Oral evidence: SME Lending, HC 1008Tuesday 29 April 2014

Oral evidence, 29 April 2014.

Witnesses

Laurence Beere, Managing Director, L&H Hotels Limited, Tim Murphy, Director, Seneca Banking Consultants, and Jeremy Roe, Founder, Bully Banks, gave evidence.

Chair

Thank you very much for coming to give evidence this morning, and particularly so because of the strike. We are reasonably pressed for time because there are Treasury questions to the Chancellor in the House today. Could I begin by asking you, Mr Roe, we have had quite a number of submissions that businesses took out loans with embedded interest rate hedging products because they trusted their bank to give them the product that they needed. Do you think that is typical among SMEs, that they have trusted banks and ended up in products that have not been appropriate for them?

Jeremy Roe

It is certainly typical, particularly of those individuals who have been involved in interest rate hedging products proper or embedded swaps, because all of them have been asset rich, and by and large that means that they are of a certain age. That generation believed that the banks were a trustworthy partner and had confidence in their banks. In practice, that confidence has proven to be sadly misplaced.

Chair

Do you want to add anything to that, Mr Beere?

Laurence Beere

I think what Jeremy said sums up exactly how I felt. I was in a situation in the latter part of 2008 where my loan structure was with HBOS. HBOS was a bank that was becoming non-co-operative. We had commercial day-to-day facilities with HSBC and HSBC were wanting to withdraw those facilities. We met Clydesdale, who had a local relationship manager, and he spent a lot of time with me looking over my business plan for about four months and understanding my business, so I genuinely felt that here was a bank that was working in Bath, that was looking at us and understood what we were doing. I had a regular dialogue with him, so I felt a great deal of trust in that bank. I would not say that I trust him at all any more.

Chair

Is there anything you want to add to this particular question, Mr Murphy?

Tim Murphy

I think pre-2008, banks actively marketed themselves as a trusted adviser and tried to build that strength of relationship with clients to retain the client, so that was an active approach that they adopted to retain clients. For this size of clients, SMEs, they could not necessarily afford access to third-party professionals, so they were open to that relationship and that approach.

Chair

Okay. Do you think that we can restore trust through better-quality handling of this type of business by banks or do you think this can only be cured by competition or both? Perhaps I will start with Mr Roe and then move again to the other two.

Jeremy Roe

The first thing that has to happen is that banks themselves have to change their conduct and have to change their attitude in the process where they lend to small and medium-size businesses. I do not believe that has happened yet to any meaningful extent and I do not think our members believe that it has happened yet to any meaningful extent. The issue is that the banks have to change the way in that they conduct themselves and then it is up to various parties to ensure that their conduct is proper going forward.

Chair

Including the regulators.

Jeremy Roe

Absolutely. It is up to the regulators, all of the regulators. They each have a role to play, and truly, looking back over this whole scenario, I do not think any of the regulators have covered themselves in glory. Hopefully there is a change there, a sea change, and they are starting to recognise that they do need to monitor the banks much more effectively and perhaps be a little bit more assertive in the way that they regulate, but there is also a role for Government and there is a role for the professions within the country. The banks are Goliaths. They are on our high streets. They are out of all proportion, all scale to the parties with whom they do most of their business, and there has to be effective control over them.

Chair

Mr Beere? Then I will ask Mr Murphy, who has particular experience with one of the Goliaths, to comment.

Laurence Beere

I think if you are looking at me as just as an example representative, I am a small business person—I own a small hotel—like thousands of other people. I started out in business 11 years ago, where I had a relationship where I looked forward to having a conversation with my bank and I trusted the advice that they gave me, because I felt that they were a partner that was interested in the long-term success of my business. I think that there has been clear deceit on their part, particularly with Clydesdale in terms of what was said to me and then what was delivered. I think the only way you are going to change that is to put greater control around the bank and how they sell their products to SMEs. The information that we were given was sorely lacking and I can sum that up simply by saying if in the process of completing our loan they had turned around and said to me, “Do you understand that on day one, you will have a breakage cost in excess of £1 million relative to this £3.9 million loan?” do you honestly think that I would have said, “That is perfectly acceptable”? For the bank to say, “Well, we told you there were breakage costs, so you should have understood” that is to me where trust breaks down. The bank understood what it was selling and it relied upon the fact that I did not.

Chair

Is what we have just heard endemic or an exception, Mr Murphy?

Tim Murphy

In terms of bank behaviours?

Chair

Cases like that.

