This week, the Financial Ombudsman Service (FOS), the independent body set up to settle disputes between consumers and financial service providers, made a landmark decision by upholding complaints that banks sold complex swaps interest rate products to small businesses despite the fact that owners did not need them or understand them.
It is the latest blow to a beleaguered banking system that we now know was rotten from top to bottom. It was not just high-rolling casino cowboys in Canary Wharf making hay with our investments, but our high street small business advisors who had their hands in the till.
In a test case, the FOS found a small family-run hotel that had applied for a loan in 2007 to expand the business, and which had run its accounts, in the bank's own words, "in an exemplary fashion" and was "low risk" was railroaded into taking out a 15 year swap agreement to ensure they got the loan.
This complex instrument was sold on the basis that it would give the family and the banks security, as a swap essentially fixes a variable rate loan by hedging it against interest rate movements.
What the bank didn't say was that after an initially discounted two years, and as the cost of servicing the swap rose, the family would be unable to cancel the agreement, and the cost of breaking it would be £542,000, or a quarter of the original loan. This effectively tied the family to the swap. Meanwhile, the bank, if interest rates went up and it would serve them more profitably to terminate the agreement, could do so immediately and leave the family at the mercy of the market. The swap never offered the family any protection.
At one point, as the family tried to get of this onerous and unnecessary obligation, the bank even suggested them taking out a further loan to cover the costs of breaking the agreement.
A conservative estimate is that 40,000 interest rate swaps were sold to small businesses, but this number could double as the investigation expands to include other types of complex derivative products sold. At the very least, consumers should be pleased that bodies such as FOS are coming out in favour of them, and recommending adequate compensation.Eleven banks have set aside £630 million in total for this latest hit. Barclays, battling to save its reputation on all fronts already, accounts for £450 million of this war chest. But the total cost could run into billions.
Why our high street banks found it so tempting to complicate something as simple as a loan to a reliable business is unfortunately not difficult to establish. Once again they acted with commercial convenience in mind rather than the best interests of their customers. The reckless attitude we thought the preserve of a small cabal of investment bankers had filtered down the food chain to small business advisors. And they, to be generous, perhaps knew less of the consequences of encouraging regular businesses to take on complicated financial instruments.
Those affected by this swaps scandal were betrayed by their banks, who they trusted to give them the right advice and ensure the security of their business and employees' jobs. Some of these businesses have gone to the wall. Others will hopefully get their compensation through in time to be saved.
This misselling is the third case of serious malpractice at the UK's banks. It comes after the manipulation of lending rates and the Payment Protection Insurance payout. And that's completely disregarding their original role in creating the financial mess we and every other country with an "intensely relaxed" attitude to getting "filthy rich" finds ourselves in.
Since the bail out, the government has urged banks to lend to small and medium sized businesses, to little avail. In August just this year, the Bank of England announced its latest ruse, the Funding for Lending initiative, which lent more of our money out to banks at below-market rates, for them to pass on to homeowners and businesses. Yet lending continues to fall.
It's no wonder banks aren't interested, when making their customers' businesses more secure appears to be the antithesis of how they've been running the show.