Tomlinson Report

Natascha Engel Excerpts

Tuesday 17th December 2013 Westminster Hall

[Natascha Engel (North East Derbyshire) (Lab)]

It is a pleasure to serve under your chairmanship, Sir Roger. I am delighted that the hon. Member for Aberconwy (Guto Bebb) has secured this important debate on what is an absolute shocker of a report. He has led a campaign to expose the bullying tactics that were often used by banks on interest rate swaps. We have all been quite shocked to discover that interest rate swaps were just the tip of what is a very large iceberg.

The Tomlinson report gives us an insight into behaviour that, if it is not systematic fraud, certainly reflects a culture and set of practices in the banking sector that are shocking in the eyes of most right-minded people. Small and medium-sized businesses are already struggling in a difficult business climate; to find that the very institutions that are supposed to help them through that difficult time are using practices that make their situation even more difficult—and often force them into insolvency —is truly shocking.

[Sandra Osborne (Ayr, Carrick and Cumnock) (Lab)]

On interest rate swaps, is my hon. Friend aware that tailored business loans sourced from the Clydesdale bank, for example, have been excluded from regulations and from the review? Businesses taking out those loans are just as badly affected as everyone else, so does she agree that such loans should be included in a review?

[Natascha Engel]

Absolutely, and I will conclude later by saying that that means we really have to look at the whole banking sector. The Banking Commission has done a good job of starting to expose some of these malpractices, but they are very worrying. The issue does not affect just RBS, and it needs to be looked at more widely.

What is really worrying is that RBS would, arguably, not exist if not for the fact that it was bailed out, and is 80% owned, by the taxpayer. However, some of the practices exposed by Tomlinson represent a double whammy for the taxpayer. I can cite examples of RBS using the GRG to take money out of bank accounts that businesses had set up expressly to pay Her Majesty’s Revenue and Customs. The bank was, therefore, not just taking taxpayers’ money so that it could continue to exist, but taking money from accounts specifically set up to pay HMRC.

I started to get involved in this issue as a result of constituents coming to see me about interest rate swaps. One particularly big example involves a man who owns care homes, which are disproportionately affected by interest rate swaps. He was a solvent customer running a successful business, but RBS bullied him into taking on loans that included interest rate swaps. He wanted to refuse, but RBS bounced his cheques until he took the loans on. He is now involved with the GRG, even though it was expressly set up for severely distressed customers. He is not in severe distress now, but he soon will be, because the money he has to use to pay back the interest rate swaps RBS forced him to take on should be going into investing in his care home business. In addition, when RBS first forced him to take on the loan, the exit fee was £10,000. Only a few months later, it was £150,000. Given the amounts involved, we really need to start taking a serious look at what RBS is doing.

The hon. Member for Aberconwy was reluctant to use the word “fraud”, and I understand why, because it is a serious accusation. However, what I would like to hear about from the Minister is the reverse: what makes him confident that systematic fraudulent activity is not happening in RBS? I am focusing on RBS because that is what the Tomlinson report focused on, but also because RBS is more than 80% state owned. What makes him confident that the bank is not forcing people into the arms of the GRG, with the result that perfectly solvent businesses are not solvent any more, and asset stripping them at the same time? What makes him confident the bank is not taking huge fees from companies that bank with them, asset stripping them and making sure they can no longer exist properly?

[Tessa Munt]

On that point, the bank sold the business of one of my constituents, which was bought by another of the bank’s customers, who then found themselves in exactly the same situation as their predecessor. The bank therefore profited from not only the distressed sale, but what happened afterwards. Worse still, the sale happened as a result of interest rate swap mis-selling, but there is another interest rate swap agreement with the new company, so something that happened in 2005 happened again in 2007. Very often, these things are happening to the people who provide large numbers of jobs in our constituencies—the businesses that will provide the jobs and the growth.

[Natascha Engel]

Indeed. Those responsible are laughing all the way to the bank—ha, ha! The engineering of loan defaults allows a company to be put into the GRG. What we find, and what we see in the Tomlinson report, is that the lending is refinanced—companies are forced to refinance—and the bank gets far higher margins on the new loans. The bank also prioritises taking disproportionately high penalty fees from companies.

All of that is chipping away at small and medium-sized companies, which just want to get on with their business; they do not want to have to worry about what these massive organisations are doing. The banking sector is supposed to help people. Before the crash, banks were over-generous in flinging money at people; after the crash, they have become highly reluctant to lend even to perfectly good businesses. Where they do make business loans to companies, they are behaving, if not fraudulently, then at least appallingly badly, as I think we can all agree.

