Interest Rate Swap Products

Karen Bradley Excerpts

Thursday 21st June 2012 Commons Chamber

[Karen Bradley (Staffordshire Moorlands) (Con)]

I join colleagues in congratulating my hon. Friend the Member for Aberconwy (Guto Bebb) on securing this important debate. The many case studies that we have heard this afternoon are very familiar to us and I am sure that other colleagues have faced similar situations. I have, which is why I am taking part in this debate.

Before I come on to my constituent’s circumstances, it is probably worth setting out why I think that swap arrangements are not suitable to be sold to unsophisticated small business men. I do not mean that small business men are unsophisticated, but that they do not have an army of lawyers and accountants to advise them. At a basic level, a swap agreement is a gamble. Mr Deputy Speaker, the two of us could enter into a swap agreement this afternoon. I will happily buy you a cup of tea on the condition that you will buy me a cup of tea in three months’ time. I am gambling that a cup of tea will go up in price so that when you buy me the cup of tea, it will cost you more than the cup of tea that I buy you today. However, we could have a glut of tea and the cost could go down significantly. If so, I will have lost in that gamble. That is ultimately what a swap arrangement is.

Swaps can be very useful to businesses. As Wimbledon is coming up, let us take the example of a strawberry grower. The strawberry grower needs sun at the right time and could probably take out an insurance policy that the sun will shine, or they could find someone who thinks the sun will shine and is willing to take out a bet with them that it will. If the sun does not shine, and it rains, that individual would pay the strawberry grower for the rain and the strawberry grower would have money although he would have no strawberries to sell at Wimbledon. Alternatively, if the sun did shine he would have his strawberries to sell and he would pay the bet because the sun had shone. That is what swap arrangements are. Because they are a gamble, it has to be made extremely clear to individuals that that is what they are entering into. What I and colleagues have seen is that it has not been explained to people that they are taking a gamble.

That brings me to the case of my constituent, Mr Doug Wardle. Mr Wardle is a very successful local businessman who runs a number of businesses in my constituency. He has a very successful coach transport business and his name will be very familiar to people in Staffordshire Moorlands who see Wardle Transport vehicles going around. He also has Wardle Property and a number of other businesses. Back in 2006, he understandably wanted to expand his businesses and wanted a loan. He therefore went to his bank and entered into a loan arrangement whereby he borrowed £2.2 million, secured, he thought, against £3.1 million-worth of property. But there was a condition on this loan to expand his business, the travel part of which at one point employed 120 people. The condition was that he would enter into two interest rate swap arrangements—one each against two of his businesses. He was told that this would guarantee him a fixed interest rate and that he would be safe from interest rate fluctuations.

Mr Wardle was told that he would be paying 1.57% over base, which he thought was a very good deal. Even back in July 2006, that seemed like a very good deal. However, circumstances change and the financial climate changed. Unfortunately, by 2010, although his businesses were successful, Mr Wardle was having difficulty negotiating with his bank. He got to the point at which he had repaid his loan down to £1.25 million, so he had significantly reduced it, but the bank was not willing to move on the interest rate swap arrangements. That has caused Mr Wardle an incredible amount of stress and anguish, and he faces losing his home. He told me today that it has cost him £300,000 just to deal with the fees to the bank.

I have here the figures for the interest rate swap arrangements. The cost of buying out the swap arrangement is £180,000. Mr Wardle has been told that he will be paying 3.25% over three-month LIBOR—London interbank offered rate—not the 1.57% over base he thought he had, on a £1.25 million loan. I apologise for all the numbers. The amount he has to pay in interest a year is £111,752 with an additional £71,780 just to service the interest rate swap arrangement. I calculate that to be an interest rate per year of 14.7%. I do not think that when Mr Wardle entered into this arrangement he thought he was going to be paying 14.7% when the base rate is 0.5%. That is the problem. Mr Wardle is a very successful small business man. He has built up a number of highly successful businesses and he employs a lot of people, but how was he expected to understand that under this arrangement he could lose his home, having paid hundreds of thousands of pounds in fees, all because he was told by his bank, which he trusted, that he would be safe from interest rate fluctuations?

[Caroline Lucas (Brighton, Pavilion) (Green)]

I am almost reluctant to interrupt the hon. Lady because she is making such an eloquent case and is giving a very useful economics lesson at the same time. I have been contacted by a number of my constituents who have been badly burned by these toxic products. Does she agree that the experience she describes of the small business person in her constituency, Mr Wardle, is being repeated right across the country? Indeed, there will be many cases that we do not know about because many people are loth to speak out against their bank for fear that they will have problems with their business reputation. Does she agree that the issues we are discussing are probably the tip of the iceberg, which makes action even more urgent?

[Karen Bradley]

I absolutely agree with the hon. Lady. I called Mr Wardle this morning, before mentioning his name. I was happy to speak about him anonymously, because I understand that he is in a difficult position. Hon. Members in all parts of the House have expressed concerns about their constituents, and I agree that there must be many other cases of small business people who do not want to come forward and might not even realise that they could approach their MP. They do not want to raise the topic, although they are, frankly, being bullied by the banks in such situations.

I again congratulate my hon. Friend the Member for Aberconwy. I support the motion and I hope that we shall see some action very soon.