Banks look to have dodged yet another multi-billion pound compensation bullet after a QC ruled that the Financial Conduct Authority (FCA) has no powers to act on thousands of small business loans containing interest-rate swaps.
Some £1.8bn in compensation has been paid out after the financial watchdog launched a review of interest-rate swaps that were sold alongside loans to small businesses, leaving them with huge bills when interest rates unexpectedly plunged in the wake of the 2008 financial crisis.
But twice as many such swaps were “embedded” within loans, and then sold, and Jonathan Fisher QC has told the Treasury Committee the FCA was right to say it had no power to force a similar review of these products.
Mr Fisher, in a legal opinion which was published by the Committee, warned that there was a gap in the law.
FCA chief executive Martin Wheatley has already voiced concerns that some banks will take advantage of this and in future sell all such “swaps” by embedding them in loans because they will know they will be unlikely to face any consequences.
The Treasury Committee chairman Andrew Tyrie said members would now consider whether to push for a change in the law given the importance of small and medium-sized businesses to Britain’s continued economic health.
He said that many small businesses “appear to have been hit by the complex terms of the loans proposed by their bank”.
“Some have claimed that they were – by every ordinary understanding of the term – mis-sold the product.”
Mr Tyrie said the FCA’s decision had come as “a blow to thousands of firms who feel that they have been mis-sold these complex products”.
He added: “That is why, on behalf of the Treasury Committee and with the help of an independent legal adviser, I have checked this out.
“The Committee will be considering whether more needs to be done to address this gap in regulation as part of its report on SME lending. It is crucial to the UK economy that this market be restored to working order.”
The sale of loans to consumers is regulated by the FCA. But lending to small businesses is not. That means that if a person is mis-sold a car loan they could be compensated, but if they were mis-sold a loan for a van for their small business there would be no such cover.Reuse content