Interest Rate Swaps Scandal - How the small businesses won the war against the banks but may lose the peace

The author of this guest post is a member of Bully-Banks, an alliance of small and medium businesses that were victims of the Interest Rate Swaps scandal that has ruined many UK businesses.

Imagine a situation of Little Red Riding Hood discovering she had been rescued by the woodman only to then be put into the custody of the Big Bad Wolf! That’s how the thousands of small businesses like me feel after the announcement by the Financial Services Authority (FSA) on the mis-selling of Interest Rate Swap Agreements (IRSA’s)

The FSA for the first time recognised that the banks had been ripping off small businesses and we, like everyone other than the banks, celebrated. Somehow an injustice was recognised and was going to be put right, so we thought. The FSA’s announcement stated:

"Our review has found serious failings in the sale of interest rate hedging products to small and medium sized businesses (SMEs). We have evidence which raises concerns about the sales we have reviewed in certain banks. These concerns include

(i)           inappropriate sales of more complex varieties of interest rate hedging products (such as structured collars) and

(ii)         a number of poor sales practices used in selling other interest rate hedging products.

(iii)       We also found that sales rewards and incentive schemes could have exacerbated the risk of poor sales practice."

It went on to say:

"In order to provide a swift solution for customers, we have reached agreement with Barclays Bank Plc (“Barclays”), HSBC Bank Plc (“HSBC”), Lloyds Banking Group (“Lloyds”) and The  Royal Bank of Scotland Plc and National Westminster Bank Plc (collectively “RBS”) banks to provide appropriate redress where mis-selling has occurred. We have agreed with Barclays, HSBC, Lloyds and RBS that they will: 

(i)           provide fair and reasonable redress to non-sophisticated customers who were sold structured collars;

(ii)         review sales of other interest rate hedging products (except caps or structured collars) for non-sophisticated customers; and

(iii)       (iii)  review the sale of caps if a complaint is made by a non-sophisticated customer during the review.

The exercise for each bank will be scrutinised by an independent reviewer and overseen by the FSA."

The banks however are not that stupid. We now face a reality that we won the war, but are in danger of losing the peace. Worrying words in the FSA judgement are:

a)      It only covers “non-sophisticated customers”. The FSA defines as financially "sophisticated" a customer who met at least two of the following:

(i)         a turnover of more than £6.5 million; or

(ii)        a balance sheet total of more than £3.26 million; or

(iii)       more than 50 employees.

b)      “independent reviewer” – The proposed use of major firms of accountants to act as ‘independent’ adjudicators is fundamentally flawed. Each of them has significant commercial relationships with the banks and have previously been used by the banks to close down or put into administration  businesses damaged by the mis-selling of IRSAs.

Do you know of any other situation where someone is robbed and then the system which is supposed to look after you appoints the criminals to resolve your dispute?

We have serious misgivings about the decision by the Financial Services Authority (FSA) to appoint the guilty parties - the banks - as judge and jury  by giving financial accountants and consultants who are very likely to have other business with them to decide whether a mis-sale of an IRSA has occurred. And the definition of “non-sophisticated” seems intended to let the banks off what are likely to be their larger mis-selling cases. A “sophisticated” company, as defined by the FSA, is likely to be in a bigger hole as it is likely to have entered into a bigger IRSA – but is just as unlikely to include a sophisticated finance specialist able to deal in swaps.  

I know of a Bully-banks member who after a 25 year career as an ambulance driver had a business based around a property portfolio - and this meant, according to one recent judgment that he should have the knowledge of a 'property specialist'. I also know of a few printers who exceed this turnover but their sophistication is in their trade, their ability to make a business out of their craft, not in having an expertise in what are called 'non-vanilla financial products.


The banks look like they will ultimately win, via the back door, because they are being put in charge of deciding whether there was mis-sale in each case. Small businesses like me are also concerned that:

·         There are no clear criteria, definition, or guidelines as to what constitutes a ‘mis-sale‘.

·         There is no urgent timescale to provide immediate help to businesses currently struggling as a result of the mis-selling. (The banks know how to drag out the compensation process - as they did with Payment Protection Insurance)

The FSA proposed resolution is not only bad news for small businesses like me, but will encourage litigation and will primarily benefit lawyers and claims firms. Yet, there is an alternative. A better way forward to ensure justice can be done.

