TTF Blog: 14 February 2022

Transparency Task Force believes the Treasury and the UK’s regulator, the Financial Conduct Authority, is covering up the extent of bank lobbying against redress for healthy busineses mothballed by banks after the financial crash of ’08-09.

From ’09 into the 2010s, the banks’ recovery fed from an open wound in Britain’s small to medium sized businesses. Farmers, property developers, publicans, shopkeepers, doctors’ surgeries – were picking up the tab. Many believe the Treasury and watchdogs were hand-in-glove, protecting big business at the expense of small.

TTF’s founder, Andy Agathangelou emailed the watchdog over the weekend to say: “I’d rather not have to continue to speak to distraught people, often in tears, because their financial security and personal wellbeing has been obliterated due to catastrophic regulatory failure by the FCA.

“Take, for example, the IRHP [Interest Rates Hedging Products] mis-selling victims” Agathangelou points to the FCA ‘refusing to do what it can’ to “help SME business owners to get the compensation they are owed due to the deliberate selling of toxic IRHP products by the banks, despite a very expensive investigation by a leading QC making it crystal clear that they should, as set out so clearly here and here.”

Guarding George Osborne

An excuse used by the FCA for denying customers access to redress, is to allow banks to retrospectively label them ‘sophisticated’ — sometimes several years later — implying that they were fully capable of knowing what a swap could do to their business. Agathangelou wrote to Rathi: “I do not know what the legal basis is for the FCA’s position on this matter; but I do know that the moral basis for its position is non-existent.”

The Times’ business journalist James Hurley last year accused the Treasury and FCA of “lying” about what John Swift QC determined to be then-Chancellor George Osborne’s interference against protecting IRHP victims. ‘Lying’ is not a word that journalists ever use lightly, it implies spin-doctors are actively distorting or obscuring the facts, which cannot be written off as a difference of opinion.

How did swaps work?

‘Swaps’, or ‘interest rates hedging products’, were often sold as a condition of taking out business loans. The period of Swift QC’s review of the scandal extends all the way from the millennium to the end of the noughties. Customers could be told that this product would protect them if interest rates rose. What they were not necessarily told is what it would do to them if interest rates fell.

Ordinarily, if interest rates go down then this is good, it means the cost of borrowing is low. A ‘swap’ resulted in a reverse effect  that when interest rates go down, the business has to pay the bank fees. Bank managers were incentivised to sell the products in the mid-to-late 00’s. But at what cost to their customers?

The post-crash feeding frenzy

Business analyst and ex-banker Steve Middleton has spoken to reams of devastated SME directors over the years since the crash, and reflects his experience: “Between 2001-2006″ – when interest rates tended not to be falling – “the swap sales were not normally that damaging, but in cases I have seen where the customer was ‘in the money’, the bank cancelled the deal and sold a new one to favour them again.”

From his perspective, the wreckage to customers was absoutely foreseeable: “From circa September 2007 all of the forecasts were down long term, Northern Rock went bang in September 2007 that was the real start of the crash. Virtually all swaps sold after that date (the majority of them) were sold by telling customers rates would go up when the opposite was true.”

Middleton has become a deep subject matter expert in how swaps were structured. Credit lines for ‘swaps’ were hidden and customers were often, allegedly, being signed up for products without their knowledge or consent, a clear breach of financial services rules.

A ‘no cost option’ that cost £millions

TTF Blog recently interviewed a publican who was arbitrarily excluded from the financial watchdog’s redress scheme, despite the toxic products having cost him his business.

This customer had had no idea what the swap could do to his business. But he was deemed ‘sophisticated’, several years after being lumbered with a swap, because he had employed a certain number of people and turned over a certain figure, before the pub chain was mothballed by lenders.

He explains why his business took a loan with a ‘swap’ attached to it: “All we were informed, Alex, was that these will effectively protect your business against interest rate increases, and that it’s a no cost option. We were reminded by bank of the very high interest rates of the 80’s and 90’s and that rates were now at historic low and how much it would cost when rates rose.”

