Financial Conduct Authority Redress Scheme

Lord Garnier Excerpts

Thursday 4th December 2014 Commons Chamber

[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.

--- Later in debate ---

[Sir Edward Garnier]

I could not agree more. The banks and the FCA must take responsibility for what they have done, and if that requires the urging of the Treasury, please let that happen. These banks are making vast amounts of money, and although I am a Conservative capitalist and like companies to make profits, I expect them to behave properly.

[Paul Farrelly]

Do the hon. and learned Gentleman’s constituents feel that they were advised by the bank to take on that collar? I ask because in the recent Crestsign case it was found that a company had been advised by RBS, but the bank was none the less allowed to rely on its disclaimer that it has not given advice. Does he agree that that legal position only compounds the uncertainty and the risks posed to businesses that take the banks on?

[Sir Edward Garnier]

I will not comment on the legalities or illegalities involved in that specific case, but I will say in relation to the case to which I have referred that the bank not only failed to explain the risks of moving into a new loan vehicle fully, properly and candidly, but subsequently sought to hide its own responsibilities for its failures. Such action, besides being—in my view—immoral, lowers not just the trust and confidence that small businesses should have in the retail banking sector, but the collective confidence of Members of Parliament, who should hold the Government to account for those failures if they are such, and if they occurred on the Government’s watch.

[Ann McKechin (Glasgow North) (Lab)]

Another problem, which has been described to me by a constituent, is the fact that the documents with which the internal reviewer is provided by the bank are not necessarily made available to customers or their own advisers, unless a freedom of information or data request is submitted. The lack of transparency in the way in which the review is carried out, and the inability of customers to correct the information that is given to the reviewer, constitutes another failure in the system.

[Sir Edward Garnier]

I agree, and that reflects what happened in the case that I have described. If there is anything that ought to be done—and the motion deals with this—the transparency of the banks, and hence their accountability, should be increased. It is no good the independent reviewer saying “Nothing to see, do move on”, because there is plenty to see. It is simply a question of being able to find it, expose it, and reach proper conclusions, either at law or as a matter of reasonable inference from what has gone on.

There is too much lack of candour, too much obfuscation, and too much dissembling. It is high time that the FCA lived up to its responsibilities; it is high time—I must say this to my hon. Friend the Economic Secretary, who has done a sterling job since entering the Government—that the Treasury leant on the FCA rather more heavily than it may have done in the past; and it is high time that the FCA, this new body, stopped pulling its punches with the salespeople, whether they are operating in pubs or in banking offices, in order to ensure that honest dealing is what we get from our banks.