Small and Medium-sized Enterprises: Mistreatment
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Lord Young of Cookham (Con)
My Lords, I commend the noble Baroness, Lady Bowles, on her choice of subject and the speech she made in introducing it. As the noble Viscount, Lord Chandos, and the noble Lord, Lord Davies, said, it was forensic, well-informed and critically focused.
The Government want a strong, diverse and dynamic economy in which small businesses are respected and valued. As we have consistently said, the mistreatment of businesses by the Royal Bank of Scotland’s GRG from 2008 to 2013 was unacceptable and clearly at odds with that ambition. When discussing circumstances such as these, we should always remember the human element to each case. As the backbone of our economy, small businesses must be able to trust that their financial service providers will support them as they strive to meet their ambitions. The real distress that has been felt by GRG customers must be heard, acknowledged and referred to during our debate. It is vital that lessons are learnt from these events, which has been the theme running through the debate today.
I was shocked to read that 86% of SMEs in RBS GRG suffered inappropriate treatment, a point made by the noble Baroness. RBS has rightly apologised for these mistakes and has set up a scheme to compensate victims, overseen, as the noble Viscount, Lord Hanworth, said, by the independent reviewer, Sir William Blackburne. This scheme has paid out more than £150 million in redress so far, comprising both automatic refunds of complex fees and then payments for direct loss. Approximately two-thirds of complaints have been addressed so far and the Government are closely monitoring the progress of the scheme.
On the Financial Conduct Authority’s investigation—again one of the issues raised during our debate—let me set out the steps it has taken. First, it used its statutory powers to commission a skilled person’s report of how GRG treated its customers. This report identified that there was widespread inappropriate treatment of SME customers by RBS but concluded that,
“there was no widespread or systematic inappropriate treatment”,
of SME customers by RBS in a number of areas. This includes allegations that RBS artificially engineered a position to cause the transfer of an SME into GRG, although the report found isolated examples of serious malpractice.
The skilled person’s report also made findings which indicated that GRG’s senior management were aware, or should have been, of some of the issues identified. The FCA therefore opened an enforcement investigation to understand senior management’s knowledge of the issues in GRG and whether there was any basis for enforcement action. The FCA announced on 31 July last year that it had completed its investigation and concluded that any further action against senior management at RBS GRG,
“would not have a reasonable chance of success”.
I think it was the noble Lord, Lord Sharkey, who asked what the Government’s view was of that. The FCA is an independent non-government body and it would be inappropriate for the Government to comment on its conclusions on that case.
Following this, the Government appreciate that those businesses affected by the actions of RBS GRG would have expected to understand exactly how the FCA came to that conclusion, especially as it would have been viewed as a disappointing outcome by many. The FCA’s final report published on 13 June therefore supplies this clarity, and the Government welcome this transparency.
The noble Baroness, Lady Bowles, wanted more information about exactly how the FCA came to this conclusion. I encourage her to contact the FCA directly on this point. I will make it aware of her request.
Businesses affected by events at RBS GRG, as well as by other historic issues in business banking that have dominated public discourse in this area over the past few years, will rightly ask what has changed to prevent such circumstances arising again. That has been a theme of this debate, particularly in the contribution of the noble Lord, Lord Davies.
First, in future the senior managers and certification regime will allow the FCA to hold managers to account for the way they treat their SME customers. The Government expect the highest standards of behaviour across all financial services firms and believe that this is an important step in restoring public trust in the sector. The SMCR strengthens the regulatory toolkit by promoting individual responsibility for misconduct, holding senior managers to account for misconduct that occurs under their watch and ensuring that individuals at all levels can be held to appropriate standards of conduct. I was asked by the noble Lord, Lord Sharkey, I think, whether the SMCR would prevent such issues happening again. It is a good question. Andrew Bailey was clear in front of the Treasury Select Committee yesterday that the SMCR gives the FCA the ability to act, should circumstances similar to GRG ever occur again.