There has evidently been a compromise agreement between the FSA and the banks - of which we were not party to. Sadly, in the same way the banks hoodwinked thousands of decent hard-working small businesses in mis-selling toxic products, they have used the same tricks at this stage.

One positive to come out of this saga has been the example of small people standing up for themselves. In our instance, we have created a campaign group Bully-Banks: a commercially and politically independent group of the little people realising that enough’s enough, and we are fighting back.

We have put forward a 14 point plan which we believe provides a just, fair and reasonable way forward to ensure justice is done and urgently resolve the estimated 28,000 cases of mis-selling, while avoiding the unsavoury aspects of the recent PPI mis-selling debacle.

We carried out a detailed survey of our members (there are now over 550 of us, and rising). We used the survey results and our experiences and collected these in a report called  ‘The Case Against the Banks – The Mis-selling of IRSA’s’ – you can get a free copy downloaded from www.bully-banks.co.uk/survey-results(Hard copies are also available by sending a large stamped addressed envelope to: Bully-Banks c/o Wakefield Media Centre, 19, King Street, Wakefield WF1 2SQ)

Our survey revealed a damning story of high street banks misleading and mis-selling ‘toxic products’ to small businesses across the UK which has led to them facing crippling costs with exorbitant break charges.

Our study also reveals how this mis-selling has made the downturn far worse for the wider economy and how it is actually a hidden brake on economic recovery. I think the average is about 5 jobs lost; multiply that by the 28,000 business affected – and that’s a staggering 140,000 plus jobs - and that’s probably a massive under-estimate.

So you’re probably wondering how is it that so many small businesses were taken for mugs?

Our story seems fairly typical – although we probably must have bought one of the smallest IRSAs in the country.

I run a Media Centre business. The idea was to create a hub for creative industries in a former mining area. It’s a good little business and we have won awards for our regeneration work.

Our bank had done a good job: we originally chose them as we trusted the local manager. 

Several years on, our local manager has since retired but the bank in up-dating its arrangements for us provides a new overdraft facility, some adjustments to the mortgage, oh, and by the way, we are concerned about rising interest rates and we think you need to be protected, so as a condition of keeping things going, you will need this Cap and Collar product.

No indication that there could actually be a negative cost. Yes, the small print mentions there would be a break cost, but no indication of how much.

Sure, we’re grown-up business people. We did ask about the size of the break cost and we got this very mumbled response; and looking back it was like stealing candy from a baby. We trusted them, and they abused that trust royally.

It now emerges the banks knew interest rates were going to go down, but approached its customers to sell them a product to guard against rising interest rates.

In fact these cap and collar products - it’s only now we discovered they were what are called IRSAs - are so complex and complicated they are designed for multi-million pound transactions.

We, like the other businesses affected, have been held captive by our banks. When we wanted to change banks - we were fed up with our bank for other reasons -  the big shock was discovered; for a business with an annual turnover of just £32,000 they wanted nearly £40,000 as a break cost.

Boy have we struggled to keep our Media Centre alive. We have hung in there and just kept going with it. Me and my business partner have had to use our life savings to keep the Media Centre business afloat.

We sometimes get people saying ‘well you took a gamble, and it’s only when you lost you are complaining’. My response is that there isn’t a single casino or betting shop on this planet that does not tell you that first you are making a bet, and secondly, the cost of your bet.

Talking with every other member of Bully Banks – these are small businesses ranging from chip shops to restaurants to property businesses – and we all seem to say the same: we weren’t looking to make a gamble or place a bet. We just wanted the financial products to run our businesses.

Our battle continues. It looks like the Big Bad Wolf might still get me and thousands of other small businesses (why do I get the image of Jack Nicholson in 'The Shining’ in my head?).

Our fight continues. Even if you’re not a small business affected by a mis-sale, our plight is causing a serious brake on your economic recovery.

And everyone has to fight injustice wherever it takes place.

And are you going to let the banks get away with it yet again?

For more details visit www.bully-banks.co.uk