Interest Rate Swap Derivatives

Lord Benyon Excerpts

Thursday 24th October 2013 Commons Chamber

[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 (Newbury) (Con)]

rose—

[Guto Bebb]

I will take my hon. Friend’s intervention, but this will be the last because I am conscious of the time.

[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.