Business Lending

Mark Williams 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.