Interest Rate Swap Products

Mark Garnier Excerpts

Thursday 21st June 2012 Commons Chamber

[Mark Garnier (Wyre Forest) (Con)]

I, too, would like to add my name to the long list of people who will be congratulating my hon. Friend the Member for Aberconwy (Guto Bebb) on securing not only the debate, but a great deal of support from the outside world and a community that has been badly affected by these events.

I suspect that we are now at the beginning of what will amount to yet another large mis-selling scandal. I completely endorse the comment of my hon. Friend the Member for Aberconwy that the last thing we need is the spectacle of bus loads of ambulance-chasing lawyers charging across the countryside looking for businesses that have been mis-sold these products. It is incredibly important that we try to resolve the problem before members of the legal profession take advantage of it as an opportunity to feather their nests. These events come at a time when small businesses are struggling to make sales and win orders and contracts. It is a time when the banking system is adding yet another problem to small businesses. It is something we need to try to resolve.

These products, which really amount to caps and collars, should have been relatively straightforward products. They should not be dissimilar to a fixed rate mortgage. Rather than being like a fixed rate mortgage stating that the customer will pay 3% or 5% for five years, for example, they should have stated that the customer would pay between no less than 3% and no more than 8% over a five-year period or whatever. In that respect, such a product would have been a very straightforward cap and collar.

The problem is that the products were written before this period of super-low interest rates. Of course, interest rates have since fallen well below the collar, so the products are not actually cap and collar products; they are cap and noose products. Rather than holding the interest rate at the lower level, the noose has the effect of bouncing the interest rate up, thereby creating a higher rate than the customer would otherwise have expected and, in some cases, than they would have paid at the rate of interest in the first place.

The result is that these products are far more complex than they would normally have been. I declare a history of serving as a compliance officer for an FSA-regulated firm before being elected to this place. We used to spend a huge amount of time ensuring that we classified our clients properly to make sure that the products that were sold were aligned with the abilities. I fear that what is happening here is that we have a misalignment of customer classification. There are salesmen who are not experts in the products and do not know a huge amount about them, and they are selling them to customers who are clearly not experts in the products at all. Under these circumstances, a huge problem is brewing.

The Chair of the Treasury Committee mentioned the fact that in yesterday’s Sub-Committee meeting we met Adair Turner, who assured us that he would go to great lengths to investigate the whole process. Subsequently, I asked Martin Wheatley, the other witness and director of the FSA’s conduct business unit, whether the authority will be looking into the whole business of misclassifying clients as well as salesmen, and he said that without a shadow of doubt it will be specifically doing so, so I sincerely hope that we will reach a speedy resolution on that issue.

[Ian Swales]

The hon. Gentleman makes the powerful point that we do not expect small business owners to be experts, but that their accountants are not often experts, either. The people whom they deal with who will most often be experts are their bankers, so where does he feel that small business owners should get their independent financial advice from?

[Mark Garnier]

That is an incredibly important point. We live in an ever-increasingly complex world, and banks are competing against each other to come up with more and more sophisticated products that appear to be user-friendly, such as simple fixed rate mortgages. But as products become more complex there are more hidden elements in the contracts that people sign, such as in the one under discussion, whereby in a completely unforeseen period of super-low interest rates, business owners have to pay what amounts to a fee to buy themselves out of the contract’s residual value.

People then get into very complex calculations to try to understand what is going on, and the economic value of, and internal rate of return on, the contract. That is when things go way above the pay grade of most people, apart from those specialists sitting in dealing rooms in Canary Wharf who really understand such stuff. So, as part of the banking review and the Financial Services Bill that is passing through Parliament, we need to look very carefully at the classification of customers and of salespersons in order to get back to the fundamental point that we have to match products to a customer’s ability to deal with them.

[George Eustice (Camborne and Redruth) (Con)]

I have seen cases in which, through a process of legal discovery, a very clear e-mail trail has shown banks wilfully deciding not to explain the disadvantages of such products and, sometimes, a complete mismatch between the length of their loans and the length of the product they were selling. Does my hon. Friend agree that this is not just about people not understanding the situation, but about an intention in many cases by people not to inform customers because they wanted the business for their own bank?

[Mark Garnier]

The hon. Member—

[Mr Geoffrey Cox (Torridge and West Devon) (Con)]

Hon. Friend.

[Mark Garnier]

My hon. Friend has almost been reading my speech, because I am about to finish on that point.

There are mismatches of terms and objectives, and on this issue I have a fundamental problem with the banks. A bank manager used to be a customer’s friend, whom they could turn to for financial advice, who would look after them and who, much more importantly, had their interests at heart. The problem is that banks are now simply salesmen looking for another product to sell, and it does not quite matter to them what holistic package is being sold as long as an individual product is.

I simply do not understand why the banks are failing to get the message that they are breathtakingly unpopular. They have really made a pig’s ear of our economy and financial system, so why do they continue to do so—in the face of the public opinion? It does not make any sense, so I make this appeal to the banks: please take a look at this issue. If you have created what should be a collar and cap arrangement, but it turns out to be a cap and noose arrangement, negotiate with your customer, help them out, stop feeding solicitors lots of money and try to resolve it in order to get back to a situation where bank managers are people we can trust.