The second change that has taken place is that all major lenders have signed up to the standards of lending practice. Overseen by the independent Lending Standards Board, the standards for business customers set the benchmark for good lending practice in the UK, including when business customers experience financial difficulty, and contain clear guidance on best practice. If a lender breaches the standards, it may be warned, issued directions as to future conduct and possibly publicly censured by the Lending Standards Board.
The third change is that as of 1 April this year more than 99% of all UK businesses now have access to fast, free and fair dispute resolution in the form of the Financial Ombudsman Service. In response to the point raised by the noble Lord, Lord Davies, I say that the Government’s position is that an ombudsman-style approach is preferable to the tribunal that he suggested as it does not require the regulation of SME lending, it can apply a fair and reasonable test, it does not require legal representation and it has the potential to resolve disputes swiftly and efficiently.
We have been clear that where there has been inappropriate treatment of SMEs by their bank, it is vital that those businesses can resolve these disputes and obtain fair redress. That is why we supported the FCA’s recent expansion of eligibility to complain to the FOS to include small businesses as well as micro-enterprises.
A question that has been raised consistently by the noble Baroness, Lady Bowles, the noble Viscounts, Lord Chandos and Lord Hanworth, and the noble Lord, Lord Sharkey, is why the regulation does not apply across the board. In other words, why do only three of the 11 principles apply, not all of them, and should we not therefore extend the scope of regulation? As I just said, the financial services industry has changed significantly since the very challenging period following the financial crisis. Given the factors that I have just set out, the Government do not believe there is a clear case for bringing SME lending into regulation as there would be a number of direct and indirect costs associated with such a move. Direct costs would include annual FCA fees, product reviews and increased compliance and monitoring costs while indirect costs could include stifled product innovation, a narrower product choice for SMEs, and higher barriers to entry leading to reduced competition in the SME lending market. These changes could in turn impact on the price and availability of credit for small businesses, which would not be a desirable outcome. Having said that, I detect a very strong view from all those who have spoken that there might be a case for looking at this again and that if the principles are good principles, why should they constrained in the way that they are? That is a message that I will certainly send back to my seniors.
I shall try to deal with some of the other points that were made. The noble Baroness, Lady Bowles, asked whether the asset protection scheme has had an impact. As the FCA report makes clear, no evidence was found that the RBS’s participation in the APS made any difference to the way in which customers were treated. The FCA-commissioned skilled persons review of RBS noted that, in relation to the sample of cases it had reviewed, it has,
“not seen evidence … where the existence of the APS had an effect on how RBS approached the customer”.
Picking up a point made by the noble Viscount, Lord Chandos, I say that we have been clear that banks need to work hard to restore businesses’ trust in the institutions of banks. I am sure RBS will have noted the specific criticism that he made about it in particular. We have welcomed the banking industry’s commitment to establish a voluntary dispute resolution service. Having these standing dispute resolution mechanisms available for SMEs is an important part of restoring businesses’ trust in the sector.
The shareholding which the noble Viscount raised is managed by UK Government Investments on an arm’s-length and commercial basis. Commercial and operational decisions are for the RBS board to make. That said, of course the Government expect the highest standards of conduct from all businesses.
The noble Baroness, Lady Kramer, asked why the FCA did not go to phase 2 of the report. The FCA decided it was more appropriate to undertake a focused investigation itself than to progress to the so-called phase 2, which would be led by an independent third party. This allowed it to proceed straight to consideration of enforcement action, if it were deemed necessary, and ensured that the FCA was able to conclude any investigation more quickly. I need to write to the noble Baronesses, Lady Bowles and Lady Kramer, on some of the issues and questions they raised.
I assure noble Lords that we have taken the matters relating to the RBS GRG seriously and I have taken on board the comments, criticisms and suggestions that have been made during this debate. While we acknowledge the disappointment that many will feel at the conclusions of the FCA’s investigation—a theme running through our debate—lessons have been learned. We have the senior managers regime in place, firms have signed up to the standards of lending practice, and there is a permanent dispute resolution mechanism through extended access to the FOS. We are not complacent. We will continue to remind banks of the importance of earning the trust and faith of small businesses and will continue to monitor progress of the compensation scheme under Sir William Blackburne. With seconds to spare, I thank noble Lords again for their contributions to this debate.