Interest Rate Swap Products

Marcus Jones Excerpts

Thursday 21st June 2012 Commons Chamber

[Mr Marcus Jones (Nuneaton) (Con)]

It is a pleasure to follow my hon. Friend the Member for Daventry (Chris Heaton-Harris), and I congratulate my hon. Friend the Member for Aberconwy (Guto Bebb) on securing what is, for many of our constituents, a vital debate.

In the short time available to me, I want to explore the methods used by one bank to sell an interest rate swap product to a business in my constituency, explain the disadvantage that that subsequently caused to the business, and discuss what more can be done to help businesses that feel that such products have been mis-sold to them. I have been asked by the business involved not to divulge either its name or that of the bank, because the business fears that that would prejudice its position in relation to the bank.

Anecdotal evidence seems to indicate that the business was persuaded and cajoled into taking an interest rate swap product by high-pressure sales tactics. There was what could almost be described as a pincer movement between the small businesses relationship manager and the capital arm of the bank, which clearly set out to persuade the business that converting a loan to an interest rate swap product was absolutely the right thing to do. The relationship manager told the business that it was the best option, because interest rates would go in only one direction: up.

Members have mentioned fixed rates. The business feels that the product was sold to it in a similar way to the way in which a capped-rate mortgage is sold. However, when my constituents asked what would happen if interest rates fell, the question was not answered with a proper explanation and a warning. The employees of the bank simply said that there was no prospect or possibility of a reduction in interest rates, given their historic low at that point.

The capital arm of the bank pitched the product in what I can only describe as a Del Boy-esque fashion—as if Del Boy was selling saucepans to a housewife at the market. The capital arm contacted the business and persuaded it that the product in question was fantastic and was usually available only to far larger businesses, but that as this business was such a good customer of the bank it could have the same deal. The capital arm then continually contacted the business—it did so almost daily—to explain that day’s special interest rate and to tell it the time was now or never to pick up that special deal. To compound the situation, while this was never discussed, the business was under a lot of added pressure and believed it needed to keep the bank sweet. It was the time of the onset of the credit crunch and the business feared the other accounts and facilities it had with the bank would not be serviced if it did not take the bank’s advice.

[Mark Menzies (Fylde) (Con)]

My hon. Friend eloquently describes the same situation as that suffered by hoteliers, shopkeepers and restaurateurs in Fylde and Lytham St Annes. These are not naïve people, but they believed what they were told by their bank relationship manager and they were misled. We must urgently address this issue.

[Mr Jones]

My hon. Friend is absolutely right. We are talking here about small businesses that do not have experience of these banking products, and they should never have been led down this route without very strong warnings explaining what they were taking on. The business in my constituency that I have mentioned feels precisely that way, and the consequence of all this is that it is now paying double what it would have paid if it had kept to the more traditional lending arrangements it initially had with the bank.

This business estimates that it has spent between £150,000 and £200,000 in extra fees and extra interest—on the friendly advice of its bank. As a direct result of the interest swap loan, it has struggled to repay its loan as interest rates have fallen. The bank said there was nothing it could do to help. Eventually, after being contacted on a number of occasions, the bank finally allowed the business to convert to interest-only payments, but that comes with its own consequence, because the capital is not repaid, leaving a legacy that eventually has to be dealt with.

It can be argued that these are commercial business-to-business relationships, and that any small business should have taken further advice, and that would be my usual view. However, often these businesses were put under great pressure by their bank, which was aggressively selling the product in question and advising its customer to take it, and there was usually a wider business relationship as well, involving other banking facilities. There appears to me to be a clear conflict of interest, therefore. There is also the question of how suitable these products are for small businesses.

What action can businesses that find themselves in this situation take? As with any dispute of this nature, they can go to law, but as has been pointed out by many colleagues, the chances are that a business in this situation will not have the money needed up front to be able to take up a case against a bank, which is likely to be a huge multinational organisation. Also, as my hon. Friend the Member for Camborne and Redruth (George Eustice) rightly pointed out, there might be another conflict of interests in that some of the lawyers who might take on such litigation cases will have professional relationships with the bigger banks. That is also unhelpful.

[George Freeman (Mid Norfolk) (Con)]

I am grateful to my hon. Friend for giving way, not least as I now have the opportunity to add my name to those of the other Members supporting my hon. Friend the Member for Aberconwy (Guto Bebb) in raising this important issue. My hon. Friend has also given me the opportunity to highlight the case of Adcocks of Watton, a venerable old business in my constituency which has suffered terribly and whose case has recently featured on the BBC. Does he agree that whatever the whys and wherefores and the legal findings on the small print in the contracts, these wider cases are symptomatic of a deeper problem in our banking sector? The banks seem increasingly to have decided, in rural areas in particular, to make their money from charges and selling more glamorous derivative products, at the expense of backing small businesses and supporting growth on the high street, which is what we really want our traditional banking sector to do.

[Mr Jones]

I thank my hon. Friend for his comments. He is absolutely right to say that these products were not suitable for the type of business that he mentioned. As chair of the all-party group on town centres, I take a great interest in town centres and high streets. At this difficult time for them, the type of business that he mentioned can do without this type of additional pressure.

In the short time available to me, I wish to return to the recourse that businesses have and talk a little about the ombudsman and the Financial Services Authority route. Whether businesses take the ombudsman route, the FSA route or the route of going to law, one of the biggest problems small businesses face is that at the outset they have to divulge all the information about the particular case. They particularly have to divulge the information about the bank and a lot of information has to be gathered from the bank. As we have heard from hon. Members from across the Chamber, many small businesses feel that they are not in a position to do that because they feel that they will be prejudiced by that bank in relation to other loans and borrowing facilities that they hold with it. They find it difficult to move these things to other banks, because they may, for example, be in negative equity with property because of the economic situation.

So I wish to ask the Economic Secretary to the Treasury a number of questions. First, will she press the banks to give a clear and unambiguous commitment not to treat any complainant unfairly in other dealings between a business and a bank? Secondly, what steps will she take to persuade the banks to do the right thing at this point and support those small businesses that have been caught out by these products that have been inappropriately sold to them by the banks? Thirdly, will she write to the FSA to set out the concern of the House, to ask the FSA to expedite the work it is undertaking on this matter, to stress the importance of a thorough investigation with teeth and to ask it to look at the criteria that the ombudsman can use, because they are narrow at the moment for small businesses and the level of compensation is very low? I fear that if we do not do that at this point not only will the small businesses be disadvantaged, but we will also risk similar mis-selling scandals occurring in the future if the banks are not brought to account.