June 22 2012. 

Britain's big banks have been accused by MPs and the Federation of Small Businesses (FSB) of a huge new mis-selling scandal that could destroy thousands of small firms and cost 80,000 jobs.

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 yesterday 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: "There are businesses being put into administration as we speak. The Law Society has already said 4,000 firms may be affected. The scale of this needs to be taken very seriously."

John Walker, National Chairman of the Federation of Small Businesses, 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."

Another Conservative MP, Heather Wheeler, said: "This could be the biggest mis-selling scandal since PPI."

Emma Reynolds, Labour MP for Wolverhampton, witnessed Guardian Care Homes, a medium-sized business with 30 sheltered housing units and 900 staff, collapse 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."

MPs heard how another un-named firm collapsed after being charged £6.1 million in interest on an original loan of just £3 million. Many small businesses affected have been too frightened to come forward for fear of having their loans foreclosed, ruining the relationship with their bank and being made un-creditworthy. Evidence is also 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.

However, Sandra Osborne MP, said small businesses had already paid £10 billion in interest on the swaps and were liable for £20 billion more - a figure that would result in 80,000 job losses.