A decade after the financial crash, the UK lacks a robust regulatory system that can protect SMEs from rogue bankers. Greg Wright reports.
For many small business owners, their enterprise is a life’s work
It is a passion that consumes nearly every waking hour. Their self-worth is linked to the performance of a business which often carries the family name. The loss of the business can have devastating psychological consequences.
But what if your business is ruined by rogue bankers? You will be an emotional and financial wreck and hardly in a position to take the big banks to court.
Does the UK have a tough regulator who can fight your corner? The chilling answer appears to be “no”, but an army of MPs and campaigners has been mobilised to try to put this right.
MPs, regulators and business groups all agree that SMEs (small and medium-sized enterprises) with legitimate grievances against the banks do not have a fast, inexpensive route to justice
At the same time, there is growing unease about the fact that nobody has been jailed for banking misconduct that wrecked firms and pushed some victims to the brink of suicide.
Regulators have admitted that they are still dealing with the fallout from the failure to prosecute senior bankers after the financial crash.
Charles Randell, the newly-appointed chairman of the Financial Conduct Authority, told The Times: “The fact that bankers didn’t go to jail will be a scar that financial regulators continue to carry for a very long time.”
The regulatory system is facing a crisis of confidence, which critics believe can only be rectified by revolutionary change. That’s why there is a groundswell of support for a new tribunal to ensure SMEs who have been bullied by the banks gain the protection they deserve.
The planned tribunal would provide a route to justice for bosses who believe their firm has been wrecked by banking misconduct. Plans for a new tribunal have gained support from the All Party Parliamentary Group on Fair Business Banking (APPG), leading lawyers, a number of banks, the regulator and the victims themselves.
However, the Government and the financial services sector have been unwilling to embrace plans for a new tribunal.
When UK Finance, the banking industry’s trade body, commissioned an independent review into the way SME complaints are resolved, there must have been hopes that the findings would help bring closure to a troubled period.
The APPG and misconduct victims were bitterly disappointed by the review’s findings. It concluded that the proposed tribunal would be expensive and could take years to set up.
It argued that a new division of the Financial Ombudsman Service (or FOS), could focus on disputes between banks and SMEs.
Simon Walker, the review’s chairman, told MPs that the tribunal would be costly, because it involves lawyers, and would take years to legislate because Parliament would be busy with Brexit.
Some MPs were unimpressed. Rushanara Ali, a member of the Treasury Select Committee, said the review “feels quite timid” while other committee members expressed doubts that the FOS could make the changes needed to provide justice for SMEs without a “hurricane” behind it.
Another terrible example of banking misconduct – the mis-selling of payment protection insurance (PPI) – has placed tremendous strain on the FOS’s resources.
This issue has rumbled on for years. In 2017, Andrew Bailey, the chief executive of the Financial Conduct Authority (FCA), told The Yorkshire Post that Britain lacked an “adequate” complaint resolution mechanism for small firms who believe they have been mistreated by the banks. He said he was working with Parliament to try to find a way of putting this right.
Kevin Hollinrake MP, the co-chairman of the APPG, has warned that misconduct involving the big banks has harmed tens of thousands of small businesses. The APPG has called for a public inquiry into the regulatory regime for business banking.
A letter to Mr Bailey, written by Mr Hollinrake, who is the MP for Thirsk, Malton and Filey, did not pull its punches:
It said: “The lack of accountability of senior figures in the financial services industry for the widespread destruction of British businesses undermines confidence in our financial services sector and is a threat to the integrity of the sector as a whole.”
The APPG has written to the FCA to express concerns about dispute resolution, compensation and the standards of turnaround units in financial institutions.
The APPG remains frustrated that the level of compensation for misconduct is wholly within the “gift” of the institutions themselves.
It also says there have been no substantive regulatory changes to stop misconduct from happening again. The group wants to see a public inquiry that will investigate the complex “and often incestuous” relationships between financial institutions, their advisers and the regulatory framework that is supposed to uphold standards.
In a 64-page report, the Treasury Select Committee also called for the establishment of a financial services tribunal to hear complex disputes between small firms and their banks. The MPs expressed horror at the “scandalous” way the banks had been allowed to mistreat victims.
The report called on the Treasury and the FCA to introduce a regulatory regime that protects small and medium-sized firms.
“Waiting for another high-profile misconduct scandal before pursuing it would be irresponsible,” it said.
“Given the committee’s concerns about the FOS’ capability, broadening its remit beyond the FCA’s proposals would be unwise and potentially damaging,” the report said.
The FCA’s Andrew Bailey has also argued that a tribunal could provide a more formal, court-like approach for higher-value disputes, or disputes involving complaints above the Ombudsman’s eligibility thresholds.
In his Budget, the Chancellor Philip Hammond welcomed plans to expand access to the FOS to SMEs with a turnover up to £6.5m.
The FOS will now take steps to ensure it has the necessary skills and processes in place to handle these new cases, the Chancellor’s Budget said. However, the Chancellor’s failure to back the tribunal plan prompted a furious response on social media.
“Never forget the harm that banks have done,” said one commentator on Twitter.
The SME Alliance tweeted: “We imagine there could also be a backlash from the huge SME sector who will see this as a real betrayal given even the Treasury Select Committee and the Financial Conduct Authority supported a tribunal.”
The APPG has vowed to fight on. Although it welcomed the confirmation that SMEs will be given greater access to the FOS, it believes more still needs to be done.
The group said the extension to the remit of the FOS is an “excellent first step” in reforming the dispute resolution landscape in the UK.
The group added: “However, the extension to the formal remit of the FOS is only part of the puzzle and in order to ensure that businesses are properly represented and have access to justice that is quick, cheap, efficient and crucially, accessible, the Government needs to introduce a complementary financial services tribunal.
“This tribunal will be the only mechanism, other than the courts, that will be able to compel witnesses, force the disclosure of information and hear judgements in a public court that can influence culture and behaviour.”
For many small firms who have been abused by the banks, the road to justice remains long and winding.
Kevin Hollinrake MP believes that bankers with deep pockets should not be allowed to escape justice.
He said: “They have a huge budget for legal fees. It’s fundamental that everybody can get justice.
“It’s disgraceful that banks have acted the way they have. These are not isolated cases.
“There has been horrendous abuse and scandalous mistreatment.”
He added: “We believe that establishing a tribunal is the right thing because it levels the playing field.”
He added: “Many victims feel so frustrated. Businesses that have gone bust cannot afford to take the bank to court. It is destroying people’s confidence in the system.”
This collapse in confidence has wider economic implications. If SMEs do not have faith in the banks, they are unlikely to ask them for the funding and support they need to grow. Fewer jobs will be created.
Some SMEs have turned their backs on the banks and sought backing from other lenders.
Damon Walford, chief development officer at SME lender ThinCats, said: “Banks have spent hundreds of millions of pounds since the financial crisis trying to rehabilitate their brands and distance themselves from their pasts.
“But SMEs have long memories and many are now bypassing banks altogether to access the capital they need to grow.”