Banking Sector Failures

Stephen Kerr Excerpts

Thursday 12th July 2018 Westminster Hall

[Stephen Kerr (Stirling) (Con)]

It is a pleasure to serve under your chairmanship, Mr Bone. I thank the Backbench Business Committee for making this important debate possible.

I also thank the hon. Member for East Lothian (Martin Whitfield) for his speech, which was powerful and insightful. The questions he asked deserve good answers. I also congratulate my hon. Friend the Member for Thirsk and Malton (Kevin Hollinrake) on his work in producing that valuable report. As the hon. Member for East Lothian said, this issue will not go away. A cross-party coalition of Members of Parliament will continually bring it to the fore until there is justice for those who have been so obviously wronged.

I pay tribute to our nation’s entrepreneurs, in businesses that are small, medium and large. Those entrepreneurs should be celebrated, encouraged, nurtured and, occasionally, even lionised. They are people with aspiration, ambition, ideas and entrepreneurial energy and drive. They take the calculated risks that create something, which in turn creates wealth and prosperity. They create employment, they support families and they are the true engine of our economy. To care about the future prosperity of our country is to be passionate about entrepreneurs. We should foster the energy and ambitions of our businesses.

That is why this debate matters. The one thing that we have learned from the scandals at HBOS Reading and in RBS GRG is how frighteningly easy it is for businesses, small and large, to be parted from their assets—to be taken out of their business and erased from existence. Any small technical breach of a commercial loan contract can be seized on by a bank as an excuse to foreclose on a business, even if that breach has no impact on the business’s current performance or future success. The most common rationale for this extreme measure is the allegation that the value of the property that the loan is secured on has fallen. That means that the loan-to-value covenant is breached, which gives the bank the power to appoint a Law of Property Act receiver or to put the company into administration. There are many cases of businesses that have never missed a payment but the banks have still seen fit to move in and seize the company. At that point, the owners immediately lose control of their business and can only watch helplessly from the sidelines while it is asset-stripped and destroyed.

[Bob Stewart]

It is really upsetting to think that companies such as GRG have these robbers—they are people who are set up to try to find something that they can use to screw their customers out of their life’s work. It is so appalling that I cannot believe it can happen, but it seems to happen all the time.

[Stephen Kerr]

My hon. and gallant Friend not only says the right things but says them with the passion and angst that we all feel on our constituents’ behalf.

At the stroke of a pen, and often based on a valuation that was instructed by the bank in the first place, a director or an individual loses immediate control of their business and their assets. To that end, I would like to share with hon. Members the story of one of my constituents, to add to the many other stories that have been and no doubt will be told today. My constituent’s name is John Roseman. I can do no better than to describe him in his own words from his LinkedIn profile, which I know are accurate from having met him. He describes himself as an “entrepreneur” and he is absolutely that. He fits the bill. He has

“vast experience in International Business in the High Tech Arena of Microelectronics, Solar, Oil & Gas, Cleanroom Environments & High Purity Manufacturing.”

John had a business, Sematek UK, that he describes as a

“Clean manufacturing service company specializing in turnkey clean environments, high purity gas, chemical and water installations, Mechanical, control and electrical engineering.”

His business had a turnover of £10 million and was based in my constituency. There are not so many businesses in my constituency that turn over £10 million, but John’s business did. He had blue chip clients across the world on every continent. His business was making money—it was profitable and had good margins. He came to see me in a surgery that I held in Dunblane, with a whole set of management accounts as evidence.

The success John had made of the business that he founded in 1990 was clear and obvious. But that all changed. Suddenly, in 2011, without any notice, John had the rug pulled from under his feet. RBS said it would like security on his existing facility, but no covenant had been broken and nothing substantial had changed, except that John’s business was becoming more successful and making more money. One day, the bank appointed someone to call on his business. John thought that he had come to do an inspection on behalf of the bank. But no, this was an insolvency practitioner, whose first words to John were that his facility had been immediately withdrawn and his business put into administration by the bank. John Roseman had another company called Mov-Stor. That business was not liquidated, but RBS GRG took all its assets and sold them on. It gave him a fraction of the true worth of that business’s assets.

I spent some time with John and he gave me permission to talk about his case today. His story is just one illustration of the brutal approach of RBS GRG and other banks to small and medium-sized businesses such as John Roseman’s.

[Martin Whitfield]

It is interesting that when we discuss entrepreneurs in this country, we frequently talk about their inability to develop from an SME into a large company. We put that down to selling the idea abroad, but actually today’s debate and the effects of the finance show that perhaps there is another reason why they are unable to do that, which has nothing to do with their ability or out-of-the-box thinking.

