Many companies have already gone bust after being sold complex hedging products called Interest Rate Swap Agreements (IRSAs).

The products were sold throughout 2006 to 2009 allegedly to protect small firms taking out loans from future interest rate rises. Instead, as interests plummeted, these firms faced vastly increased payments and ruinous penalties – sometimes exceeding £1 million – in exchange for escaping from these agreements.

The Financial Services Authority is now investigating as evidence has emerged that firms were forced to take out IRSAs as a condition of the loan and with little or no explanation of the risks involved. It has promised a detailed report on the issue by the end of July.

The scale of the scandal started to emerge at a Commons’ debate of backbench MPs shocked by the stories they had heard from small businesses in their constituencies. Conservative MP Guto Bebb, who convened the debate, said, ‘The Law Society Gazettee gives the figure of about 4,000 businesses affected, with about £1 billion worth of potential claims.’

FSB national chairman John Walker adds, ‘The huge scale of this mis-selling scandal is starting to emerge. It is vital small firms that have been affected make themselves heard rather that expect their bank to settle if they keep it secret.

‘The 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.’   

Emma Reynolds, Labour MP for Wolverhampton, witnessed Guardian Care Homes, a medium-sized business with 30 sheltered housing units and 900 staff, suffer after being forced to take out an IRSA as a condition of being granted a loan. She said, ‘You would hope that banks would support small business rather than exploit them. It is disgusting that this has happened. Something needs to be done urgently.’