Business Lending

Andrew George Excerpts

Tuesday 8th April 2014 Westminster Hall

[Andrew George (St Ives) (LD)]

It is a great pleasure to have secured this important debate, Mrs Riordan. The issue has been pressing for many businesses in my constituency, and it has been raised on a number of occasions by me and by others in the House because of concern about the change of relationship between businesses and what used to be trusted advisers and supporters in banks. Now that relationship has changed—I hope not irrevocably, but many people fear that it is irrevocable—because of the way in which banks have treated small businesses in recent years.

Banks should be business-friendly, but the evidence is that they have behaved like parasites and engaged in sharp practice by mis-selling complex interest rate hedging products or hidden swaps that they will have known were massively to the detriment of the small businesses that they flogged them to. Instead of doing what small businesses do well and what the Government, those on the Government Benches and others who support the Government want businesses to do, which is to grow the economy and create jobs, thousands of small businesses have been held back and others put out of business altogether. But their being put out of business suits the banks in these circumstances, because every company that they lend to and that they can drive into administration has assets that they can sell and becomes a company that, conveniently, cannot seek redress from the bank, particularly in the current climate.

[Mr Mark Williams (Ceredigion) (LD)]

I congratulate my hon. Friend on securing the debate. In his analysis of this problem, is he of the view that the banks were clearly targeting specific businesses—asset-rich businesses? I ask that because my experience in my constituency is that the hotel sector, people owning property, property management companies and, above all else, the farming sector were really hard hit, particularly in the sales of unregulated tailored business loans.

[Andrew George]

My hon. Friend makes a very acute point. It does seem to me that in the many cases that I have taken up—no doubt he has done the same in his constituency—there were these rather dodgy business loans and, of course, the swap agreements embedded in them. That is the critical thing. There do appear to be very significant assets within the businesses themselves, and no doubt that will have guided the banks as to which businesses to offer the loans to.

I gave my hon. Friend the Minister at least some notice of the areas that I would be covering. In particular, I would like to ask her how the Financial Conduct Authority can justify the exclusion of at least one third of the companies that were being looked at and that were mis-sold these products because they are deemed by the FCA to be “sophisticated”. What was the basis for that—in my view, it was an arbitrary basis—and how can it be challenged?

What view do the Government take of the reasonable claim, in my view, by companies to which the mis-selling of these products has caused detriment that they could seek redress for “consequential loss”? It is suggested that some banks are seeking to reinterpret the law in this area, so that it is difficult for those companies to pursue consequential loss.

What happens to those businesses that were in effect forced into administration or liquidation by the mis-selling? At present, they appear to have no redress at all. Surely that cannot be right. I hope that the Government will encourage the FCA at least to have that matter looked at again.

Does the FCA review and redress process take into account or exclude the matter of “ongoing facilities” provided by the banks—the ongoing facilities that are made available through the banks?

Will the Government now authorise an inquiry into the sale of all hidden swaps—the tailored business loans, the embedded swaps and so on—sold to small and medium-sized enterprises by the banks since about 2001? That is when this pattern of activity was identified.

This is a separate but no doubt related point. What assistance is there for entrepreneurs who are trying to secure a mortgage, or even complete a rent check, for a home now that the self-certification system has been scrapped? Many small businesses and, in particular, new businesses that are starting up—we want to encourage people in those businesses—cannot secure a loan to advance their business.

I fully appreciate that the Government have made significant strides in recent years with the establishment of the business bank, the enterprise finance guarantee scheme, the enterprise capital fund, funding for lending, the growth accelerator and many other initiatives, which have been significant and helpful to the business sector. I certainly hope that those will prove to be a success in the months and years ahead. My primary focus today, however, is that we still have a legacy of a problem, which ought to be erased from the business lending environment. I hope that when the FCA completes its review process, it will ensure that the banks engaged in such shoddy practices are brought to book as quickly as possible, so that the companies that have suffered detriment may resolve their redress equally quickly.

Inevitably, I come at the problem from the perspective of my constituency, so I probably need to paint a picture of the west Cornwall and Isles of Scilly constituency of St Ives. Not only is it the most attractive constituency in the country, but it has a large number of very small businesses. There are no major companies—no car plants, refineries, major manufacturers or head offices of multinational companies, as there are in many other constituencies—and there are instead about 7,000 enterprises. That figure depends on how we define a small business, but certainly includes sole traders and medium-sized enterprises. They are multifaceted and many-talented businesses; they not only throw pots and manage satellites, but engage in basket weaving and international website design, and they include hoteliers, caterers, bakers, farmers, fishermen and fishmongers.