[Stephen Kerr]

The hon. Gentleman speaks well to that subject. Banks should exist to provide the capital that businesses need to scale up and become bigger, albeit for their own commercial interest, but I am sorry to have to say that is not how it works in this country.

The impact of the events on John Roseman was far more than just commercial. They had a devastating effect on him, his health—as I witnessed when I met him—and family, and his employees and their families. John’s business was stolen from him, and I make no apology for using that word.

[Kevin Hollinrake (Thirsk and Malton) (Con)]

My hon. Friend is making a brilliant speech. Does he agree that the common factor in a lot of these businesses was that they had assets or that the people had personal assets? The bank chose them deliberately, but then denied year after year that GRG was a profit centre, despite the fact that the skilled persons report determined that in 2011, GRG made £1.1 billion in profit on a turnover of £1.3 billion.

[Stephen Kerr]

There can be no doubt about the nature of GRG’s operations. To say anything other would be a deceit about the part played by GRG. I apologise for having to use such unparliamentary language to describe the operations of a business, but that is the case too often in the examples that so many Members have had brought to us.

There was no failure in John’s business or model—they were a success. His business’s products and services were in demand. His customers certainly had not deserted him. But the Royal Bank of Scotland brought him down for its own purposes. He has still to get anything like an appropriate settlement in compensation for the way he was treated. John is cut from rock and the Royal Bank of Scotland should be warned that it can try to close his case, as it has told him, but he will not give up and will not go away. He wants justice and recompense, and he should be treated with more respect than he has been so far. As his Member of Parliament, I will support him as best I can.

John’s case is only an example; there are so many others. He suffered severe trauma. His health has been affected through stress and anxiety. He has suffered heart problems; he had heart surgery the week before his daughter was married. His marriage and his friendships have suffered. He said to me:

“My wife found it especially hard having to deal with the day to day situation and our marriage suffered seriously and was lucky to survive the constant pain, anger and aggression I was going through watching our family business and assets being stolen from us.”

That is the human cost, along with the human cost to his employees, his team and their families.

I repeat that, at the stroke of a pen, directors and shareholders suddenly have no voice and no right of reply, even if they never missed a payment but honoured their obligations. It is that easy. The customer gets no warning and has no ability to appeal. That can happen whether or not the valuation on which the supposed contract breach is based is correct.

Who determines that a property’s value has fallen? It is usually a surveyor from one of the bank’s panel of firms, which depend on banks for their business. They are hardly independent. Hypothetically, if a bank had a liquidity problem and needed to raise funds quickly, all it would have to do is engineer a bogus breach of contract—the rest would be history. Sadly, many banks are commonly accused of having done exactly that in the aftermath of the financial crisis.

As we can see, it is not just the bank involved—surveyors, LPA receivers and administrators all play their part. It is therefore imperative that those practitioners and their regulators are held to account for the roles they played—and continue to play—in the destruction of British businesses.

[Martin Whitfield]

The hon. Gentleman is being generous with his time. The fact that the contracts the banks entered into with customers were so complex and so cleverly—I use that word carefully—worded that they misled individuals about the powers the bank had over them plays into the APPG’s cry for a much simpler, more straightforward and more honest contractual relationship between banks and individual customers.

[Stephen Kerr]

Absolutely—complexity is a weapon in the hands of the banks.

RBS has been at pains to point out that Promontory did not find any evidence of deliberate undervaluation of properties. However, Promontory also stated in its report that in many cases it could not find any evidence that a valuation was correct. In other words, they were making it up as they went along. In such a cosy relationship, the surveyors, LPA receivers, insolvency practitioners and financial institutions all hold incredible power over the borrower. They used that power—they still can —to enrich their own firms and their balance sheet positions at the expense of viable businesses. Indeed, the section 166 report specifically refers to their searching out “opportunities” to default.

Insolvency was seen as an opportunity to get rid of troublesome complaints, as the voice of the individual businessperson is wiped out, and avenues for complaint or redress blocked, at the point of receivership or administration. In our last debate about this issue, which was in the main Chamber, I mentioned another method that some banks—Clydesdale, for example—have used to wipe out swathes of troublesome or just unwanted business customers: selling their loans on and letting a shady vulture fund, such as Cerberus, do the dirty demolition job for them.

