A silent scam

Sometimes, when the Commons is not heated with the fire of PMQs, or some other big event, the feeling can come about that something of significance is being discussed. The much-derided "Punch and Judy" politics having been stripped away, what remains is a residue of real substance.

In the House today, Guto Bebb (Cons, Aberconwy) stood to begin a session of backbench business. His subject was a condign one: what the financial regulator plans to do about the mis-selling of interest rate swaps. Not perhaps a subject to excite the minds of headline writers. The press gallery was empty. Tellingly, perhaps, the public gallery was just about full.

Small and medium sized businesses have been sold these interest rate swaps, the House heard, and many of the businesses in question are finding themselves crippled by the repayments. Ninety-one percent of cases highlighted so far, Bebb said, involved mis-selling. Imagine, he said, if it were discovered that mortgage products had been mis-sold to the same extent. MPs suggested that the regulator, the newly-minted Financial Conduct Authority, was dragging its feet.

MPs intervened in Bebb's speech to suggest that companies, some of them very small, were sold interest rate swaps as a condition of gaining access to bank loans. Companies were now afraid to go to their banks with complaints fearing that their loans might be cancelled if they made a fuss.

"We have to put pressure on the FCA," said Bebb, who went on to note that banks had so far spent £300m and hired 3,000 employees to handle the problems caused by interest rate swaps, but had so far only paid back £2m to businesses. An MP, who has seen constituents' businesses wiped out by swap repayments, described the banks' behaviour as a "scam."

Natascha Engel, Chair of the Backbench Select Committee (Lab, NE Derbyshire) gave further examples of constituents ruined by the scheme. She wondered whether the Government should become more closely involved in the situation and also whether criminal proceedings might arise. A moratorium on repayments she suggested, might help to speed the banks up in their work in providing compensation to customers—30,000 people are awaiting redress from the banks, said Engel, and so far the number to have received repayment is 32. The FCA and the banks she said, were both showing inefficiency in addressing the problem: "nobody will really take any responsibility," for the matter, she said.

Mark Garnier, (Cons, Wyre Forest) gave an explanation for why the banks were slow to repay. Swaps such as these, he said, had a third party on the other side of the trade. A bank stands in between two customers that want to swap interest rate risk with one another. If a bank identifies two parties correctly, then a mutually beneficial symmetry can be constructed. This was the essence of the swaps market, Garnier explained. Banks he said, are now in a position of having to look after not the small businesses that are suffering with repayments, but the other side of the trade—these are mainly, Garnier suggested, large institutional investors such pension funds.

There was consensus among MPs that the FCA needed to get the banks paying back money to businesses that had been devastated by these swaps. Small and medium-sized businesses should never have been sold such sophisticated hedging products, MPs agreed.

It was an obscure debate and the detail was complex. But it delved into a crisis that is destroying the lives of a large number of people. at the root of which is a deeply unpleasant financial scandal. Martin Wheatley, the head of the FCA, had better get control of the situation—if not, he might soon find himself being grilled by a Parliamentary Committee (Andrew Tyrie, of the Treasury Select Committee was present at today's debate). The media attention would at that point no doubt become substantially greater than it was today.