In order to be successful, as well as having to work extremely hard, the people in those businesses often have to have many other talents, such as in marketing, customer care, bookkeeping, or IT and other skills. Few of them, however, are financially sophisticated. Most of them used to assume that they could trust the bank of which they had loyally been a customer, in many cases for decades, before they were mis-sold those products. Surely banks are there to help. Do banks not have a shared interest in businesses succeeding? Surely banks would not engage in sharp practice or sell a small business something that they knew it would regret. I am afraid to say, however, that I and many other Members have seen that that is simply not the case.

The banking sector seriously let down small businesses and completely demolished any of the trust that used to be fundamental to the relationship between them and their banks. Would the banks do the same to Tesco, BP or Unilever? Of course they would not, and we know that they would not; they are simply taking advantage of small businesses. The banks know that small businesses do not have the sophistication, and that they can run rings around them, bullying them into the kind of agreements that put some of the businesses out of business and left many of them struggling to survive. I have taken up many cases, as other MPs have done, and my eyes have been opened to the shady dealing.

Colin Phillips of the Coasters tea shop in St Ives, for example, was recently put out of business by that bank practice. He saw his business sold from underneath him, without any consultation, after he was mis-sold a loan by Clydesdale bank more than five years ago. There are many other examples, which I could name, as well as some I cannot name. They have been devastated and damaged by the banks in that way. One company, Seasalt Ltd, was started in Penzance in my constituency in 1981 by Don Chadwick and is now run by his three sons, Leigh, David and Neil. It is a successful UK company. It is the first business ever to have its clothing certified by the Soil Association and it has won the Queen’s award for sustainable development, making it the first fashion company to do so. It has been very successful, it has won many awards and it is growing.

However, Seasalt could have grown a great deal more. It entered into a five-year interest rate swap agreement for £805,000 in April 2008 with HSBC. I am told by Leigh Chadwick that the company did not have a choice about the swap; it was a condition of the loan that it took the “interest rate protection.” The bank failed to make proper inquiries to ascertain the company’s level of knowledge and understanding of the risk inherent in the IRSA. The company was led to believe that interest rates were going to rise. Although the company had never previously taken a fixed-rate loan, the owners wrongly thought that HSBC, its trusted banking partner for 17 years, was acting in their mutual interest; otherwise, the owners thought, why would it be making a swap agreement a condition of a loan?

At the time, there was significant equity in the business—that relates to the point that my hon. Friend the Member for Ceredigion (Mr Williams) made—and the company also had access to additional external funding. The swap agreement was unnecessary and the bank’s motive for making it a condition of the loan was profit, not risk mitigation. The cost of breaking the swap was never explained or illustrated. The bank knew that there was a possibility that the loan could be repaid early, and yet it of course made it difficult for the company’s owners to do so. It confirmed in writing that there would not be any early prepayment or early termination costs, which was wrong. The bank failed to disclose that the IRSA created a contingent liability that would affect the company’s credit line. The IRSA had a detrimental effect on the company.

The company complained in 2012, but HSBC has done its utmost to fight its claim, despite the strength of the company’s case. While the company is preoccupied with trying to get proper and just redress, it is of course not focusing on growing its business and creating jobs. It is an appalling waste of money for UK business, given that the Financial Services Authority found that 90% of the swaps had been mis-sold.

[Mr Mark Williams]

My hon. Friend gets to the nub of the issue affecting businesses that are within the Government’s redress scheme. The Financial Conduct Authority’s redress scheme is very welcome and it has led to resolution of some cases. However, I have constituents who have been waiting for more than a year now to have resolution. As he says, that puts a huge amount of pressure on their businesses, let alone the tailored business loans—the embedded swap products—that are not being considered yet.

[Andrew George]

I am sure that the Minister heard my hon. Friend’s comment and will take it into account in her response.

The fact is that Seasalt is still waiting for its interest swap issue to be resolved, more than 21 months since it lodged a complaint about it. HSBC has done its best, first, to resist the redress process and then to slow it down, although the company’s owners have been told that the matter will be reviewed by the end of next month.

This issue has unquestionably cost thousands of jobs. In the case of Seasalt alone, it has estimated that the cost to it is 20 jobs, which it could have created if it were not for the impact that this swap has had on a company of its size; we are not talking about a very large company. Not unreasonably, Leigh Chadwick asked me:

“When will criminal proceedings be brought…?”

The Tomlinson inquiry suggested that in some cases this matter should be a criminal matter. As Leigh asks:

“When will criminal proceedings be brought against the bankers who have perpetrated this fraud?”

Equally reasonably, Leigh makes the point that this issue needs to be related to the issue of bankers’ bonuses. He fails to understand how a business—particularly one that is, after all, taxpayer-funded—can continue to pay huge bonuses when it is making losses. He says that he is sure that the bank would baulk at renewing Seasalt’s facilities if it made a loss but started paying its owners huge bonuses in the process.

