Small talk: New bank scandal threatens over SME interest-rate swaps


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The Independent Online

Are interest-rate swaps going to be the next major banking scandal? All the high street banks, already battling claims that their refusal to lend to small and medium enterprises (SMEs) is jeopardising the country's economic recovery, stand accused of mis-selling complex derivative products to firms worried about their borrowing costs.

The products varied from bank to bank and business to business, but are similar in their design. Most swaps were sold between 2006 and 2008 as insurance against the possibility of interest rates rising, with tens of thousands of small businesses signing up.

The flipside is that while SMEs taking out the contracts were protected in the event of an increase in the cost of borrowing above set levels, there were additional costs to pay if interest rates fell too far.

As it turned out, that's what happened. In March 2009, the Bank of England responded to the country's dire economic outlook by cutting base rates to 0.5 per cent, where the cost of borrowing has remained ever since.

As a result, the downside clauses on tens of thousands of interest-rate swap deals signed by SMEs kicked in – many are now paying three times more interest than they otherwise would be on their loans. Some have even gone out of business as a result of the unexpected bills.

The question is whether the products were mis-sold. SMEs may not like the way the contracts have turned out, but if they understood the potential downside of this sort of interest rate insurance before they signed on the dotted line, they can hardly complain.

In fact, there's good reason to think at least some small businesses have a decent case to allege mis-selling. Many claim the risks weren't properly explained at the point of sale and point to what look like sharp practices. The deals invariably lock borrowers in for extended periods, for example. And SMEs were often persuaded to insure their entire overdraft facilities, even if they weren't using them in full.

Moreover, the behaviour of the banks is reminiscent of scandals such as payment protection insurance (PPI) . Small business advisers at the banks appear to have been paid commission to sell the deals, or at least to introduce clients to their investment bank arms, which ultimately arranged the swaps. And where SMEs have brought cases to court, the banks have chosen to settle rather than face precedent-setting judgments.

Here's the problem, however. While the Financial Services Authority (FSA) and the Treasury say they are now having another look at interest-rate swaps, SMEs do not have access to the sort of help to which the banks' retail customers are entitled. In particular, the Financial Ombudsman Service, which would consider identical mis-selling claims in the retail sector, does not accept complaints from businesses with more than 10 employers or a turnover of more than €2m (£1.6m) a year.

That leaves SMEs with little option but to risk taking legal action against the banks – and at the mercy of the sort of ambulance chasers still targeting those sold PPI. Solicitors are already scenting blood – some have experience in this area, but others certainly don't.

In March, Andrew Tyrie, chairman of the Treasury Select Committee, asked the FSA to brief him on its review of sales of interest-rate swaps. SMEs' best hope for a full and public investigation into the affair may be an inquiry by his powerful cross-party committee.

Seven is not so magnificent

Could we be seeing the first inklings of recovery on the Alternative Investment Market, where the London Stock Exchange says there were seven new listings during March, compared to just four in February and three in January?

Well, to put those figures into context, there were 90 new Aim admissions in total during 2011, a poor year, so the first quarter of 2012 has still been disappointing. And note too that delistings are continuing apace – another 11 companies left the market during March, so Aim is continuing to shrink.

In tune InternetQ set to hit the right note with investors

Global marketing budgets may be static, but the way they are divided up certainly isn't, with smartphone channels taking an ever-larger slice of the cake.

Enter Alternative Investment Market-listed InternetQ, which provides the technology for mobile marketing campaigns. It also offers Akazoo, a content technology that entertainment providers can use to deliver music and games.

InternetQ's 2011 results, published a fortnight ago, were promising, and a trading update, due out this week, also looks encouraging. It will include details of new deals with mobile phone network operators in countries as far-flung as Laos and Zambia, as well as tie-ups with a string of countries to provide smartphone voting to viewers of May's Eurovision Song Contest, where the UK is represented by veteran crooner Engelbert Humperdinck, pictured.

House broker RBC Capital Markets expects investors to warm to InternetQ's tune. Its target for the stock, currently trading at 251.5p, is 325p. Analysts at First Columbus Investments are in the same ballpark – their target is 306p.

Small business man of the week

Boxing clever with healthy snacks at a price to tempt: Ben Jones, co-founder,

I launched the business in 2008 with six friends from school and university – we were all fed up with eating unhealthy snacks at work and we wanted to see if there was a way to get good-tasting healthy snacks instead. We have more than 250 employees and we import more dried mango than Tesco. We deliver food boxes with the customer's personalised choice of 100 different snacks – there are a possible 4.9 million combinations, so no one box is ever the same – for £3.79.

We started at £3.49 but food-price inflation was wild in 2010 and we were forced to increase our prices. We're very keen to stick at this point now, because pricing is crucial and we're aware that household finances are tight.

One thing that we think makes our business really exciting is that we control the whole value chain, from procurement to manufacturing, packaging, distribution and retail. It's crucial for us to retain that control – and we invest heavily in new technology to do so – because with a single price point, the margin is different on every box.