Mis-selling scandal has potential to ruin thousands of UK SMEs and cost 80,000 jobs. Image courtesy of rgbstock/sanja gjenero
Britain’s banks were yesterday (June 21) accused by MPs and the
Federation of Small Businesses (FSB) of being entangled in a mis-selling scandal that has the potential to ruin thousands of UK SMEs and cost 80,000 jobs.
Complex hedging products, known as
Interest Rate Swap Agreements (IRSAs), were sold to small businesses throughout 2006 and 2009, allegedly to protect companies taking out
loans from future
interest rate rises. In reality, as interest rates nose-dived, these businesses were confronted with increased payments as well as devastating penalties. Payments were more than £1 million in some cases – a necessary evil for companies looking to escape these agreements. It is said that many firms have already gone bust after being sold the products.
The
Financial Services Authority (FSA) is currently investigating evidence that businesses were forced to take out IRSAs as a condition of their loan without an explanation of the risks involved, and vowed to produce a detailed report by the end of July.
The scandal was brought to light at a Commons' debate involving backbench MPs who were appalled by the experiences of some of their own constituents.
MPs were told of an anonymous firm which eventually folded after being charged interest of over £6.1 million on a loan of just £3 million. Reluctance shown by those SMEs affected to come forward has been explained by a fear of having loans foreclosed and being made un-creditworthy. There is also evidence to suggest that previous cases have been settled by banks out of court but with strict non-disclosure terms to deliberately try and keep the scale of the problem hidden.
Sandra Osborne, Labour MP said: "SMEs had already paid £10 billion in interest on the swaps and were liable for £20 billion more, resulting in 80,000 job losses".
Guto Bebb, Conservative MP said: "Today, the Law Society Gazettee gives the figure of about 4,000 businesses affected, with about £1 billion worth of potential claims.”
John Walker, the National Chairman of the Federation of Small Businesses, commented on the scale of the scandal: “It is vital small firms who have been affected make themselves heard rather than expecting their bank to settle if they keep it secret. The last thing banks need now is another mis-selling scandal but exposing it is the only way of dealing with the problem effectively.
Small firms are the lifeblood of the economy and these sharp practices carried out by the big banks need to be stopped right away".
Emma Reynolds, Labour MP, whose constituency contains affected businesses said: “You would hope that banks would support small business rather than exploit them. It is disgusting that this has happened. Something needs to be done urgently".
Heather Wheeler, Conservative MP, warned: "This could be the biggest mis-selling scandal since PPI"