Hidden credit liabilities and the role of the Financial Conduct Authority

A Westminster Hall debate has been scheduled for 14 April 2026 on hidden credit liabilities and the role of the Financial Conduct Authority (FCA).

The subject for this debate has been chosen by the Backbench Business Committee and it will be opened by John McDonnell MP (Lab), the chair of the All-Party Parliamentary Group (APPG) on Investment Fraud and Fairer Financial Services.

The debate will focus on allegations that, during the 2000s, banks sold business loans and hedging products with undisclosed features that were detrimental to borrowers, forcing many into insolvency when interest rates fell between 2007 and 2009.

Following an investigation by the then regulator, the Financial Services Authority (FSA), into such products, banks compensated customers deemed to have been mis-sold hedging products.

However, whistleblowers allege the scheme did not go far enough, and that one of the FSA’s successor agencies, the Financial Conduct Authority (FCA), has failed to respond adequately to remaining allegations of mis-selling and, in some cases, fraud.

Background: Pre-2008 business loan sales

When an individual or a business takes out a loan, a crucial consideration is whether the interest rate is fixed or variable:

• Fixed interest rates offer stability but reduce the borrower’s flexibility, especially if the loan is fixed for a number of years and the terms include an early repayment charge.
• Variable rates are more flexible and offer the borrower the chance to benefit should interest rates fall, but they also pose a risk should interest rates rise.

During the 2000s, various banks sold businesses variable-rate loans but also sold them interest rate hedging products (IRHPs). There are various types of IRHPs but, in effect, they turn variable-rate loans into something more like fixed-rate loans. IRHPs can offer a borrower more flexibility with their loan than if they simply take out a fixed-rate loan.

For further information on IRHPs, see the 2018 Commons Library briefing Interest rate swaps on business loans and the Commons Treasury Committee’s 2015 report on Conduct and competition in SME lending.

Hedging product mis-selling and redress scheme

In the 18 months from November 2007, the Bank of England cut the base interest rate from 5.75% to 0.5%. This meant borrowers with variable-rate loans (where their loan rate was, in some way or form, linked to the base rate) and an IRHP benefitted from lower repayments on their loan but lost out on their IRHPs. Borrowers on fixed-rate loans also lost out.

Financial Services Authority review (2012)

In 2012, the Financial Services Authority (FSA), the predecessor of the Financial Conduct Authority (FCA), identified that some lenders failed in the way they had sold IRHPs to small and medium-sized enterprises (SMEs). While business loans themselves are unregulated, standalone IRHPs were regulated as investment products (PDF).

Some of the issues that the FSA identified included that lenders:

• did not adequately disclose to borrowers the cost of exiting an IRHP
• failed to ascertain borrowers’ understanding of risk
• sold products which unsuitably ‘over-hedged’ borrowers (overexposed borrowers to risk)

In 2013, the FSA agreed with nine banks to operate a redress scheme, resulting in £2.2 billion being paid out to 14,000 businesses.

Independent review of the redress scheme (2019)

In 2015, the Treasury Committee published a report on Conduct and competition in SME lending. The report highlighted various criticisms of the redress scheme itself, chiefly that the scheme excluded about a third of IRHP customers on the grounds that they were “sophisticated” customers, as evidenced by the size of the IRHP they had taken out, or their business size.

In 2019, the FCA appointed John Swift KC to carry out an independent review of the redress scheme in response to the Treasury Committee’s report. Its main conclusion on the scope of the redress scheme was that the FSA was wrong to confine the scheme to a subset of customers designated as “non-sophisticated” (page 32).

The FCA responded, affirming “the decision to treat sophisticated and non-sophisticated customers differently in the case of IRHPs was justified”, while acknowledging shortfalls in its decision-making process, governance and record-keeping (page 11).

In 2025, the High Court dismissed a claim from the APPG on fair banking for judicial review of the FCA’s decision not to reopen the redress scheme.

Hidden credit liability allegations

Whistleblowers allege that the issues with IRHPs go beyond those addressed by the FSA (PDF), the FCA and the Swift review. They say that the way banks recorded and managed IRHPs artificially distressed thousands of otherwise healthy businesses, and that the banks then profited from their eventual demise.

