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Financial Services Authority Finds Banks Misled Small Businesses

The banking industry has suffered another blow after the Financial Services Authority (FSA) ruled that the rate swapping deals they have been offering to small businesses for years have been mis-sold in 90% of cases.

The rate swapping deals that were offered to businesses were supposed to protect them against rises in the base interest rate set by the Bank of England. If the rate went up, the businesses would need to pay more interest on any loans that they had taken out with the bank, but these rate swaps were a safeguard against that.

However, many businesses feel they were not adequately warned of the downside of the deal, which meant that these businesses are now locked into a higher interest rate than they would be if they hadn’t taken the deal. The record low 0.5% rate at by the Bank means that businesses who get loans can do so at massively reduced rates, but the businesses who rate swapped can’t.

This has led to some businesses going under whilst others struggle to meet repayments, especially with the ongoing economic downturn. Now that the FSA had ruled many of these deals have been mis-sold, the banks could end up paying as much as £1.5 billion in compensation.

Phil Orford, the chief executive of the Forum of Private Business, a body which supports, fights for and offers advice to small businesses across the country, believes that this is just another example of the banks treating small businesses poorly, as they have been for years: “To see that 90 per cent of the FSA’s sample review of sales broke regulations is shocking, but unsurprising. Products forced on customers to ‘protect’ them have in fact caused stress, debt and closure for many small businesses. It is bad enough that businesses with these products couldn’t benefit from the historically low interest rate now in place because of the very large exit fees, but it is worse that many still remain tied into these contracts.”

The Forum of Private Business had been critical of the lending situation for small businesses for years, but with the government wanting to encourage more small business start ups in order to power the economy, Phil Orford believes that the situation must totally change: “It is fair to say that in the last few years banks have been no friend of small business, falling well short of the scale of lending needed to support SME growth. Yet these new findings show their role as a trusted adviser – let alone a lender – has never been in a worse state. This is another epic fail by the banks, but one they must put right – and quickly.”

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