The UK government took a step in the right direction when it conducted a roadshow in Birmingham to speak with small to medium size businesses and consumers and their experiences with the banks, followed by a three hour evidence hearing in Parliament two days later.
Instead of just allowing the Financial Services Authority's (FSA's) agreement with the banks, which effectively resulted in the "wrongdoer deciding their own punishment" as described by Labour's Shadow Financial Secretary to the Treasury, to continue without criticism, many MPs from all parties have started to look at the situation in more depth and called upon a number of key expert witnesses to unveil the scope and scale of the problem.
The Parliamentary Banking Standards Commission (PBSC), which was created after the Libor fixing scandal emerged, provided a wholly appropriate line-up to question experts in the evidence sessions on 26 September, including Mark Garnier who amassed over 20 years of investment banking experience before becoming an elected MP.
While the questions and experts giving evidence provided hours of balanced feedback and analysis, there were severe pitfalls in addressing key issues that affect the consumer and small businesses, which is mainly because this forum has to cover everything.
When I mean everything, I do mean everything.
The evidence sessions touched upon packaged bank accounts, overdraft fees, late fees, customer service, regulation of training, the training of retail bank counter staff to executive level, transparency, the duty of care, Libor fixing, mortgages, lending and then eventually, the mis-selling of derivatives.
With representatives on hand from all manner of bodies, from consumer watchdog Which? to the British Chamber of Commerce (BCC) and Confederation of British Industry (CBI), the all-encompassing forum meant that MPs only scratched the surface on the depth and breadth of the problem with the mis-selling of derivatives.
Understanding These 'Complex Derivatives'
After just over two hours of evidence from panellists on consumer and business issues that ranged from customer complaints to overdraft fees, the PBSC heard evidence and analysis from Abhishek Sachdev, managing director at Vedanta Hedging in the final session.
As someone who worked for the UK Treasury and then subsequently at Lloyds for nearly 10 years, including in its hedging department, Sachdev was a coup for evidence deliverance for the MPs as he has also appeared as an expert witness in court cases that involved businesses claiming to be mis-sold interest rate swap agreements by the banks.
Even as Garnier understood the veneer of the problem that the industry faced, from the outset of questioning, a lot of time was spent explaining to the panel what types of complex derivatives had been sold to SMEs from 2004 onwards.
While this only scratched the surface of the full situation, the 50 minutes of questioning did emphasise that this exact complexity was one of the reasons for why the mis-selling of derivatives to SMEs took so long to come to the foreground and why it had been accepted as a blanket hedging tool for businesses taking out loans.
In Sachdev explaining some of the more simple products, to examples of more complex swap agreements, it was a good avenue to highlight how each and every case that a business has against banks for 'mis-selling' them a product is entirely different as the structure of the product would be priced and structured on the day it was sold.
Furthermore, it served as a good platform to explicitly hammer home that this is nothing at all like Payment Protection Insurance (PPI) and nor should mis-selling derivatives cases be blanket treated in analysis and redress.
Pawning Off Other Products
As part of the evidence session with Sachdev, where the questioning was primarily led by Garnier, there was an important point that was raised but would need to be explored in more depth by the PBSC and then then the Treasury Select Committee (TSC).
"Every case has to be assessed one by one. Some of the early redress options are quite concerning but as part of the current FSA redress scheme, banks are still allowed to offer businesses a replacement product," said Sachdev. "For instance, if the business had been sold a structured collar product, then they can offer you a replacement with a fixed rate product. But this is very concerning because is could still leave the customer with the same break costs and penalties as the previous product, as the details would be fixed at the levels in 2006."
As Sachdev illustrated, the lack of understanding of the complexity and uniqueness of each individual over-the-counter derivative sold to a business, means that the buyer could be just as easily moved to another financially crippling hedging device.
While written evidence can be submitted at a later date to the PBSC, which will later be delivered to the TSC for review, the flavour of types of issues that surround the FSA agreement and what constitutes as mis-selling still needs to have a separate form of assessment and analysis to the other consumer issues that were purported in the previous evidence sessions.
Not Just a 'Big Fat Cheque'
The next three months are going to be crucial into the unfurling of the mis-selling derivatives debacle, as clearly there needs to be more investigations into the full extent of the damage these products have and will continue to have UK businesses.
In terms of redress, we are expected to hear next week of the first 'pilot' forms of findings and redress from the banks themselves and whether they have, in fact, 'done the job correctly.'
According to the FSA, 28,000 of these swap products have been sold to customers, meaning that there would have to be 28,000 separate investigations.
The regulator would not have the resources to look into these cases itself and as it pointed out, the banks have all the original documents.
Each case will require analysis from those who are qualified to analyse and conclude on derivatives case disputes, alongside lawyers, the independent reviewers and relationships managers. It is intense. We've already reported that many businesses are moving towards going straight to the solicitors to seek a swifter resolution after years of being "ignored," rather than just months.
However, the mass mistrust for the banking sector, following the Libor scandal and PPI, will mean that all eyes will fall on the first taster of how the banks have handled the redress scheme.
Of course not all businesses will get redress. And it is important to note that redress encompasses a wide range of settlement options, not just a 'big fat cheque.'
Experts tell us that some of the recent settlement conditions have not included a full refund, which is widely expected by businesses for the swap payments, in some cases, it is either just to be able to break out of the contract at no extra cost or to secure a 10-year loan, which actually in today's economic climate is rather difficult.
Of course, some of the cases have included settlement amounts, but not everyone has or will receive this because it is not as black or white as PPI.
Over the next few months, the PBSC should really reassess how they are going to deliver their findings to the TSC, as the mis-selling of derivatives cases is a completely different kettle of fish from not only PPI but is certainly critically more complex than determining overdraft fee structures.
Moreover, the PBSC are moving in the right direction, but if the members do not take the opportunity to fully investigate and determine the pitfalls of the mis-selling situation, it could mean that many years of disputes and investigations could continue and in turn undo any governmental efforts to stimulate UK businesses and therefore the wider economy.
All the Funding for Lending schemes or Project Merlin will mean nothing if there are no businesses to fund.
Furthermore, while it may be tedious to keep recommending clarification and definition over these complex products that businesses are being sold, it is one of the most important elements for the banks, customers, regulators and the subsequent redress and change to selling structure.
As Sachdev did emphasise, businesses should have a hedging strategy in place and of course blanket banning "hedging products" is not exactly the way forward.
The bone of contention is whether these products were appropriately sold to a customer and whether there was any assessment or analysis in place for these SMEs to receive something so complex.
At the time of these products being sold, the banks would of course lace the contracts with disclaimers saying that the customers should seek independent advice, however in 2004 up until recently, these businesses would have been hard pressed to find FSA authorised independent derivatives experts to tell them exactly what a 40 page ISDA agreement entailed.
Knowledge is power and until the clear definitions and clarifications are met, it's difficult to truly move forward in redress and improved selling structures.