In a report titled ‘Interest-rate swaps & Fixed-Rate Loans: Hidden Credit Lines’ (PDF), the group Bank Confidential explains in detail how they claim this worked. In summary the authors say:

• Banks (the allegations focus on RBS, now part of the NatWest group) would lend money to businesses secured against businesses’ assets up to a lending limit; that lending limit was constrained by the loan-to-value (LTV) limit set by the lender. For example, if a bank loaned an SME money to buy a £2 million shop with a maximum LTV of 70% (the LTV “covenant”), the maximum the SME could borrow would be £1.4 million. LTV limits are a normal part of lending money.
• Banks recorded the financial value of the IRHPs that were offered alongside an original loan as, in effect, additional loans (or “hard credit lines”). The banks then included the additional IRHP loans in their LTV calculations. As a result, a borrower could have thought their LTV percentage was well within an agreed limit when it was in fact much closer to that limit, because of the IRHP.
• When interest rates fell, the value of IRHPs to banks increased because customers with IRHPs were paying fixed interest rates that were higher than the variable interest rate. This increased the recorded liability that banks attached to customers with IRHPs. The cost to customers of breaking IRHPs early also increased.
• On top of growing liabilities, many borrowers with IRHPs saw the value of their properties decline during the financial crisis. In combination, these factors meant borrowers started to breach their LTV covenants. On banks’ systems, customers appeared to be high risk with impaired credit ratings, even if they were still profitable businesses and making their monthly loan and IRHP repayments.
• Businesses were transferred into bank subdivisions designed to deal with distressed businesses, such as Royal Bank of Scotland’s Global Restructuring Group (GRG). The Bank Confidential report characterises the GRG as an asset-stripper, “not a hospital for sick businesses… a harvesting operation for healthy ones”. RBS ran a voluntary compensation scheme for businesses placed in the GRG between 2008 and 2013 which believed they were mistreated.

Bank Confidential says that banks did not tell customers about the financial risks to which they were being exposed:

Customers were not told that credit facilities had been opened in their names without their knowledge. They were not told those hidden lines covered hefty day-one commissions and profits. And they were not told these liabilities were the very triggers that later pushed them into GRG or insolvency. Full disclosure would have pointed straight at fraud and opened the door to serious consequential loss claims.

The group alleges that the issue has never been properly exposed because the FCA “continues to claim these swap credit lines were only ‘nominal’ figures for internal risk, not real liabilities”. Bank Confidential’s report (PDF) covers its disagreement with the FCA in detail from pages 48 to 64.

By contrast, the Swift review pointed to court cases brought by customers against lenders (PDF), finding that banks had generally been able to argue that they had given customers adequate information about IRHPs:

The banks were, in general, able to argue successfully that their disclosure around the potential break costs in respect of IRHPs was sufficient

[…]

The banks were held to be able to rely upon arguments that customers could not prove that in fact they had relied upon alleged misrepresentations or omissions, and/or that the banks had otherwise caused their losses.

A spokesperson for NatWest responded to the allegations, telling the Library:

The FCA‑led IRHP review (reviewing sales between 2001 and 2012), overseen by an independent Skilled Person, identified shortcomings, as a result of which NatWest paid significant redress and fundamentally changed its approach to serving customers.

The FCA’s detailed review into GRG (regarding treatment of SME customers between 2008–2013) identified a number of failings, resulting in the bank automatically refunding certain complex fees from November 2016. We put in place an enhanced complaints process (overseen by an independent third party) and have fundamentally changed the way the bank deals with business customers in financial difficulty. No evidence was found of any fraud or other legal or regulatory breaches, nor any evidence that the bank deliberately distressed businesses, and we disagree that un-remediated detriment remains.

A connected issue: Fixed-rate loans

So far, this briefing has covered allegations relating to IRHPs sold to businesses which took out variable-rate loans.

However, Bank Confidential (PDF) also alleges that some banks (in particular NatWest subsidiary Ulster Bank) took out their own interest rate swaps (a type of IRHP) related to fixed-rate loans. Instead of booking these swaps in the bank’s name, they booked them in customers’ names and added a related credit line. Bank Confidential alleges that this allowed bank staff to record upfront profit resulting from these swaps, earning them personal commission. It alleges such actions amount to fraud and describes “similar practices” at Lloyds Banking Group.

