Greg Wright: The latest mis-selling scandal that could cost 80,000 jobs
And all because of a mis-selling scandal that could so easily have been avoided.
Few things make me angrier than the thought of Yorkshire’s hard working entrepreneurs – the backbone of Britain’s economy – being ripped off.
We should all be furious and concerned about the economic consequences of the mis-selling of interest rate swap agreements – or IRSAs.
Some readers might wonder what IRSAs have got to do with them. After all, if you didn’t buy these complex products, surely you won’t have suffered?
This scandal affects us all, because there is good reason to believe, in the words of Yorkshire businessman Andy Green, that it has acted as “one of the hidden brakes on economic recovery”. There’s evidence that thousands of businesses have suffered financial hardship after being mis-sold these products, often by salesmen who were handsomely rewarded. The Federation of Small Businesses has claimed that the scandal could cost 80,000 jobs.
This isn’t just another example of a cynical hack indulging in a spot of banker-bashing. I’m happy to let the facts speak for themselves.
The banking industry is facing another whopping compensation bill after a review of IRSAs sold to small businesses found that more than 90 per cent had been mis-sold.
The Financial Services Authority (FSA) said a “significant proportion” of the cases that were the subject of the review were likely to result in redress – in other words compensation – being due to the customer.
Interest rate swaps are complicated derivatives that might have been sold as protection – or to act as a hedge – against a rise in interest rates. In many cases, the customer did not fully grasp the risks involved.
They were marketed as low-cost protection against rising interest rates, often as a condition of a business loan. But businesses such as bed and breakfasts and takeaway shops were left with colossal bills after the financial crisis caused interest rates to plummet to historic lows. In some cases, this cost has dragged the firm under.
Last summer, the FSA uncovered evidence that there had been “poor disclosure” about the exit costs for these products – in other words firms weren’t always warned about how much they would have to pay if they wanted to walk away.
The FSA found that poor sales practices had been driven by “rewards and incentives”.
It sounds like the same old story. In recent weeks, I’ve been contacted by a number of small companies who are members of Bully Banks, the pressure group which represents small businesses who have been mis-sold IRSAs.
Jeremy Roe, the chairman of Bully Banks, told me that the IRSAs were toxic products that have caused havoc.
“It is the PPI (Payment Protection Insurance) mis-selling scandal in the business sector; it has cost jobs and contributed to many company failures,” he said.
I can’t forget the words of a Yorkshire businessman, who attended the recent Bully Banks national conference in Birmingham, which attracted 400 people. The businessman told me afterwards: “During the question and answer session, there were some real horror stories – including people who have lost their homes, businesses, and in some cases it has even cost them their marriages.”
It is believed that as many as 40,000 of the interest rate swaps could have been mis-sold to small businesses since the end of 2001.
For the victims of mis-selling there is, at least, some light at the end of the tunnel.
Earlier this month, the FSA revealed that the major banks had agreed to start work on reviewing individual sales and providing compensation. Last week, the FSA said it would extend its scheme to several smaller lenders.
When I spoke to The British Bankers’ Association, (BBA) they highlighted the fact that the FSA had reached an agreement with the major banks to “provide fair and reasonable redress” for businesses affected. According to the BBA, the banks have worked with the regulator and independent experts in an attempt to resolve the issue as swiftly as possible. As the spokesman put it: “Where customers have suffered unfairly, the banks have all agreed that they will put it right. Banks will be contacting those companies affected shortly, prioritising those with the greatest need.”
It is thought the total cost of compensating businesses who were victims of mis-selling could be as much as £1.5bn across the banking sector. For some businesses, the compensation will arrive too late.
Their firm has already gone bust. Those who were responsible for this mis-selling should hang their heads in shame.