UK banking: SME’s feel the squeeze
Abhishek Sachdev argues the FCA is shirking its responsibility to address the systematic abuse of customers by British banks who are collectively focussed solely on their own profit margins, often in breach of their regulatory obligations.
Talk to any politician or City grandee and they will tell you that Britain leads the world in banking services. But talk to many SME owners and they do not have a good word to say about British banks.
Systematic abuse of customers for their own profit, often in breach of their regulatory obligations, is the accusation levelled against them. Many medium-sized companies (who come to my firm for advice on the sale and manipulation of hedging instruments by banks) have lost faith in the regulator's willingness to take on the big banks over historic abuse and to enforce the regulatory codes of conduct.
In November last year, the Financial Conduct Authority released a Final Summary of an independent review of RBS's treatment of its SME customers that had been referred to its Global Restructuring Group (GRG) (colloquially known as its "bad bank"). The fact that the FCA refused to publish the whole report only serves to fuel the suspicion that the regulator is really down-playing this rather than addressing the issues. Sir Vince Cable made use of parliamentary privilege to release details of the mistreatment of customers detailed in the full report, which states that "management knew or should have known that this was an intended and co-ordinated strategy". Cowed by legal threats from RBS, the FCA still feels unable to publish the full report.
If the regulator allows itself to be put under such pressure by the banks, then what hope is there for the SMEs themselves? Their relationship with their bank is asymmetric: the bank's balance sheet is much bigger than theirs, and it is this imbalance which the banks have been ruthlessly exploiting for years. All of the banks had similar units to GRG. Many operated in a similar manner. For the FCA, the report into RBS should be only the start of its investigations into this sector-wide behaviour, but they give the impression they would rather wish away past abuse rather than taking action to provide remedies for SMEs.
A cursory examination of the FCA's Summary Report suggests that the FCA was bending over backwards to paint RBS in the best possible light. Take, for example, the report's crude statistical manipulation to produce misleading results in favour of the bank. A sample of 207 companies was selected to extrapolate the effects of RBS's actions on the 5,900 SMEs (which excludes the 10,000 or so micro businesses also referred to the GRG) referred to the GRG in the six years between 2008 and 2013. Of these sample companies, data was not even collected on 70 companies that they deemed need not be reviewed because they were "clearly not viable". Yet projections were then made as if it was data collected on all 207 sample companies. Consequently, the report stated that 57% of the companies experienced "inappropriate action on pricing by the GRG". 86% of the tested viable companies actually experienced inappropriate pricing action.
The Bank's failure to be transparent in the process was just as bad: again, by excluding the 70 companies deemed as "clearly not viable", the transgression rate was reported as 55% rather than the actual rate of 82%. Not only were the actual transgression rates significantly higher in most categories, but the report also showed that each company reviewed suffered around four instances of "inappropriate actions" by the bank.
The report claims that commercial lending is not a regulated activity and that there are no 'Conduct of Business' rules against which to assess the GRG. But RBS and all of the other banks ARE regulated entities. There ARE rules against which to assess their conduct, these are called 'Principles of Business' which "apply in whole or in part to every firm" and which are found in the FCA Handbook. These Principles include, amongst others, the requirement to act with integrity; to conduct its business with due skill, care and diligence; to pay due regard to the interests of its customers and treat them fairly; not to mislead clients; and to arrange adequate protection for clients' assets.
Many victims were forced into the so-called bad bank by being unfairly declared in distress by their bankers. Over much of the period reviewed, banks required SMEs to enter into some form of hedging when entering into the loan. While this had the benefit of creating fixed rate loan repayments, it also contained an undisclosed sting in the tail for companies – the "secret" credit line that banks put against the hedge. As interest rates fell, the secretly assessed "credit exposure" of the hedge increased, enabling the banks to determine that a company was now outside of acceptable credit limits. The FCA summary report into GRG fails to mention that this hedging activity, which was integral to many of the loan facilities, is a regulated activity and is subject to a set of 'conduct of business' rules. Many other High Street banks, which had similar "bad banks" that experienced similar complaints about their treatment, were also widely ignoring their regulatory obligations.
Rather than trying to paper over past abuse, the FCA should now be taking action to help companies hold their abuser to account where the abuser has acted contrary to the regulatory codes. There are many more cases of historic abuse being litigated, and establishing a tribunal or arbitration process would help companies gain faster access to justice.
Some City grandees are beginning to acknowledge that the sharp banking practice has to stop. RBS's Chairman (and former FSA Chairman) Sir Howard Davies recently expressed his deep embarrassment about his bank's failures. This is a good start. Only by admitting their past faults and compensating their victims will Britain's High Street banks be able to restore the trust of their business customers.
