Commercial Financial Dispute Resolution Platform

Steve Baker Excerpts

Thursday 15th December 2016 Commons Chamber

[Mr Steve Baker (Wycombe) (Con)]

I am very glad to be called to speak in this debate. I support the motion, and congratulate the hon. Member for East Lothian (George Kerevan), with whom I serve on the Treasury Committee, not just on securing this debate, but on the excellent work he has done in having the initiative to bring forward the all-party group on fair business banking. I am glad to be a vice-chair of it, and am grateful to him for the invitation to take that role. I shall make three points: the first is about incentives; the second is about the cost and accessibility of courts; and the third is about complexity.

I have spoken previously in the House about the incentives for bad behaviour, particularly in relation to accounting under the international financial reporting standards, and liability. It is appropriate that the House is so well packed with Scottish National party Members, because I know at least one of them will be glad to hear that I recently attended an event at the Adam Smith Institute, where I helped launch the book “Legislating Instability: Adam Smith, free banking and the financial crisis of 1772”, by Tyler Beck Goodspeed, a brilliant American economist working in the UK. That event may seem irrelevant, but it goes to the heart of what is wrong today. The book shows that the Scottish banking system, characterised as it was by unlimited strict liability among partners, had very good, strong incentives for the owners and staff of banks to behave well. I am grateful to the hon. Members who are nodding in agreement.

Of course, we have come a long way since then, and we are not about to go back to free banking, much as I would wish us to. I shall quote an actuary, whom I do not wish to name, who talked about his work:

“I have examined around 100 individual cases, all of which had the same negative qualities. It is a case of bank salesmen deliberately withholding key information about the risks embedded in the ‘hedging’ products they sell. The term ‘hedging’ is therefore itself misleading.

Overall, the process is disgusting. Banks sold derivative products on top of loans to their clients which those banks knew would render them less creditworthy at the point of sale, and therefore render the business more likely to fail. How this can be described as ‘hedging’ by any financial organisation with a scrap of integrity is beyond me.”

I agree. The actuary went on to say:

“This misleading use of language, unfortunately, is maintained by some of the ‘experts’, some of whom charge large fees for reports to take into the courts. If these reports miss out on key risks, the cases become far weaker, possibly to the point that the case fails. At the best, the bargaining power of victims is much reduced.”

I want to pick up on that experience, because my second point is about the cost and accessibility of the courts system. This points to why our debate is so important. I am sure that the hon. Member for East Lothian has, like me, heard evidence in constituency casework and from the authorities showing that the system that was set up was not adequate to the task in hand. Indeed, I am sure many Members will have constituents whose businesses have been in grave difficulty, and whose lives have been affected, who found that the system failed them.

However well intentioned the authorities were in setting up the system, it has not worked well. We need to find some middle ground between the courts, which are too expensive, complex and require expert evidence—often either unavailable or too expensive to purchase at quality—and the failed semi-formal system. The court system, its inadequacies and the necessity of avoiding it is an old problem—Matthew 5:25 refers to it—and the Government have quite some task ahead of them if they are to deal with this matter.

As for complexity, even Treasury Committee members, who have been elected by the House to deal with such issues, have found derivatives fabulously complex and difficult to follow. If that is true of those of us who are charged with developing the expertise, it will no doubt be true of the small business people who buy the products. To ensure that similar problems do not reoccur, the Government may want to consider whether small businesses —limits on size is something else to consider—ought to be treated as consumers for regulatory purposes.

I am glad that we are interested in a tribunal system funded by the banks, and that we are open-minded. Although my hon. Friend the Member for Henley (John Howell) is not in his place, I am grateful that he will be working with the APPG to take things forward. Finally, I again congratulate the hon. Member for East Lothian. I look forward to making progress, and to hearing what my hon. Friend the Economic Secretary to the Treasury has to say.

--- Later in debate ---

[Michelle Thomson (Edinburgh West) (Ind)]

I made a speech in this place on 1 February 2016 on the FCA compensation scheme for interest rate hedging products. I argued then that that scheme was ill thought out and provided no effective redress for businesses that had been made insolvent. To be honest, I was almost tempted to re-read my previous speech because here we are again, although I would have included the new numbers. Whereas in the case of the IRHP scheme 10% of its complainants were insolvent, in the case of RBS Global Restructuring Group that figure is upwards of 75%, with some estimates as high as 94%, yet fundamentally nothing has changed because RBS has already confirmed that it will not deal with the business owners who have lost their livelihood. The too little, too late apology from the chief executive of RBS, Ross McEwan, is not good enough.

