Peter Aldous calls for independent advice for selling interest rate swap products
21st June 2012
Speaking in the House of Commons, Peter Aldous calls for the FSA to investigate the mis-selling of interest rate swap products to small businesses and for new banking rules to ensure advising a customer and selling a financial product are provided independently.
Peter Aldous (Waveney) (Con): I am grateful to my hon. Friend the Member for Aberconwy (Guto Bebb) for raising this important issue and for campaigning on it with such determination.
I wish to draw attention to a case study concerning a medium-sized business in my constituency, setting out its experiences and seeking to draw some lessons from them. At this stage, the business wants to remain anonymous, as it is seeking to resolve the matter with its bank without recourse to legal action and it does not wish to prejudice those negotiations.
In 2005 the business entered an interest rate hedging transaction that ran for five years. At the outset, taking into account the immediate outlook for the economy and for interest rates, there was some logic to such an arrangement. In May 2008 the bank contacted the business, recommending and urging it to renew the arrangement for another five years, even though the agreement was not due to expire until 2010, more than two years away. During the ensuing three to four months, the customer continued to receive correspondence and telephone calls from the bank encouraging renewal.
At a meeting that took place on 15 August 2008, the matter was discussed more fully. Subsequently, on 29 October, more than two months later, my constituent sent an e-mail to the bank advising it that he did not wish to renew the agreement. On 4 November he received a contract from the bank for signature. The bank told him it was confirmation of the verbal agreement reached on 15 August. Under pressure, not wishing to upset a business arrangement with his bank that had been in place for many years and at a time when the economic outlook was uncertain and the customer was keen to keep on good terms with the bank, he signed the agreement.
Earlier this year, my constituent decided, having sold a property, to bring the agreement to an end, so he contacted the bank to establish the cost of doing so. He was advised that that would cost more than £72,000. Up to today, the whole arrangement has cost him £162,000 in interest charges, which are predicted to have risen to £200,000—40% of the value of the loan—by the end of the arrangement in September 2015.
I have three observations on that chain of events. First, in whose interests was the bank acting? Its own or its customer’s? Why did it put pressure on him to renew the agreement when there was no need to do so for another two years, until 2010? In 2008, taking into account the outlook for interest rates and their likely future movements, there was no incentive or reason for the customer to rush to renew. It would have been much better to see what would happen over the following two years. Any independent adviser acting in the company’s best interest would have advised it to do that. In my view, the bank’s actions were dictated purely by its own self-interest rather than in the best interests of its customer.
Secondly, the bank appears to have been incompetent at best, and at worst to have adopted underhand tactics in putting pressure on the customer to renew the agreement. Obviously what happened at the meeting on 15 August is subject to disagreement, but I personally accept my constituent’s version of events. Surely the best practice for the bank to have pursued would have been to take its customer through the arrangement step by step at that meeting and, if there was a verbal agreement, to produce a contract immediately and not two months later. A further meeting should have taken place, to go through the contract line by line, until the customer was fully aware of the implications before signing. The fact that the bank did not send the contract for two months, and only did so because it received an e-mail from its customer indicating that he did not wish to proceed, shows it in a very poor light.
Thirdly, there is a clear failure by the bank to provide full, independent and impartial advice that sets out the pros and cons of the transaction, in particular the cost of breaking early. If my constituent had been aware of all those factors, he would not have renewed the arrangement.
I am keen to give other hon. Members the opportunity to state their case, so I will conclude with two points. First, this whole matter needs to be addressed straightaway and given high priority by the FSA, and a framework should be put in place for cases to be investigated quickly with proven claims settled immediately. We do not want this scandal to drag on for years, because that could undermine the very businesses on which the economic recovery needs to be built.
Secondly, we need a banking system that is regulated and run in a way that prevents such conflicts of interest. In the case I have described, the bank was clearly acting in its own interest rather than that of its customer.
George Eustice: Does my hon. Friend agree that if banks encourage their customers to take up such products, they should not then be allowed to provide them through one of their subsidiary companies? That would be one way of creating a division.
Peter Aldous: I agree entirely with my hon. Friend—a dog cannot serve two masters. The two acts of advising a customer and selling a financial product must be completely separate and provided by organisations that are independent of each other and not related parties.
I support the motion and look forward to hearing from the Minister about the Government’s proposals for achieving a prompt resolution to yet another bank selling scandal.