Tim Murphy

Unfortunately, there are a lot of those cases. It was a particular point in time when that behaviour was happening, but yes, those events do happen.

Chair

Yes, but my question is not do they occasionally happen, but do we have an endemic problem here?

Tim Murphy

I think it is changing. I think bank behaviours have changed. There was a lot of pressure on the banks to cross-sell products, which created a certain type of behaviour. It became more of a sales culture than a credit culture and a lending relationship culture. That was one of the key changes in banking through the 2000s, and that is what is behind a lot of the issues that we have now.

Chair

So you are suggesting this is a recent phenomenon that developed in the last decade and that has been flushed out as a consequence of the crash and that we are now putting right?

Tim Murphy

Putting right, not yet. I think Williams & Glyn’s coming out of RBS will be a step in the right direction, because that creates more competition. I think we need to keep the Co-op alive and healthy, because again that creates more competition.

Chair

That could be quite an undertaking, but do carry on with your list of proposals.

Tim Murphy

Yes, but the cost of not doing it could be a lot more expensive, because we will back here in 20 years’ time if we are not careful to put some fundamental changes into the market. I think FOS is just not fit for purpose for SMEs. We contacted FOS yesterday and asked them, “How long will it take to get a reply?” and they said they are just picking up files that were submitted to them in June, so they have a 10-month backlog on SMEs and they are only microbusinesses anyway. An SME that is north of €2 million turnover, it has nowhere to go, apart from internal complaints. There is no third party appeal.

Chair

Did you say that the first-line response from the Financial Ombudsman Service will be, “We have a nine-month lag?” Is that what I heard?

Tim Murphy

10 months.

Chair

A 10-month lag.

Tim Murphy

We phoned them yesterday, one of my colleagues, and the answer was he was picking up files from June 2013. That service is just not fit for purpose for the SMEs.

Chair

There are several points there. The core remedy is not working, but the market itself is highly dysfunctional if this kind of behaviour is persisting despite the fact that we understand—you want to add something, Mr Roe?

Jeremy Roe

I do. I disagree quite strongly with Tim. I do not believe the banks have changed their behaviour. I do not believe the banks have changed their attitude.

Chair

They are still in the sales culture rather than the credit culture, as Mr Murphy put it?

Jeremy Roe

Yes, and I think a change of culture begins with a wholehearted acceptance of responsibility and that has not happened.

John Thurso

Can I come to you first, Laurence? By the way, Chairman, I should perhaps say that Laurence and I share a qualification. We are both Master Innholders. Nice to see you.

Laurence Beere

Thank you.

John Thurso

What I am interested in trying to work out is whether the cases like yours are instances of bad luck and timing or deliberate or perhaps even accidental mis-selling by the banks. Can I ask you, when you went through the process with the trusted bank manager who you thought was going to be helping you and advising you, how was the facility referred to? Was there, at any time in the dialogue, reference to embedded swaps or hedges, things of that nature?

Laurence Beere

I would start by saying I think there was deliberate intent to sell what was best suited to the bank. I think the gentleman that I worked with, Ian Harris, was very positive and took a lot of time to understand the business, write up his report and put it to credit and so on. It was the final process of how we moved into a fixed rate that gives me the greatest cause for concern. I had always taken a relatively conservative approach to how we run our business. We do not have large financial resources. We had taken on a high level of debt and so what I wanted to create was effectively a mortgage payment. I wanted to know at the end of every month what I was going to be obligated to pay and then build my business model around it and ensure that I could meet that obligation. We said we had taken fixed rates before and we were interested to take a fixed rate. What happened was we were then told, “Well, when we move into a fixed rate, that is a specialist service and we will need to introduce you to our treasury department to do that”. We had a telephone—

John Thurso

But the terminology was always “fixed rate”?

Laurence Beere

Yes. I know, notionally, in my head, you are paying a higher interest rate for accepting it is a permanent amount of money. It is not explained—the methodology by which that is done and the complex nature of what you are entering into. They make it very simple and very straightforward. When I spoke to Graeme Batstone, who was the gentleman at treasury, he basically presented me with three options, saying there was a 10-year rate, a 15-year rate and a 21-year rate, and the difference on the margin on those three rates was 10 basis points. It was nominal. His advice, and it was advice, was, “You should take the 21-year rate because interest rates at half of 1% at this point in time. This will protect your business from rate rises. It is the best thing to do”.

John Thurso

Just to get this straight, you have a facility for how long?

Laurence Beere

We took a—

John Thurso

You still have the facility?