I fear that the process of establishing a decent relationship between businesses and banks may have changed irrevocably. Seasalt has said that instead of banks being trusted advisers to SMEs, their relationship is like that with an untrustworthy supplier. The Government, the FCA and other regulating authorities should look at whether the regulations need to be significantly stepped up. What are the Government doing to stop banks side-stepping the EU bonus caps? What steps are the Government taking to increase the FCA’s power and to ensure that it acts in the best interests of SMEs and customers, and not the service providers?

I could describe many other cases, but the Minister needs time to respond. I mentioned the difficulty that many small businesses in my constituency, particularly new businesses, face because of removal of the self-certification scheme for those seeking a mortgage. It seems wrong that businesses that are employing people cannot get a mortgage when their employees can. I hope that the Minister will look at that.

The relationship has clearly broken down. The banks have behaved very irresponsibly with sharp practices like parasites on small businesses. I hope that the Government will take the bull by the horns and ensure that the FCA drives the review process and that we get satisfaction for our small businesses.

[The Economic Secretary to the Treasury (Nicky Morgan)]

It is a pleasure to serve under your chairmanship this afternoon, Mrs Riordan. I thank the hon. Member for St Ives (Andrew George) for securing this debate. I am grateful for the opportunity to discuss this important issue. I know from previous debates that it is of great concern to hon. Members of all parties.

Towards the end of his speech, the hon. Gentleman mentioned the wider issue of the relationship between banks and customers. I hope he will understand that, if I do not tackle that broader subject, it is because I have only 12 minutes to deal with the matters he has raised. I am sure he will be able to apply for a further debate in this Chamber to explore those themes, but I have taken note of what he said.

The hon. Gentleman made a strong case on behalf of all the businesses in his constituency and others that have suffered from mis-selling. He referred to 7,000 small enterprises in his constituency, and I would like to start by assuring him that from the very beginning this Government have been clear that the mis-selling of financial products is unacceptable. We take extremely seriously the abuse that has taken place, and we are determined that any wrongs that have been inflicted on businesses should be righted.

Hon. Members will know that the Financial Conduct Authority’s review process was the subject of a Back-Bench debate on 24 October 2013 and focused on the speed of the review. The hon. Gentleman mentioned that in relation to a particular company in his constituency. My colleague, the Financial Secretary, noted that although the Government shared the disappointment at the progress that had been made then, we were confident that the review process would provide the correct level of redress for affected businesses.

I am pleased to say that considerable progress has been made during the intervening five months. All cases are now under review and almost half a billion pounds has now been paid to more than 3,400 small and medium-sized enterprises. I hope hon. Members agree that that is positive news and shows that the review is working.

It is worth noting that the majority of banks in the review will also now make an initial redress payment to businesses and then discuss consequential losses separately. I will return to consequential loss, which the hon. Gentleman mentioned. That will help those small businesses that have been at the wrong end of mis-selling to get back the money they badly need. I know from companies in my constituency that have approached me that cash and cash flow are tremendously important.

The FCA has published each bank’s projections for when it expects to finish the review process. All banks are expected to finish the review by June 2014, which is the month after next, with a number likely to finish before that date. I can assure the hon. Gentleman that Treasury Ministers and officials will continue to track progress closely against those projections.

The hon. Gentleman voiced concerns about the large number of businesses that have been assessed as “sophisticated” and therefore fall outside the scheme. The Government have been absolutely clear that businesses that lacked the necessary skills and knowledge to fully understand the risks of these products should receive appropriate redress. However, as the Financial Secretary made clear last year, we do not agree that all businesses should have access to the review. There needs to be a defined cut-off point where more sophisticated businesses take responsibility for understanding the products they purchase. There will have been organisations that took one of these products with a full understanding of the risks involved if interest rates fell. It is not for the Government to perform due diligence for such large sophisticated businesses. Any such action would weaken incentives for businesses to act sensibly when purchasing financial instruments, and I would be concerned that we could open the floodgates to any businesses that lost out from a financial transaction.

[Andrew George]

I am grateful for the Minister’s comments on that, but will there be an opportunity for appeal for those businesses? There will be circumstances in which businesses can show that this unregulated financial product was mis-sold and that they were misled through how the banks sold the product to them.

[Nicky Morgan]

As I understand it, the FCA has amended the sophistication test in the past few months. It started off with a broad test under the Companies Acts, and that has been refined. From a constituency case, I know that it is possible to ask the FCA to reconsider whether a business should be deemed to be “sophisticated”, but the FCA will ultimately make the judgment. Some push-back is possible, and there needs to be a defined cut-off point so that the right businesses are within the scope of the review.

I reiterate that the Government take extremely seriously the abuse that has taken place in many cases, and we are determined that any wrongs inflicted on businesses should be put right. I want a quick solution to the mis-selling of interest rate hedging products to allow the businesses to continue to operate and to contribute to the ongoing recovery of the UK economy.