Thanks to the excellent investigative journalism of BuzzFeed and the BBC, the so-called dash-for-cash articles make fascinating, yet harrowing reading. They clearly demonstrate a system that is well ordered and well structured in which the winner takes all. The so called victory emails that were sent to teams in GRG when West Register acquired an asset are a disgrace. That is quite telling because where there is a victor, there is always a loser.

I am grateful to Nick Stoop of Warwick Risk Management who applies the story of the “Komodo dragon” condition. The Komodo dragon lies in wait at a watering hole where it nips the foot of its prey. The prey escapes, apparently not seriously harmed, but the bite is toxic and the dragon knows that its target will eventually weaken and die. So it is with RBS swaps and GRG. The swaps salesman lands the toxic bite. GRG and West Register then get to tear the client to pieces.

I concur with Members who spoke about what that means for those people. We can never forget that people are at the heart of what we are trying to do here. Remember what they may have lost—their family home, their business, their livelihood, their future livelihood if they planned for their children to go into the business, their dignity, their pride and often their very self-definition. We know that wider society loses—the wider community, other local businesses that depend on the failed business, its supply chain, creditors, Her Majesty’s Revenue and Customs and local authorities. My hon. Friend the Member for East Lothian (George Kerevan) pointed out the potential emotional impact on individuals who, for years, have to dig deep for resilience and strength, but very often end up with mental health issues or develop physical illnesses. Let us never forget that people have committed suicide as a result of the actions of some of our banks.

When did we sign up to this? When did we sign up to a taxpayer-owned bank pillaging the assets of our SMEs—the so-called life blood of our economy—or creating a system where victory emails are sent when another department of the same bank asset-strips? We have to ask whether abuses such as those at RBS could have taken place if we had a system where a business owner could simply be heard. I concur again with my hon. Friend that it is a contract between unequals when somebody who has been declared sequestrated or insolvent cannot take on a bank.

[Mr Baker]

In this House we often hear strident language. The hon. Lady used the word “pillage”. I entirely agree that it is wholly appropriate to describe some of that behaviour as a pillage of those companies, and I hope the Minister will bear that in mind.

[Michelle Thomson]

I thank the hon. Gentleman for that compliment.

Finally, I want to address the topic of culture. We need to recall that it is the underlying culture of institutions that has enabled this to happen. We know that we have come from a driven, bottom-line culture, but we must make our banking system—our whole financial system—work for us and for our society. I fear that we have lost sight of that over recent years. I agree that we need a tribunal, but we also need an effective process so that precedent can be set and learned from, and so that behaviour is changed and abuses do not happen in the first place. We have seen that happen with other tribunal systems.

I thank the APPG for its support in driving this campaign and Andrew Bailey of the FCA who endorsed the idea. It is time to get started.

--- Later in debate ---

[Simon Kirby]

I will not give way, but perhaps we might speak afterwards. I have an awful lot of things I have to address.

My hon. Friend the Member for Wycombe (Mr Baker) asked about incentives to discourage misconduct. The Government and regulators have acted to embed personal responsibility in banking through the senior managers and certification regime. He also stated that small businesses should be treated as consumers.

[Mr Baker]

I am not sure that I did state that. I asked the Government to consider whether it would be appropriate, if I recall correctly.

[Simon Kirby]

I thank my hon. Friend for that clarification, and I apologise to the right hon. Member for Delyn for being inconsistent.

Unincorporated sole traders and small partnerships fall under the regulatory rules of the consumer credit regime. The FCA is asking how all SMEs are treated as customers of financial services, as is right and proper.

The hon. Member for Coatbridge, Chryston and Bellshill (Philip Boswell) mentioned the IRHP scheme. The redress scheme was not designed to replicate the courts system, which can be lengthy and expensive, as Members have acknowledged. Independent reviewers were put in place to oversee each case.

The hon. Member for Ceredigion (Mr Williams) asked about the timeliness of the ombudsman’s decisions. I agree that the decisions should be quick. I am assured that its decisions are faster than the courts and free for complainants. However, inevitably, complex cases will take time to resolve. He also asked about the disclosure of information. Where the ombudsman considers it appropriate to accept confidential information, an edited version, summary or description will be disclosed to the other party. I agree that it is right to pay tribute to my hon. Friend the Member for Aberconwy (Guto Bebb) for keeping this issue on the agenda.

The right hon. Member for North Norfolk (Norman Lamb) asked an important question about whistleblowers. I understand that the FCA has invited the hon. Member for East Lothian to discuss whistleblowing and I am sure he would be welcome at that meeting. To be clear, the Government recognise the information and huge value that whistleblowers provide.