Interest Rate Swap Derivatives

Debate between Mike Thornton and Ian Murray

Thursday 24th October 2013 Commons Chamber

[Ian Murray (Edinburgh South) (Lab)]

It is a great pleasure to follow the hon. Member for Ceredigion (Mr Williams). The cross-party consensus in the Chamber shows how important this issue is, and it has to be dealt with as quickly as possible.

May I add my congratulations to the hon. Member for Aberconwy (Guto Bebb) on securing this debate? I would have been delighted with his custom in my previous life as a publican. He mentioned a £30 cheque for two nights out, but that must have been at least 15 or 20 years ago if he was a student—[Interruption.] I am sorry; 25 or 30 years ago. Those must have been some parties if he was cashing £30 cheques for a night out so long ago.

We have to put this debate in context. There have been many financial scandals—not only since 2008, but even before that. This is the latest scandal in the financial services sector. We had the payment protection insurance mis-selling scandal, the manipulation of LIBOR rates by banking institutions, which has been highlighted today, and the global financial meltdown, which was caused partly by financial institutions gambling on the financial market with other people’s money. Now we have the mis-selling of interest rate swaps. It is right for the FCA to look into that, but hon. Members have rightly made the criticism that not enough is happening. The hon. Member for Ceredigion was right to highlight the fact that only 32 of the 30,000 cases have been dealt with so far.

Interest rate swaps are hugely complicated. I had a briefing from an expert on them about eight months ago, and the complex nature of how they are put together makes them impossible to understand. He was an expert, but he found it difficult to explain some of the more complex points about them.

It is worth highlighting that the banks were able to cancel the instruments in question when interest rates were going down, but the customer was unable to cancel them when interest rates were rising. Not only were sellers incentivised to sell them without much knowledge, but the financial institutions made the vast majority of the money out of them on day one, when they were sold. They sold them to the customer and made money out of the derivative part of the product, and then sold them on to a third party, who subsequently sold them on to other parties further down the tree.

[Mike Thornton (Eastleigh) (LD)]

Does the hon. Gentleman agree that one reason for the appalling mess was the unfair and incredibly pressurised target culture that senior managers at banks imposed on their staff, to the extent that people had to use unethical means to keep their job? I have particular experience of that culture.

[Ian Murray]

I am grateful for that intervention, because not only the FCA but the Government have to change the culture in the banking sector. My right hon. Friend the Member for Wolverhampton South East (Mr McFadden), who was part of the Parliamentary Commission on Banking Standards, has talked about the culture in banks and the pressure to sell complicated products. If a customer buys a product that is not properly explained, that is surely mis-selling and there should be redress.

Customers have been unable to seek redress, or to negotiate with their bank, because the banks were able to sell on the products at great profit on day one. The relationship between the customer and the bank therefore broke down, because when a customer wanted to renegotiate the contract, they were told that they would have to compensate the bank for not only the interest rate lost, but the proportion of profit that it had gained by selling the product on to a third party. The break costs were impossibly high for many people even to contemplate buying their way out of swap products. That breakdown in the relationship has got us to the position we are in today.

Many constituents have come to see me about the matter, such as Mr Dixon, who has highlighted today’s debate and the all-party group that has been set up to examine the matter. One customer of the Clydesdale Bank who contacted me after he had been mis-sold a product was in the process of losing his house. My hon. Friend the Member for North East Derbyshire (Natascha Engel) was right to talk about the impact on not just businesses, but people’s lives. There are life and death issues in some instances, because some business owners have lost their homes, livelihoods and businesses.

There has not been a proper response from banks—not just to their customers, but to Members of Parliament. I have written to banks to see whether they can assist customers in dealing with mis-selling, but I have been batted away. There has been some table tennis between the FCA, the Government, the Financial Ombudsman Service and the banks about who should take responsibility, and I hope that the Financial Secretary will put it firmly on record that the FCA should deal with the matter. It should be the point of contact for businesses, Members and banks.

Members have talked about whether the selling culture of banks made the problem worse, which I believe it did. The mis-selling also went against the policy of treating customers fairly, which most of our banks have trotted out. When customers go to meet their business development manager or anyone else in the banking sector, they are told that their problems will be dealt with and that everything possible will be done to resolve them. However, in many of the cases that my constituents have brought to me, they have not been able to seek proper redress through that relationship, and that is why we have ended up in this situation.

The House should take a stand and say that the scandal was completely and utterly unacceptable. We should encourage the banks and the FCA to resolve the problems as quickly as possible to ensure that small businesses affected by the mis-selling scandal can have redress and a proper appeals process, so that we can get them back on their feet. If small businesses are falling because of a mis-selling scandal, it is up to the House to take a stand to support them.