The all-party group’s investigation into interest rate swap mis-selling revealed not just the banks’ bullying tactics, but many cases that highlighted the imbalance between the size of the banks and the size of small and medium-sized enterprises, which the hon. Member for Wells (Tessa Munt) mentioned. We recently had a meeting with the Minister about that very issue. Can we really say that individuals have access to justice, when RBS—I repeat that it is mainly state owned—can call on some of the best legal minds in the country to support it against tiny businesses? I would say that those businesses do not have access to justice, and I would like the Minister to look at that.

To return to interest rate swap loans, which is where all this started, another problem is the foot dragging by the banks, which are looking into this, and which would say they are dotting the i’s and crossing the t’s; by the Financial Conduct Authority, which is also making sure it gets everything absolutely right; and by the Treasury, which is not putting enough pressure on the banks and the FCA to make sure this issue is dealt with swiftly. As we have seen, exit fees can go from £10,000 to £150,000 in only a few months, and interest rate swap mis-selling is costing businesses vast amounts, so every day matters, because all this money is going to the bank, not the businesses.

We cannot be confident—the Tomlinson report highlights this—that systematic fraud is not going on, perhaps in the wider banking sector, but certainly in RBS. I would really like the Minister, when he responds, to say what he is doing to make sure we can be confident that systematic fraud is not going on at RBS and more widely in the banking sector. I will conclude there, because I would like to give him as much time as possible to respond.

--- Later in debate ---

[Sajid Javid]

I disagree with the hon. Gentleman. The value of the report is that it is entirely independent. It was done by Mr Tomlinson in a personal capacity. He was free to look at any of the issues that he saw as important to the SME sector. I will look at the important issues he has raised, but at this stage I want to make it clear that it was a personal report by Mr Tomlinson and not a Government report. Once that is taken into account, the answers to the questions that the hon. Gentleman asked become clear.

The allegations made in Mr Tomlinson’s report are deeply concerning, and they have raised questions as to whether banks—particularly RBS—are treating their customers appropriately. We expect all banks to act with integrity across all the business activities that they engage in. Separately, as we have heard, the new management of RBS also commissioned Sir Andrew Large to conduct an independent review to examine RBS’s support to SMEs and the decisions that they make on SME lending. Following that review, a report was published on 25 November, and RBS has committed to implement its recommendations in full.

The reports, which were not Government reports, contained some very serious allegations, as we have heard from various hon. Members, particularly from my hon. Friend the Member for Aberconwy. It is now the responsibility of the Financial Conduct Authority to undertake investigations into allegations surrounding RBS’s lending practices and treatment of small businesses.

The FCA has now considered both reports. It has notified RBS that an independent skilled person will be appointed in accordance with the FCA power under section 166 of the Financial Services and Markets Act 2000 to review the allegations made against RBS.

[Natascha Engel]

Is there a time limit on the investigations being launched by the FCA? Foot dragging is a really serious issue, and every single day means more money lost to small businesses, so is there a specific time frame to which that person is working?

[Sajid Javid]

First, the FCA has yet to appoint the skilled person. I am not aware of a specific time limit, but it is fair to say that the FCA understands the urgency of the situation and the need to look into the allegations as quickly as possible. However, the hon. Lady will agree that it should take whatever time is necessary to get to the bottom of such serious allegations. The FCA will need to be satisfied that the skilled person appointed to review the allegations is sufficiently independent to carry out the work.

[Natascha Engel]

Will the Minister give way?

[Sajid Javid]

I will in a second. If the findings of the review reveal issues that come within the FCA’s remit, it can consider further regulatory action.

[Natascha Engel]

I am sorry to press this, but one of the very serious issues is the foot dragging, and the more time that is taken, even if it is under the guise of making sure that every i is dotted and every t is crossed, means more small and medium-sized businesses are unnecessarily going under, so the time pressure is really serious. I want to re-emphasise that the FCA must be put under pressure by the Treasury to ensure that the review is done as quickly as possible.

[Sajid Javid]

I agree with the gist of the hon. Lady’s comments, but I am not sure what she means by foot dragging. The report was published on 22 October. On 23 October, it was given to the FCA, and, within days, the FCA announced that it would investigate, so it would be wrong to accuse the FCA or anyone else of foot dragging, but she is right to suggest that we must stay on top of this and make sure it is handled in a timely way.[Official Report, 19 December 2013, Vol. 572, c. 7MC.]

The hon. Lady and other hon. Members mentioned the allegations of fraud in the report. They will understand it is not for Ministers to determine whether criminal activity by any institution or individual has or has not taken place. That is something that the courts and authorities must look into. If she or other hon. Members have been contacted by businesses with concerns, it is timely to remind her that micro-enterprises can go to the Financial Ombudsman Service with any such concerns. Businesses can also raise concerns directly with the FCA, which will investigate if it is appropriate, and of course any organisation is free to go to the police with any concerns about criminal activity. The police may involve other authorities such as the Serious Fraud Office.