The hon. Gentleman asked some specific questions. If I do not get to the end of them, the Financial Secretary or I will write to him on them. The hon. Gentleman asked about consequential loss and some banks, as he mentioned, seeking to reinterpret the law on it. Banks are required, where there is mis-selling, to provide fair and reasonable redress, and that means putting the customer back in the position they would have been in had the regulatory failings not occurred. That includes any consequential loss. The FCA has published guidance on consequential loss.

The hon. Gentleman asked what happens to businesses that are effectively forced into administration or liquidation by mis-selling. My understanding is that the FCA has confirmed that in those cases the administrator will take part in the review on behalf of the business. The business directors will be given plenty of opportunity to put their case on the sale of the hedging product. He asked about ongoing facilities, and I will have to write to him on that matter, because we have to check. I will return at the end to the self-certification regime, because it is slightly outside the scope of the debate.

[Andrew George]

I am grateful to the Minister for giving way once again. With those companies that go into administration, the administrator is in many cases acting on behalf of the creditors, including the bank. I cannot see how the administrator can in any sense represent the interests of the company seeking redress.

[Nicky Morgan]

The hon. Gentleman has raised an interesting point. At the end of the day, the administrator is there to get a fair deal for everybody. The directors of the business are given an opportunity to put their case on the sale of the hedging product to the FCA. The directors of the business, even if the business has gone into administration, will be able to put their case. In my business experience, in most cases, the administrator acts to get as much back for the business and the creditors as they can.

I turn briefly to embedded loans and hidden swaps, which the hon. Gentleman and the hon. Member for Ceredigion (Mr Williams) raised. The hon. Member for St Ives mentioned the difficulty faced by his constituent Mr Phillips and the Coasters company in relation to a fixed-rate loan, and I am sorry to hear about the problems that that caused. As the hon. Member for Ceredigion said, the FCA does not have regulatory powers over business loans, so its supervised review can cover only interest rate hedging products that were agreed separately from a business loan. The Treasury has secured a voluntary agreement through the British Bankers Association that banks will provide the same level of disclosure for features of fixed-rate loans, such as break costs, as for regulated interest rate hedging products. Most importantly, the banks will now ensure that break costs are fully explained and that worked examples are provided.

On self-certification, the hon. Member for St Ives asked about assistance for entrepreneurs who are trying to secure a mortgage. The Financial Services Authority conducted a wholesale review of mortgage regulation in the UK, the “Mortgage Market Review”, which was published in October 2012. The rules are to be implemented by the FCA before the end of this month, and as a result, lenders will not be able to offer self-certified or fast-track mortgages from 26 April. However, the FCA recognises that lenders should have flexibility to decide what evidence of income they can accept from self-employed customers, so it will be for individual lenders to decide what evidence they require as proof of income. I am sure that the hon. Gentleman appreciates that the new rules are being introduced in the context of wanting to ensure that we have stronger mortgage lending practices to avoid the problems that we have encountered in the past, which were caused by people borrowing more than perhaps they should have done.

On lending to small businesses, as the hon. Gentleman mentioned, the Government are determined to support small businesses and improve access to finance. The funding for lending scheme has provided incentives to banks and building societies to boost their lending to the real economy. Since the introduction of that scheme, bank funding costs have fallen to historic lows. As the hon. Gentleman said, there has to be confidence between businesses and their banks. That is why the major high street banks have put in place an independent appeals process that allows any business with a turnover of up to £25 million that is declined any form of lending to appeal against that decision, for any reason, to the participating bank concerned. Results show that, in the two years for which the appeals process has been running, in 40% of cases in which a decline was appealed against, a lending agreement with which both parties were satisfied was subsequently reached.

The Government announced in the Budget that the first results of a major new survey into how banks perform for small businesses will be published by the Federation of Small Businesses and the British Chambers of Commerce next month. Banks will be able to use the results to measure their progress towards becoming better banks for small businesses everywhere. The Government are very focused on that. We welcome that review, because we want to provide UK small businesses with a clear and credible way to judge how their bank compares with its competitors. We want Britain’s banks to do more to put Britain’s small businesses at the top of their priority list.

Hon. Members may know that the Government announced a package of measures designed to improve competition in the SME lending market, which included consultation on proposals to require banks to share more information on their SME customers with other lenders through credit reference agencies, levelling the playing field for challenger and non-bank lenders. Finally, the Government announced in the Budget that we would consult on whether to legislate to require SME lenders to release details of businesses that they reject for loans, so that alternative providers can discuss other options with them.

I am aware of the time, so I will conclude. I thank the hon. Member for St Ives for bringing this important issue to the House. I assure him that the matter continues to receive the highest level of attention from the Treasury and from Ministers more widely.

Question put and agreed to.