Heads they win.
Tails you lose. That is how loan agreements sold by High Street banks to thousands of small businesses seem to operate. The Herald reports today that business customers of just one bank – RBS, which is 83% owned by taxpayers – may have been obliged to hand over £3 billion in extra payments on loan agreements which were allegedly miss-sold.
Most of the loans were taken out between 2005 and 2008, when the Bank of England base rate was around 5%. Companies taking out or renewing loan agreements were pointed in the direction of Interest Rate Swap Agreements (IRSAs) which purported to protect customers from interest rate rises. Often IRSAs were a condition of getting the loan.
In the event, interest rates tumbled to just 0.5% and have stuck there ever since. But while bank interest rates fell, business customers have found their repayments have risen. Customers who tried to extricate themselves from such arrangements have been faced with gigantic break fees.
Clearly, banks scrambling to rebuild their balance sheets in the wake of the 2008 crisis have done very well out of these arrangements but at a huge cost to their business customers and to the stuttering UK economy. A business tied hand and foot by its bankers cannot invest or keep staff. In fact, our calculations suggest the impact of IRSAs could cost the economy 80,000 jobs. Even if the figure is only half that, these are big numbers. In the commercial property market it translates into boarded up shops and industrial units.
The broader context of this story is the transformation of the friendly bank manager serving the local business community to sales-incentivised staff under pressure from management to sell ever more complex financial products. It is no coincidence that RBS during the Fred Goodwin era was a leading light in the IRSA market. Perhaps business customers were slow to pick up on this culture change.
Banks have two particular lines of defence, one general, the other technical. In general, banks can argue that businesses cannot be treated like private customers with little knowledge of high finance. However, as the 2008 crash illustrated, even bank staff failed to comprehend the risks implicit in the complex products they were being asked to sell.
Mis-selling complaints have been rejected by the ombudsman on the basis that contracts specified that the bank "does not give advice". Yet that is exactly what these customers believed they had received and banks cannot contract out of all their responsibilities. The bottom line is that if these customers had known the downside would be so bad, most would not have taken on these deals. Now many can afford neither to keep up the hedging payments nor take a court case.
The FSA is considering the issue. It must act. Meanwhile where is the voice of Business Secretary Vince Cable on an issue that could be as big a scandal as the mis-selling of endowments or PPI? There is a desperate need for greater transparency on how such products are sold. Are bank staff too reliant on commission? For business customers the watchword must be "Caveat emptor!". The era of gentleman's agreements, followed by a game of golf, is over.
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