I want to address the issue of the mis-selling of interest rate swaps by commercial banks and to ask in particular why tailored business loans—or fixed-rate loans with embedded or hidden swaps—are not included in the Financial Services Authority’s review. This issue took up a whole Back-Bench debate last June and I know that we will return to it.
The pilots of the FSA’s review into interest rate swaps revealed evidence that up to 90% of products had been mis-sold by commercial banks, but the question is: why is the review not looking at TBLs? Many businesses in my constituency and, I would hazard a guess, across the whole country are affected by them. We need a review of those products if our constituents and business people are to have any chance of redress.
TBLs are remarkably similar to other interest rate swap products: they involve exorbitant exit fees for the businesses concerned, profits are booked immediately to the banks and there are huge incentives to sell them to customers. When the all-party group on interest rate swap mis-selling, ably chaired by Guto Bebb, met last December, Clive Adamson of the FSA told us:
“If there is no understanding of break costs given to the customer and if there was a poor disclosure of exit cost, then it was highly likely that there was a mis-sale”.
Yet on the grounds of a mere technicality, TBLs, which are fixed-rate loans, will not be included in the FSA review. That is unjust nonsense.
I can best illustrate that point by referring to two businesses in Aberystwyth in my Ceredigion constituency. First, Huw and Jackie Roberts of Minhafan Estates Property Development took out a £750,000 quaintly named vanilla swap over 10 years, which Barclays bank referred to as a “simple swap”. The breakage clause to get out of that agreement is £155,000 and their business is included in the FSA review. Secondly, the Beechey family who run the Black Lion pub in Aberystwyth took out a £750,000 fixed-rate loan—a TBL with embedded swap—over 15 years with Clydesdale and Yorkshire bank. Their breakage fees are £200,000, but the business is not included in the review. Both of those businesses are in the same constituency and suffering severe financial distress, yet one is in the review and the other is not. Both were involved in a trade call with an FSA-regulated derivatives expert when the hedging product was sold.
For 12 years the FSA has worked on the assumption of a principle-based system of regulation. The results of January’s pilots found that poor disclosure of break costs was one of the most significant issues in assessing compliance. However, banks such as Clydesdale and Yorkshire are telling customers that they have no legal or regulatory obligation to inform customers who have been sold a fixed-rate and that they have no redress whatsoever. If a feature is worthy of regulation when it is contained in one product, why is it not worthy of regulation when contained and concealed in another?
In Ceredigion there are well over 30 types of the Clydesdale and Yorkshire fixed-rate loan with hidden swap, and that is in one community alone. Hotels, pubs, lucrative shops and farms are being targeted by the banks. The stories are heartbreaking. These toxic loans mean that hitherto successful businesses are burdened with unmanageable interest rates. Owners are unable to exit the arrangements because of extortionate breakage penalties of between 20% and 40%.
What about the consequences? Job losses resulting from trading for four years in a severe economic situation while locked into an inappropriate product—a product that has sucked out every surplus the business has generated, preventing development and the engagement of staff and precipitating redundancies—are forcing people in my constituency on to benefits.
The challenge for the Government is to put all pressure imaginable on the FSA and the successor organisation to ensure that such embedded products are considered part of the review, so that the growing number of business affected have the redress and justice I believe they deserve. I hope my right hon. Friend the Deputy Leader of the House answers favourably.