MPs Claim Misselling Compensation Scheme is Fundamentally Unjust
Members of parliament have recently accused the UK’s top financial regulator of watering down a scheme to compensate small businesses, as they were mis-sold interest-rate swaps by banks.
Mark Garnier, Conservative MP, believes the scheme is “fundamentally unjust” and that is was changed after the UK regulator met with banks.
Approximately 25,000 companies were sold swaps to protects them against an interest rate rise, but the regulator has since stated the compensation scheme was fair.
During a intense Treasury Committee hearing, Mr Garnier commented the Financial Conduct Authority (FCA) chief executive, Martin Wheatley, and chairman John Griffiths-Jones had changed the scheme following a meeting at the banks in January 2013, making it “fundamentally unjust”.
The chairman of the Treasury Select Committee, Andrew Tyrie, is now concerned that small businesses, which are essential to the UK’s economic health, are in danger of “being done over a second time”, as they have previously been “ripped-off” by mis-sold “swaps contracts”.
Small businesses, who believe they have received an inadequate compensation amount, have just one safeguard if they deem they bank has paid out less than they have lost due to the misselling.
An independent reviewer is expected to review the evidence, and will most likely be from a “big four” accountancy firm such as KPMG or PwC.
In January 2013, the FCA drew up an initial review, which both the bank and the independent reviewer had access so they could compile all the facts into any given misselling case. However, in the subsequent review, only banks were given access to all the facts.
Mr Garnier is therefore adamant the independent reviewer could only view what the banks chose to show them, and has stated he believes this is offended natural justice.
He claims one of his constituents had submitted a 70-page, legally drafted report on the misselling case, yet the review was only shown one paragraph.
Mr Garnier recently commented: “There’s no justice system in the world that will allow a victim of crime to have to submit their evidence to the perpetrator of a crime, to then edit that information and then subject it to a closed court. This is completely and totally unjust.”
Mr Wheatley replied the FCA was “not dealing with crime here; were dealing with conduct issues between banks and their customers.”
He has, however, accepted that hundred of customers, and potentially many more, were unhappy with their compensation amount.
The misselling occured when banks insisted that small businesses should apply for loans to have insurance in place in the event of an interest rate rise, making repayments simply unmanageable. The insurance therefore took the shape of a “swap” contract, which is also called an interest rate hedging product, which would typically pay out if interest rates increased by over 1% or 2%.
Bankers failed to inform businesses that the “swap” contracts also worked in reverse, meaning if interest rates fell, the business, not the bank, would be forced to pay out huge sums – and so many believe small businesses were insuring banks against interest rate falls.
When interest rates significantly fell in March 2009, businesses did not benefit from cheaper repayments, as they were forced to pay either hundreds or thousands of pounds in extra premiums for the “swap” contracts.
Any small firm wanting to leave a contract would also have to pay an exit cost of hundreds of thousands of pounds.
The regulator at the time, the Financial Services Authority (FSA), now the FCA, set up a compensation scheme back in 2013 after discovering over 90% of swap contracts had been mis-sold.
Mr Wheatley stated the scheme achieved most of its aim of compensating the affected small businesses in 2013, as thousands of businesses received a total of £1.8 billion in compensation -with 14,000 businesses accepting the bank settlements. However, he also argued that many businesses who remained unhappy with the amount can return to the courts.
Many small companies, who were forced to sell their assets or forced into administration because of swaps, believe the compensation amount is far less than they have lost, whilst many can no longer afford a court challenge.