Warwick Risk Management is assisting a number of NHS Medical Centres whose GP practices have been subjected to swap mis-selling by RBS. Today The BMJ published an excellent article on the subject.
Visit the article at The BMJ: http://www.bmj.com/content/359/bmj.j5137
The BMJ Written by, Gareth Iacobucci GPs lose millions from mis-sold financial products BMJ 2017; 359 doi: https://doi.org/10.1136/bmj.j5137 (Published 08 November 2017)Cite this as: BMJ 2017;359:j5137
• Gareth Iacobucci Original article page: http://www.bmj.com/content/359/bmj.j5137
General practices have had to pay out millions of pounds after they bought interest rate hedging products mis-sold to them by banks, The BMJ has learnt. In some cases the deals have left GPs struggling to retire or to sell their practices. Interest rate hedging products, or “swaps,” are designed to help buyers manage fluctuations in interest rates with fixed rate deals. They were sold to small businesses seeking loans from 2001. But in 2013 the Financial Conduct Authority found that there had been “serious failings” in the sale of these products and that 90% had been mis-sold.1 The BMJ has learnt of at least 10 medical centres hit by the scandal, with experts predicting that dozens or even hundreds may have been affected. “Sold a pup” One affected practice, the Ridge Medical Practice in Bradford, paid out an estimated £3.6m (€4m; $4.7m) to the Royal Bank of Scotland in interest between 2007 and 2015 after it took out a 26 year swap along with a £9.5m loan to fund new premises. The bank has refused to pay any compensation to the practice. Nick Nurden, the Ridge practice’s business manager, who oversaw the deal in 2008, told The BMJ, “We were presented with what was effectively a fait accompli by the bank. They presented it to us as really the only option, but from what I now know there were far better products that would have been easily affordable and would’ve actually still done the same job of providing that security. We were sold a pup on day one.” Another affected practice in central England took out a loan and swap with the Royal Bank of Scotland in 2006, which were renegotiated in 2011. Because of the terms of the deal, which still has 20 years to run, the debt has ballooned from £9.5m to £14.7m. Again, it has received no compensation. A GP partner at the practice who wished to remain anonymous said, “We were misled and weren’t given the full picture. The perceived benefits were emphasised and any downside was played down and hardly mentioned at all.” Nick Stoop, a former banking derivatives trader and founder of Warwick Risk Management, which provides consultancy to businesses affected by mis-selling of interest rate hedging products, has advised 10 medical centres affected by swaps. He said that the GPs he had spoken to had been adversely affected in several ways. “It’s difficult to attract new partners into the practice, because anyone coming in would have to take a share of a massive liability. It’s difficult for them to retire, because they have got to carry on servicing [the loan], and it’s difficult for them to sell for the same reason.” FCA investigation The mis-selling of interest rate hedging products to small businesses, including general practices, is reminiscent of the scandal over payment protection insurance, where banks were not upfront about the schemes that they disguised inside loans. It has been four years since the Financial Conduct Authority investigated interest rate hedging products, or swaps, and found serious flaws in how the banks behaved. The banks, the FCA said, failed to properly explain the risks of swaps to customers, who were often not told that they would have to pay out if interest rates fell. And neither did the banks sufficiently disclose the deals’ hefty exit costs. Perhaps most damning was the fact that products were often presented to customers as the only option to secure a loan when other options were available, said the FCA. But although some of the UK’s largest banks, including the Royal Bank of Scotland, agreed to provide “appropriate redress” to small businesses where mis-selling occurred, the FCA did not compel them to do so. In 2016 the FCA’s oversight of the mis-selling scandal was condemned in the House of Commons,2 with one MP describing the authority as “weak, toothless, and anaemic.” Stoop said that many more than the 10 practices he has advised could have been affected, given that the FCA’s review focused only on businesses that took out loans of £10m or less. “I would be very surprised if the total number of practices affected is not at least in the three figures,” he said. Stoop said banks had targeted general practices because they were seen as “plump” for profit. This was because the deals tended to be quite large, the loans weren’t repayable for 20 or more years, and the customers were “inexperienced,” he said. “There is no doubt that doctors were unfairly treated,” said Stoop. “The banks were negligent in the sense that they didn’t explain the risks. It’s your duty when selling a complex financial product to explain the risks in a manner that’s fair, clear, and not misleading.” Locked in The Ridge Medical Practice has said it cannot afford to take legal action against the Royal Bank of Scotland. Nurden, the practice’s business manager, said, “Theoretically, our legal team believe that, such was the scale of what they did to us, the original agreement we had nine years ago should be torn up. But we can’t really afford to take it any further. We are locked into this for a further 17 years.” In a letter to the Ridge Medical Practice, seen by The BMJ, the Royal Bank of Scotland acknowledged that “the sale may not have fully complied” with the standards agreed with the FCA. But the bank said that it would not be compensating the practice because “we believe it is reasonable to conclude that you would have entered into the same product notwithstanding any failure to comply with the standards.” Nurden said, “If I think what we could have done with £3.6m [paid in interest over eight years] in terms of buying more clinical time and staff, and delivering more healthcare to our patients, it’s just so wrong. “And what really frustrates us now is that we know that the bank broke the rules. But even though RBS have admitted that they mis-sold to us, they are not going to do anything about it.” The Royal Bank of Scotland said that around 60 general practices to which it had sold interest rate hedging products were included in the FCA’s review, of which around 30 had been offered material redress by the bank. A spokesperson for the bank said, “We applied the FCA’s guidelines consistently, and in each case the decision was approved by the independent reviewer to ensure that it was fair and reasonable. All evidence was taken into consideration by both the bank and independent reviewer as part of this process, and decisions were only made once the independent reviewer agreed to the bank’s decision and justification.” Commenting specifically on the Ridge Medical Practice the spokesperson said, “Ridge Medical Limited was advised professionally at the time of entering into the long term loan agreement with RBS to develop a new surgery, and the development was 100% funded by the bank. Hedging was a condition of the loan because Ridge Medical could not have afforded higher interest rates given the expected income from the PCT [primary care trust]. Ridge Medical was part of the FCA-agreed review into interest rate hedging products but, taking into consideration all the available evidence, we concluded that Ridge Medical would have again entered into a long-dated swap had the sale fully met the standards agreed with the FCA. The independent reviewer agreed with this decision.” Footnotes • If your practice has been affected by mis-selling of interest rate hedging products please email firstname.lastname@example.org with the details. References 1. ↵ Financial Services Authority. Interest rate hedging products: pilot findings. Mar 2013.https://www.fca.org.uk/publication/archive/fsa-interest-rate-swaps-2013.pdf. 2. ↵ TheyWorkForYou. Financial Conduct Authority in the House of Commons. 1 Feb 2016.https://www.theyworkforyou.com/debates/?id=2016-02-01c.710.1.