MPs to call for checks on bank power over SMEs

Canary Wharf banks

The All Party Parliamentary Group on Fair Business Banking (APPG) will use a back-bench debate today, and scrutiny of the Enterprise Bill tomorrow, to argue for greater protection for small businesses against banks who mis-sell them products, and who declare them insolvent.

MPs will renew a call for fair treatment of 3000 SMEs who won compensation from the banking review into interest rate hedging products (IRHPs), but received no benefit as they were already out of business. The law currently allows redress payments to go straight back to the bank leaving people without their businesses.

The FCA revealed just before Christmas that a planned inquiry into banking culture had been dropped from its business plan.

Cat MacLean, partner at MBM Commercial in Edinburgh, said: “It could have recommended things like a standard form contract, a duty of good faith towards customers, and that banks should not be allowed to contract out of the fact they are providing advice.”

She said a standard contract, like that used in property missives, could help promote competition among banks.

Lawyers acting for businesses are frustrated at cases such as Crestsign, a family-owned property investment business, which claimed it had been mis-sold an IHRP or swap by RBS/NatWest. The High Court ruled in 2014 that the swap was mis-sold, but the bank was allowed to rely upon its contractual disclaimers and risk warnings to avoid any liability for negligent advice.

MPs will use today’s debate to return to the issue of the IHRP review, which was initiated due to the pressure of the APPG.

They will note that very few SMEs have been successful in winning any redress for consequential losses arising from swap mis-selling, with banks typically limiting compensation to primary losses plus interest, and inviting dissatisfied customers to go to court.

Ms MacLean said: “Of course a lot of companies will feel strongly that, but for the swap, they would have done wonderful things and perhaps are not looking at the reality of the recession. But equally there are companies who can vouch in a detailed and objective way for what they would have done, and getting nowhere.”

She added: “There are ways to make the system more fair and balanced. The Financial Services and Markets Act was passed in order to implement a European Union directive but was done by the UK government in such a way that means that only private individuals, and not businesses, can claim damages for breaches of FCA regulations. If this block were removed, you might well have a different outcome to the Crestsign case.”

Although a bank may have breached its regulatory duties under the FCA regulations, it can only be sued for breach of contract, not for regulatory breaches, and breach of contract cases are much more difficult to pursue successfully.

Borders MP Calum Kerr will be calling for insolvency issues to be incorporated into the new Enterprise Bill, and will note that prior to 2003, a bank appointing an administrator or receiver had to justify it in a report to a court.

Ms MacLean said: “There was a check and balance. Now a floating chargeholder can just appoint, there is no real process to scrutinise it. We think that where an administrator is appointed, there should be an automatic recall hearing within a short time, at which directors of the company have an opportunity to show the company was not in default or they do not agree with valuations.”

Calum Kerr said: “The financial crisis has highlighted the vulnerability of businesses that fall through the cracks of regulatory and legal protection. When faced with sharp practices and poor conduct from their lender, they have discovered they are not well served by regulatory or legal remedies. This must change.”

Guto Bebb MP, chairman of the APPG, said: “On far too many issues the FCA, created to protect consumers, is seen as concentrating on protecting the banking system. Numerous failures and fudges demand accountability and consideration as to whether the FCA is fit for purpose.”