He adds: “I shouldn’t use the word ‘sold’. These [conditions] were in there for starters, as a condition of borrowing. It made entering the swaps compulsory.”

‘Absolutely dumbstruck’

Early in 2009, reality bit: “A rather large amount of money was removed from our bank account by Barclays, ie around £27,000 …And we were then informed: Well, this was the ‘swap’.” Why? Interest rates had fallen, triggering the cost to his business.“We were just absolutely dumbstruck, because nobody in the right mind would ever have entered into an arrangement like that.”

Was his business in a healthy state when he was ‘sold’ or lumbered this product, in ’06? “The freehold assets we then held at that time were … somewhere in the region of thirteen and a half million pounds”. Their loans were about half the value of that estate, leading to him to calculate that they could sell off a few £millions in assets if they ever ran into trouble. The swap derailed that security.

He recalls how counter-intuitive it felt: “interest rates falling as far as we were concerned [should be] good for business, because you’re paying less.” The swap had engineered the opposite. “So that was the start of the the disaster … We were just then praying for interest rates to go back up, which just sounds unbelievably stupid.”

Upwards of £52,000 a month

What was the cost of the swap at that point? “Every month, we had to pay Barclays … I think was about £27,500. So April, May, June every damn month. So we were absolutely being screwed.”

On top of that, the bank’s relationship manager then brought in independent consultants who came with huge fees: “£24,000 a month” to ‘see all our sites and meet our managers and effectively strip us naked’, along with “advisors” to ‘carry out independent business reviews at the behest of the bank costing further tens of thousands.’

More than a £million to cancel

Eventually, the business managed to break out of the ‘swap’ arrangement, with a break fee that cost them more than a £million. The chain of pubs was however, unable to recover. Many of the pub sites are now property developments as result of the company being liquidated, after having been drained month-on-month by the toxic product and all that followed.

Similar stories are told by farmers, doctors’ surgeries, and other small businesses lumbered with these products.

This publican believed that businesses such as his that owned freehold premises were particularly targeted. Why? Freeholds were used to securitise ‘collateralised debt obligations’ which the banks could trade. He says: “Businesses that operated purely from leasehold premises were not targets for swaps as there was no security for the bank to securitise.”

NOT SWIFT: The tortured road to redress

In 2015, Treasury Committee MPs called on the Financial Conduct Authority to commission an independent scrutiny of its handling of the swaps scandal. The FCA delayed this scrutiny for almost four years because of legal proceedings.

In 2019 it then commissioned a QC, John Swift, to independently review its handling of swaps victims. His review took more than two years.

Many small businesses were, in Swift’s view, wrongly excluded from redress by the Financial Conduct Authority’s previous incarnation, the Financial Services Authority: “the FSA was wrong to confine it [redress] to a subset of Private Customers/Retail Clients which it designated as ‘non-sophisticated’. The FSA thus avoided, without adequate objective justification, its wider responsibilities to secure redress for all Private Customers/Retail Clients who had been mis-sold IRHPs”, Swift concluded on page 316 of his report.

Despite this, the FCA has no plans to re-open routes to redress. FCA chair Charles Randell recently wrote to Kevin Hollinrake MP, chair of the All-Party Group for fairer business banking:

“We believe that the decision to treat sophisticated and non-sophisticated customers differently was justified”,

“The FSA’s approach sought to direct redress as quickly as possible to those businesses which were in the most vulnerable circumstances because they were the least able to assess the products the banks sold them and faced more acute financial difficulties.”

Randell argues that the watchdog is not ‘bound’: “to regard all customers in the same way or as requiring the same degree of protection.”

TTF’s recent ‘IRHPGate’ symposium outlined how the mis-selling of ‘hedging’ products to small businesses effectively propped up big banks during and after the financial crash of ’08. One lawyer commented that there could be fraud cases to answer within a raft of grievances. The problem in securing an investigation is often an inequality of arms between small businesses and the very large ones that appeared to feed off their assets, and regulators have effectively passed the buck on redress.