Midlands businesses have lost millions of pounds because of a widespread bank “mis-selling” scandal.
MPs have condemned “Del Boy” selling techniques by banks which pressured firms into taking out complicated financial products known as interest rate swaps.
Companies were told the deals would protect them from soaring interest rates – but instead they lost money when interest rates hit record lows – and it has cost two firms in the West Midlands alone a total of £14.2 million.
Regulator the Financial Services Authority has already begun an inquiry, and has interviewed more than 100 small businesses to try to work out what exactly banks have been telling customers.
The true scale of the problem could be massive, with potentially thousands of firms affected.
But MPs queued up to condemn the banks as they highlighted the misery and hardship mis-selling has caused for businesses.
Victims include Guardian Care Homes, a Wolverhampton-based businesses which employs 900 staff in 30 care homes across the country – and stands to lose £12 million.
One Staffordshire businessman could lose his home as a result of the scandal, MPs said.
And a small business in Warwickshire firm has lost up to £200,000 after giving in to “high-pressure sales tactics” from its bank.
MPs raised the cases in the House of Commons, but warned that many other businesses were scared to come forward in case their banks took revenge on them for speaking out.
MP Mark Garnier (Con Wyre Forst) said the affair could come to be seen as “yet another large mis-selling scandal”, following the mis-selling of payment protection insurance (PPI) to hundreds of thousands of bank customers.
Banks least year paid out £2 billion in compensation to customers who had been mis-sold PPI.
MP Emma Reynolds (Lab Wolverhampton North East) said: “I think it is utterly disgusting that this is happening” and called on ministers to intervene, saying “Something needs to be done about this urgently”.
And describing the way one Warwickshire firm was treated, Marcus Jones (Con Nuneaton) said: “The capital arm of the bank pitched the product in what I can only describe as a Del Boy-esque fashion – as if Del Boy was selling saucepans to a housewife at the market.”
Interest rate swap products guarantee that the interest charged on a loan will not rise above a set level or fall below a set level. The bulk of the products were sold, alongside loans, to businesses between 2005 and 2008 – when rates were much higher than today.
MPs claim that businesses bought them in the belief they were simply safeguarding themselves against dramatic increases in interest rates.
But banks failed to explain that the products amounted to a gamble, in which the buyer stood to gain if interest rates rose significantly while the banks gained if they fell.
The Bank of England has held interest rates at an historic low of 0.5 per cent for 40 months running, which means that firms who took out interest rate swaps have lost out.
A preliminary inquiry by the Financial Services Authority in March concluded there was cause for concern about some of the sales practices involved, and about whether the products were ever suitable for smaller businesses.
Guardian Care Homes was sold two interest rate swap products in 2007, which were taken out against existing loans. But while it was told the products would protect it against the threat of interest rate rises, they actually cost the firm £12 million after interest rates plummeted.
MP Emma Reynolds, speaking in the House of Commons, said: “They were not informed of the dangers and financial implications of interest rate falls, however.
"According to Guardian Care Homes, the bank did not at any point during the sale of those swaps fulfil its obligation to explain that such costs could be incurred.”
She added: “There appear to be hundreds, if not thousands, of small and medium-sized enterprises in the same situation ... there seems to be an extremely worrying level of coercion involved in the banks selling these products to small businesses without making sufficient information available.”
MP Karen Bradley (Con Staffordshire Moorlands) warned that small businesses were being “being bullied by the banks” and did not dare speak out because they feared punitive action would be taken against them.
But she highlighted the case of businessman Doug Wardle, who owns a number of businesses in Staffordshire including Wardle Property, and was chairman and owner of Wardle Transport before the firm was sold in 2010.
In 2006 he borrowed £2.2 million to expand his businesses, and agreed to take out two interest rate swap arrangements. But as interest rates have plummeted since the loans were agreed, he is now paying far more in interest than he ever expected to pay.
Mrs Bradley said: “The bank was not willing to move on the interest rate swap arrangements. That has caused Mr Wardle an incredible amount of stress and anguish, and he faces losing his home. He told me today that it has cost him £300,000 just to deal with the fees to the bank.”
A third West Midlands case was raised by Warwickshire MP Marcus Jones, who said a business in his constituency, which has asked the MP not to name it, was convinced to take out an interest rate swap product by a bank using “high-pressure sales tactics”.
Mr Jones said: “The relationship manager told the business that it was the best option, because interest rates would go in only one direction: up.”
He added: “When my constituents asked what would happen if interest rates fell, the question was not answered with a proper explanation and a warning. The employees of the bank simply said that there was no prospect or possibility of a reduction in interest rates, given their historic low at that point.”
Treasury Minister Chloe Smith said: “The Financial Services Authority (FSA) already has a powerful toolkit to deal effectively with any potential mis-selling.
"That can include powers to establish industry-wide or single-firm redress schemes, which comes from the Financial Services and Markets Act 2000; to refer the banks to enforcement; to use supervisory measures; and to obtain redress for consumers through the use of restitution powers.”
She added: “I encourage any business that believes it was mis-sold one of the products to contact the FSA if it has not already done so, and to give as much information as possible about its case.”
A spokesman for the British Bankers’ Association said: “Interest rate swaps are a way of helping business customers manage the risk that rates may go up when they borrow and where the individual business does not want to be tied to a fixed-rate loan.
Swaps can provide some certainty about what businesses will pay for long-term borrowing and this can help with budgeting and forecasting.
“Swaps are regulated. There are strict rules and guidelines about how banks provide swaps and any customer should seek independent advice if they are uncertain before signing on the dotted line.
“If any customer is concerned about a swap product they have taken out they should contact their bank.”