Welsh Conservative Party politician and the Member of Parliament for Aberconwy (Photo: Lianna Brinded)
Thousands of businesses have fallen into financial distress after being allegedly mis-sold a number of interest rate hedging products by Britain's biggest banks
Conservative MP Guto Bebb became aware of the issue in October 2011 when a constituent, Colin Jones, visited his surgery and told him of his situation. Since then, the UK lawmaker for the Welsh constituency of Aberconwy has led the drive to force regulators into their recent review and pilot scheme to determine the scope and scale of the multibillion-pound scandal.
Bebb raised the problem in a House of Commons debate in 2012 and although he was told there was "no real issue," he said it did open the floodgates for businesses to come forward.
"I have to be honest, and I made this comment on the record at the first debate I had, that I initially thought [Jones] was just blaming others for his own failing," Bebb exclusively told IBTimes UK.
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"But I persevered enough to get a copy of the trade documents from the bank and himself when he was sold this product and the findings were concerning.
"One colleague who worked with me at the time almost became an unpaid agony aunt to a lot of these businesses and some of the stories we heard were just horrendous. Since a number of other MPs started coming forward saying 'I am aware of this issue as well', we thought the best way forward would get a debate on the issue going in parliament," he said.
The momentum eventually led to the Financial Services Authority (FSA) launching an inquiry into the mis-selling of interest rate swap agreements (IRSAs) to small-to-medium enterprises and the formation of an all-party parliamentary group led by Bebb and made of 50 MPs.
The rest is history.
Q: The political prompt clearly catalysed the FSA to launch a review then subsequently a pilot scheme over the possibility of 40,000 businesses being mis-sold IRSAs. But why do you think it took so long for the FSA to get involved?
A: This is a good example of how constituency casework results in a change in Westminster within seven or eight months. When you talk about short-term in parliament or for the regulators, this means between six to nine months, so I understand how and why businesses are frustrated and view it as a glacial pace of development.
But the reason why the FSA didn't look at mis-selling sooner is because the Financial Ombudsman Service continually said that there needed to be a tested case and their fallback argument was that no cases had gone to court.
However, since the first backbench debate in last year, the regulators realised that there needed to be further investigation.
It's also important to note that while other MPs from other parties, such as Toby Perkins and Chris Leslie, were pushing the Labour view of the issue, they did not play party politics and I have no doubts their involvement has helped for the government to take the issue more seriously.
And then from that point onwards, we have had regular contact with Business Secretary Vince Cable, and the Treasury, to become much more attuned to this issue. I think we are more attuned than we were last year.
Q: Since then, the number of businesses coming forward has risen but not near the possible 100,000 businesses affected that business secretary Vince Cable proposed. What reasons do you see for this?
A: There is no doubt that some people cannot deal with the stress (and many lack) funds for litigation and are just trying to struggle through. It is also entirely feasible that there are a lot more businesses out there that that don't know that they have been affected yet.
However, certainly at the outset, we were seeing intimidation from the banks, where businesses or people disputing the financial products were told that their existing facilities, such as overdrafts or existing loans, would be withdrawn. I am not making this up. I can't name any of these parties or the bank on record but there was even one case where a third party to a deal had their own facility withdrawn.
Q: Do you feel the banks still have too much power in determining cases and appropriate redress?
A: Yes. However it is important to bear in mind that the FSA was established deliberately as a light-touch regulator and what is perfectly apparent is that without getting the banks to employ the independent assessors, I don't think the FSA could have conducted the review.
I don't think they have the resources to conduct the review without outside help, and the only way to get outside help would've been to get the banks involved.
Now, I think it is fair to say that the independent reviewers have shown some degree of independence but there is a concern out there that the process is still completely up to the assessors paid for by the bank.
We are still concerned about it because we haven't a single business being awarded any level of redress yet.
Q: One of the biggest concerns is over banks deciding who is a 'sophisticated or un-sophisticated' investor. What are you and the group's views on this element of the scheme?
A: There is a question as to why the FSA insisted on having a 'sophisticated or un-sophisticated' rule, when there have been regulatory failings and therefore they should have a duty to act for everyone. It is also bound to be arbitrary.
The other concern is if the value of the swap is larger than £10m then you are excluded from the redress scheme.
However, we have provided the FSA with clear examples of how you can be an unsophisticated business but have a large swap.
I have a farmer who diversified as a wind farm but his swap is around £12m. Is he sophisticated? I am not being insulting, he is a very nice man, but did he know what exactly he was buying when he purchased an IRSA?
The answer is categorically no.
Q: Because of the Limitations Act, many businesses are losing their legal rights should they not be happy with the outcome of the scheme. What is the APPG doing for businesses right now?
A: We are talking with the FSA to get a separate and independent system in place, which is like a fund for businesses that cannot afford to be legally or professionally represented.
While the FSA said, categorically, that you don't need to have any advice to enter the redress process, I would question that because of the complexities of the products and not understanding the products is how we got here in the first place.
Obviously the APPG is intent on putting controls is place to mitigate the high level of legal costs for businesses, but there are undoubtedly some businesses that will have to go down the route of litigation and certainly if they fall foul of the £10m rule.
We have written to the Justice Secretary and the Treasury Minister about all of this.
I have said to businesses from the outset that it is imperative that if a business has a swap then they have to protect their position by filing a legal complaint.
Q: The big four banks have said that there is a possibility for the suspension of swap payments on a case-by-case basis, but how widespread has this actually been?
A: There have been examples of suspensions and I think it is fair to say that there are best practices has come from Barclays.
The problem is that the FSA has told all the banks to give a moratorium to businesses that are in 'financial distress', but there is no definition of what 'financial distress' means. So, again, it is down to the banks' reasoning.
It is also massively concerning that the bank considered to be the least willing to suspend payments is RBS. Suspension of payments would help businesses to survive in the short term and not to fall into administration.
The FSA have taken these concerns on board but interestingly the HMRC are being the most sympathetic. Businesses, which have been struggling to pay taxes on time, are getting some leeway on payments.
We will determine our next meeting with the FSA, Barclays and RBS hopefully within the next week. We are hoping that they will look into suspending more payments for businesses as well as start pushing through some examples of redress more quickly. We will also talk about the system for helping SMEs with the redress platform.
While the current system is flawed, we are hoping that we will get a clear and transparent definition over the criteria for 'sophisticated' or 'unsophisticated'.
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