As reported in The Times, which has covered the allegations about Ulster Bank, it is counter-intuitive for a fixed-rate loan customer to also take out a swap to hedge against interest rate fluctuations because “A fixed interest rate loan is your bet, or hedge, on future interest rate movements: adding a swap doubles your risk.”

The Times illustrates the issue with the case of Vincent Hurl, who owned a pub in Country Antrim and took out a fixed-rate loan with Ulster Bank. Hurl claimed that his credit rating was damaged after interest rates fell:

Tens of thousands of pounds of risk were added to his credit file, damaging his credit rating with the bank and hindering his move to a rival lender, he alleges. A long-planned development that Hurl had been working on for six years fell apart because of the liabilities, he claims, citing correspondence from the bank.

Bank Confidential says the FCA told the group that these credit obligations did not pose a real risk to customers. The group cites correspondence with the FCA where an FCA official said that Ulster Bank correspondence with its customer contained “erroneous and potentially confusing references to swaps”. Bank Confidential maintain that these internal swaps were fraudulently booked against business customers, allowing Ulster Bank to record upfront profits which would not have been possible had the swaps been recorded as internal.

FCA response

The FCA has reviewed the allegations against Ulster Bank. A spokesperson told the Commons Library “our review found no evidence that [Ulster Bank’s Fixed Rate Loans with Market Linked Break Costs, or FRLMBCs] were in fact IRHPs or had been improperly excluded from the IRHP scheme.”

This is important because, while the FCA regulates IRHPs, it does not regulate fixed-rate business loans. Ultimately, Parliament is responsible for deciding which financial services are regulated or unregulated.

That’s not to say fixed-rate loans were or were not properly sold and administered. Only that, in the FCA’s view, the lack of an IRHP means the FCA’s powers to intervene are far more limited.

The FCA added:

Overall, we have seen no evidence that would lead us to conclude that further supervisory work and/or interventions with Ulster Bank/NatWest was required.

[W]e saw no evidence the credit line alone could cause or materially contribute to deemed covenant breaches or defaults in otherwise performing loans.

However, we note that similar allegations have been made more recently about another retail banking group’s historic FRLMBCs. We are currently considering whether these contain any materially new information or evidence.

NatWest response

A spokesperson for NatWest told the Library:

We have also investigated allegations of hidden credit liabilities in Ulster Bank’s FRLs [fixed-rate loans]. We are satisfied that these FRLs are not IRHPs and were therefore correctly out of scope of the FCA-led historical IRHP review. Nonetheless, we conducted a voluntary review of certain FRLs in Northern Ireland (entered into between 2001 and 2009, and others where amounts remained outstanding for a certain period from 2013) as a result of which we paid redress to a number of customers. We entirely reject the suggestion that the bank committed fraud, or otherwise acted unlawfully or caused customer detriment. We engaged openly with the FCA throughout our voluntary review, who concluded that there was no need for further supervisory work.

Further reading

• Treasury Committee, Conduct and competition in SME lending, March 2015
• Commons Library, Treatment of SMEs by RBS Global Restructuring Group, November 2017
• Commons Library, Interest rate swaps on business loans, June 2018
• John Swift KC, Report of the Independent Review into the FSA and FCA's supervisory intervention on Interest Rate Hedging Products (IRHP), November 2021 (amended February 2022)
• FCA, Report of the Independent Review into the FSA and FCA’s supervisory intervention on Interest Rate Hedging Products (IRHP) – The FCA response, December 2021
• The Times, Pub provided key to unlocking the Ulster Bank loan scandal, March 2023
• The Times, NatWest fixed-rate loan scheme for companies ‘effectively theft’, August 2023
• Bank Confidential, Interest-Rate Swaps & Fixed-Rate Loans: Hidden Credit Lines, November 2025
• APPG on Investment Fraud & Fairer Financial Services, A discussion document on: “Why our financial conduct regulation needs reforming” (PDF), March 2026