We start with a situation where businesses have no effective protection against being badly treated by banks and their associates. Added to that, there is no real disincentive for banks and their associates to behave badly and even criminally towards those businesses, and nothing to stop the same banks and associates simply pulling the plug on them and hoovering up their assets to distribute among themselves. Businesspeople have nowhere—nowhere within their financial means, at any rate—to take their complaints about poor treatment that gives them a realistic chance of resolving their problems before their businesses and lives are consumed by them, or of receiving satisfactory compensation where they have suffered substantial loss or damage. On top of that, we repeatedly fail to take allegations of mistreatment and fraud seriously, and we refuse again and again to investigate and clamp down on bad and even criminal behaviour. Even on the rare occasions when we eventually investigate and prosecute, as in the case of HBOS Reading, we go after the foot soldiers, not the generals. It is not hard to see how that awful recipe of things combined to cause thousands of businesses to be devastated, their owners’ lives to be shattered and many jobs to be lost.

If we repeatedly fail to take allegations of mistreatment and fraud seriously, and we refuse again and again to investigate and clamp down on bad and criminal behaviour, there is no reason why such actions should ever stop occurring. I reinforce and second the questions the hon. Member for East Lothian asked, and I say to the Minister: please, for the sake of UK plc and the many businesses devastated by the issues I have tried to describe, let us take clear action to ensure that justice is served.

--- Later in debate ---

[Drew Hendry]

There is a need to tackle that. I will come on to exactly what my party proposes, which I think the hon. Gentleman will find favour with.

I do not want to lose the words of the hon. Member for Thirsk and Malton, who said—this is not a direct quote; I hope he will forgive me—that Ministers do not require the good will of the banks to hold them to account. That is important. Finally, he talked about the major banks being so large and complex that it seems impossible to rein them in. He mentioned a solution being a financial services tribunal, so that plaintiffs do not face a cost, win or lose. We have to consider that.

I understand that there is a bit of time left, so if it finds favour with hon. Members I will make a few more comments. I wanted to talk about all these issues, but I will start with the impact of some of the decisions made by the banks on local communities. People in rural areas have been hit by the closure of their banking services. My constituency alone has seen branches close in Inverness, Nairn, Aviemore and Grantown-on-Spey.

I was sent an appeal by the Badenoch and Strathspey Disability Access Panel. Its members felt so strongly that they got together to send their concerns. They wanted to communicate their concerns to Members about the adverse impact of bank closures on rural communities generally, and on the disabled members of those communities. They said:

“Recently the Royal Bank has closed its branches in Aviemore and Grantown, and the Bank of Scotland has closed its branch in Kingussie.”

For those unfamiliar with the geography of my constituency, those are quite disparate communities. Closing the branch in Grantown means that somebody wanting to access RBS services now has a round trip of more than an hour—in good weather—to Inverness to do so. They also say:

“Like the community in general, disabled people are very dissatisfied by the use of Mobile Banks, which offer only limited facilities for a few hours in the week. This causes problems of privacy, queuing (whatever the weather) and security, e.g. sums of money can build up between the visits of the bank and people are rightly worried about the safe keeping of them.”

They are worried about being seen in open queues as they go to mobile banks with piles of cash on them. Cash businesses often have to operate in rural economies. They also say:

“Disabled people have particular worries. The banks claim that Internet banking is a viable alternative, but many disabled people have no access to the internet. Furthermore, they find the option of having to undertake a return journey of between 20 and 30 miles (or more) to visit a proper bank distressing, because it either means depending on someone for transport or trying to use public transport, which is far from frequent in a rural community and which can be challenging to access for a person with a disability.

Finally, the banks have failed in their duty of keeping customers informed. How accessible are the sites chosen for the vans, how accessible is entry into the van, what facilities for the disabled are available in the van, e.g. for deaf or visually impaired people, and how well trained are the staff in dealing with the needs of disabled people? It may be that the banks have made adequate provision, but there has been no attempt to communicate this to disabled customers, who may be deterred from making use of the mobile bank. Incidentally, there has been an occasion when the mobile bank did not appear because of mechanical failure, but there was no system in place for the public to know what was happening.”

They were waiting in the cold for something that would turn up, without communication.

The disability access panel said of one customer that she uses a stick and walking from her house to the bank is a “big undertaking”. No seats are provided for people who are waiting,

“so she had to stand outside, which was difficult. The steps were very high—they did help her up the stairs but she doesn’t think she could do this every week. She asked for bank statements and was told they couldn’t do it…she would have to go to Inverness.”

