completely different from that of the loan, there is a serious problem about that product’s suitability.

This issue provides a really important test of the standards and culture in the banks after everything that has happened. They have to show whether they have learned the lessons of previous mis-selling scandals or whether there has been a repeat of the pattern of behaviour that we saw before in which there was first a refusal to face up to responsibility. That was followed by increasing anger among the customer base and the destruction of trust, followed by a redress scheme that might have ended up being more expensive than the one that might have been put in place earlier.

This is also a test of the FCA. We are in the early stages of a new regulatory system, as the FCA has been in existence for only about six months. The system of redress that it has proposed is an important test of whether it is going to be able to do its job in restoring trust between banks and consumers in the face of sometimes increasingly complex financial products;