Banks to face MPs over loans mis-selling

Business Correspondent/Personal Finance Editor

Monday 24 September 2012

The Parliamentary Commission on Banking Standards will this week take evidence on the banks' mis- selling of derivatives to business customers, as unease grows about the effectiveness of the bank-led review process now under way.

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SIMON BAIN

At its first formal meeting at Westminster on Wednesday the commission, set up with all-party support in the wake of the Libor scandal, will enable MPs to quiz consumer and industry experts on interest rate swap agreements (IRSAs) now the subject of a regulatory "review and redress" process.

However, campaigners say the review, instigated by the Financial Services Authority but run by the banks, is inadequate. Last week the Federation of Small Businesses called for it to be abandoned in favour of an independent scheme. The FSA, which is due to meet the federation today to discuss the issue, has said it has listened to criticism, and that businesses could begin to receive compensation within weeks following pilot work on claims.The Herald, which in June revealed the extent of the IRSA scandal, reported last month that the Clydesdale Bank's "tailored business loans" appeared to fall outside the scope of the sales review. The TBL, sold to hundreds of Scottish small businesses in recent years, embeds interest rate hedging into a fixed rate loan, technically escaping FSA regulation as a derivative. Jon Colclough, an associate supervisor at the FSA, has told one Clydesdale customer in an e-mail this week: "We have discussed with the bank the potential for the inclusion of TBLs... and the bank will communicate with all customers sold interest rate hedging products, including relevant TBLs, in the coming weeks."Meanwhile, former hotelier Mandy Ford, whose case was originally highlighted by The Herald in June, has been told by Lloyds Banking Group that her loan will not be reviewed. Ms Ford had to sell her family hotel in Glasgow's west end last year after being confronted with a £72,431 "exit fee" to vary her £420,000 fixed rate loan with the bank.The bank has told Ms Ford: "The FSA agreement relates to derivatives as defined by the FSA on their website... Examples of derivatives include an interest rate swap and an interest rate cap or collar. Fixed rate loans do not meet the FSA's definition of a derivative and so the company's fixed rate loan will not be included in the review."Ms Ford, however, says: "The nub of my complaint is that I was not made aware of the risks associated with this product nor the true nature of the contract." She has obtained from the bank a "breakage fee schedule", which shows the £72,431 breakage fee equates to the interest payments over the remaining 10 years of the loan following exit. One column in the document is headed "Covering Swap". Ms Ford has written to the bank, saying: "Please can you confirm that the fixed rate loan had an embedded swap. From my understanding the bank would have entered into a swap with the market and the bank would have made a profit from the difference between the rate I paid and the rate that was achieved in the markets." Lloyds Banking Group has told The Herald that in this case as in others it has "complied with all its obligations".Clydesdale Bank has said it has "voluntarily agreed to conduct a review of the sale of interest-rate hedging products overviewed by an independent assessor appointed by the FSA".Complainants are still awaiting progress. Pastor Andrew Owen of Glasgow charity Destiny Church, which is claiming more than £100,000 of damages from the Clydesdale for the alleged mis-selling of an IRSA on its property loans, said this week: "The bank wrote two weeks ago, confirming that they are waiting further FSA rulings and guidelines, and will review our case in due course."Clayton Perks founder of Glasgow Chiropractic, who alleges mis-selling of IRSAs by Royal Bank of Scotland has cost him £500,000, said he was still awaiting a response from the bank.The Bully Banks cam-paign group, representing 750 small businesses across the UK including a growing number in Scotland, has called on the banks to dis-close total sales of all loan products which involved fixing interest rates, arguing that so-called fixed-rate loans with potentially huge breakage fees were "disguised swaps".The group has this week teamed up with London law firm RJW Slater & Gordon which, it says, has "the resources to both finance and administer a large number of litigants and to effectively litigate against the banks for fair redress". Fraser Whitehead, the firm's head of group litigation, said: "The FSA's response to date has been wholly inadequate and unfair to the victims of this scandal."

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Banks to face MPs over loans mis-selling

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