A MIS-SELLING scandal could destroy thousands of small firms and cost around 80,000 jobs, according to the Federation of Small Businesses (FSB).
The Financial Services Authority (FSA) has started an investigation into issues surrounding complex hedging products called Interest Rate Swap Agreements (IRSAs).
Many companies have gone bust after taking out the financial products throughout 2006 to 2009. They were supposed to protect small firms from future interest rate rises when they took out loans from the bank.
However, falling interest rates left businesses facing vastly increased payments and ruinous penalties, in some cases of more than £1m, to allow them to escape from the agreements.
It has now emerged that some firms were forced to take out IRSAs as a condition of the loan and received little or no explanation of the risks involved. The FSA has promised to detailed report on the issue by the end of July.
The potential problems emerged during a debate among backbench MPs, sharing reports they had received from constituents.
Conservative MP Guto Bebb, who convened the debate, said: “The Law Society Gazetteer gives the figure of about 4,000 businesses affected, with about £1bn worth of potential claims.”
MPs heard a number of case studies, including how one firm collapsed after being charged £6.1m in interest on an original loan of £3m.
They also heard that many small firms had been too frightened to come forward in case their loans were foreclosed, ruining the relationship with their bank and leaving them with an un-creditworthy status.
And MPs were informed of evidence emerging of other cases being settled by banks out of court but with strict non-disclosure terms as they try to keep the scale of the problem hidden.
FSB national chairman, John Walker, said: “The huge scale of this mis-selling scandal is starting to emerge. It is vital small firms who have been affected make themselves heard rather that expect their bank to settle if they keep it secret.
“That last thing banks need now is another mis-selling scandal. But exposing it is the only way of dealing with the problem effectively. Small firms are the lifeblood of the economy and these sharp practices carried out by the big banks need to be stopped right away.”