They could only offer her the balance, just like at an ATM. The panel continues:

“She gave them feedback but they only noted it down on a bit of paper, she didn’t feel they took her complaint seriously.”

All I have had from RBS in response is that it has forwarded some information about the current situation. It is looking for a coach builder; it has not found one yet, but in the short term it is using a system called MyHailo, so customers will have a fob that they can press to get a member of staff from the van to come out. That answers very few of the criticisms that were made.

It is a disgrace that, despite being a 70% shareholder in the bank, the Government have failed to use their influence to represent Scottish communities and reverse devastating branch closures. The public bailed out the Royal Bank of Scotland; it cannot repay communities by simply abandoning them. It is a dereliction of duty that the UK Government did not make stronger representations to RBS about the impact that the closures will have on communities across Scotland and the other nations of the UK as they roll out. RBS branch closures have a devastating impact on Scottish communities, particularly, as I have said, in isolated rural areas. RBS has underestimated how much people rely on traditional in-branch banking services.

[Stephen Kerr]

I wish to support what the hon. Gentleman has just said and add to it. The Royal Bank of Scotland and others who are party to the process of bank branch closures have underestimated the anger that those closures have caused in communities in my constituency and throughout Scotland. That anger towards the Royal Bank of Scotland is not going away. Real reputational and brand damage has been done to what was otherwise a great—a grand—Scottish institution.

[Drew Hendry]

The hon. Gentleman and I normally disagree on just about everything. Very occasionally, we find points of agreement, and it is impossible to disagree on this issue. There is palpable anger. I talked about the comment by the hon. Member for East Lothian about the failure of trust in the bank. That is at grassroots level. It is right inside the communities. How daft is it to have trust in the bank demolished at the very top level and right at the grassroots? It is just crazy behaviour; it is also harmful behaviour. It is clear to me that some people are just looking for a very short-term gain, so I thank the hon. Gentleman for his intervention.

There is more I could say on the rural issue, and there is a lot more that people would say, but I want to get on to the treatment meted out by RBS’s Global Restructuring Group to SMEs in the aftermath of the financial crisis.

[Stephen Kerr]

I think that the hon. Gentleman and I will find that we can agree on a number of things this afternoon, and for that reason alone, this debate is noteworthy. He mentions the short-term gain that the Royal Bank of Scotland feels that it is making through the branch closures, but the amounts of money involved are minuscule in the context of the bank’s operations, and the damage that the closures are causing, if that were to be quantified—I am sure that it would have to be somehow—would be far greater than a few million pounds. The Royal Bank of Scotland must accept that it has a social responsibility that goes beyond mere pounds, shillings and pence.

[Drew Hendry]

This is becoming a habit, but I completely agree with the hon. Gentleman. I have cut my notes a wee bit shorter, but the point I was going to make was exactly that: the sell-off of assets does not make any financial sense in the longer term. If we believe that the vans are going to stay—that requires a stretch of the imagination—they still have to employ people and incur costs. When we hear figures of x million pounds, that sounds like a lot of money to some people, and in some contexts it is a lot of money, but in terms of the scale of the bank, it is a tiny drop in the ocean, so again, I agree with the hon. Gentleman.

As I said, I will turn to the treatment meted out by RBS’s Global Restructuring Group. In the aftermath of the financial crisis, it behaved in a completely unacceptable and disgraceful manner. I concur with hon. Members that it is also a disgrace that the UK authorities have failed to intervene. Following the credit crunch, GRG took control of 16,000 SME customers with £65 billion of assets in Project Dash for Cash. Following allegations of malfeasance, GRG was reportedly disbanded in August 2014. More than 12,000 companies were pushed into the bank’s controversial “turnaround” division; and between 2007 and 2012, the value of loans to customers in GRG increased fivefold to more than £65 billion. With the threat of foreclosure of loans, the banks seized control of customer assets cheaply from businesses that they claimed were failing even though they had not defaulted on any loan repayments.

When we state the situation as simply as that, we wonder how it can be the case, yet as we have heard, time and again it was. We have said this before in the main Chamber and other debates, but it is absolutely shocking that bank managers were able to increase their bonuses by identifying customers who could be squeezed in what RBS itself, in a 2008 email, called “Project Dash for Cash”. The leaked document disclosed that the taxpayers’ bank ran down businesses as part of a premeditated strategy to cut lending and bolster profits. People should be in jail for doing that.

RBS is not alone in being embroiled in this scandal. Several other banks, including Clydesdale, were caught in similar scandals.