Laurence Beere

We still have the facility. We are still in business, but we have 16 years left to run on the original term of that loan.

John Thurso

If interest rates do go up then for a large part of that loan that will have proved to have been a good decision.

Laurence Beere

Yes, it would. The problem comes when your relationship breaks down with your bank and your bank then starts putting pressure upon you. When I originally met with Ian Harris it was, “We know we are in this, as your partner, for the long term; for good and for bad. We understand that.” That relationship fundamentally changed when NAB decided to exit the UK market and put Clydesdale up for sale. The Bath office was closed and so on. We now no longer have a positive relationship with the bank. The relationship got so bad as to be moved over to their specialist banking services because they felt that there was concern over our ability to meet cash flow requirements. We have lived under that structure—we were transferred to them with 48 hours’ notice before the VAT—

John Thurso

What you did could have been construed as a good business decision if you were having a constructive relationship with that bank for the next 16 years. The core of the problem, if I have it right, is that you have been sold something that linked you irrevocably to their fortunes and the only way of doing something about it is for you to pay 30% of the loan in a penalty charge. That is basically the problem.

Laurence Beere

That is basically it and at no point we were given an understanding that that was the risk that we were taking on in that structure.

John Thurso

The critical point is that while the arrangement was a perfectly sensible one and could look good, all the fine print that makes it something you would not touch with a bargepole was simply not explained to you.

Laurence Beere

That is my point.

John Thurso

Can I come to Jeremy Roe? Through both Bully Banks and the NAB Support Group this will be a story you are very familiar with, is it not?

Jeremy Roe

Yes.

John Thurso

Is the tale that Laurence is telling one that you see consistently across all the other complainants?

Jeremy Roe

Every case is individual and is specific, but in broad terms yes. We have done a survey of our membership and, of those with hidden swaps, 68% of those loans were put in place to replace variable rate facilities. The individuals had borrowings and a decision was taken to change to a fixed rate. In 77% of those cases the banks were warning individuals that interest rates were going to move higher. In 89% of those cases it was the bank’s idea to fixed rates. In 84% of the cases the banks pressurised the businesses to fix rates. In 97% of the cases the customers were unaware of the commission structure. In 96% they were unaware of the breakage costs that they were entering into. There is a consistent pattern of the banks promoting at best, pressuring at worst, businesses to enter into fixed rate commitments without properly explaining the financial implications of the break costs.

John Thurso

This would fulfil the classic definition of mis-selling?

Jeremy Roe

In my view it does.

John Thurso

Absolutely. Does it surprise you, therefore, that the Treasury and the Government seem decidedly uninterested in the idea and the FCA does not want to have anything to do with it?

Jeremy Roe

I find it extraordinary. We are in a situation where two years ago Bully Banks raised an issue about the sale of a specific product, interest rate hedging products. That was dismissed. We pressurised. We campaigned. We have now a situation in which over 10,000 businesses have had results from the banks’ determinations and over 80% of those were found to have been substantially mis-sold. We are in a rerun. We now have another product that is on the table. We learnt earlier this month that there are some 70,000 of those products that have been sold0—70,000 people have these products and we are saying a number of members are saying that they have been mis-sold. Why on earth would the regulator not investigate that? Why on earth would the Treasury not demand that the regulator investigate it? It is an issue of profound economic and social importance. You have a series of institutions who, it is alleged, have mis-sold this product. We are standing here and saying that two years ago we said the same thing about interest rate hedging products. Our claims were modest and have been wholly substantiated. We are repeating the same issue now. There is a problem in the way in which these products were sold. Many thousands of small businesses have these products. We do not know how many of them have been mis-sold but it is probable that a large number have been mis-sold. Therefore, the regulator should investigate the sale of those products.

Chair

When I raised these issues informally some 18 months ago, I was given what appeared to be wholly misplaced assurances that these problems were either exaggerated or non-existent. What you have said is consistent with my own anecdotal experience. Before passing the questioning on to Stewart Hosie, Mr Murphy, is there anything you would like to add about how we tackle and address these problems? You have had experience on the other side of the counter. You can now offer us suggestions on what to do about it.

Tim Murphy

On the TBLs, I think, with a standalone bank facility letter, it is difficult for a non-financially-aware person to understand all the nuances of that facility letter and it is skewed towards the bank. It is in the bank’s favour. There are clauses in those facility letters that are standard clauses that the bank can use to put the facility into default and then drag them through the recovery teams. You have that issue with the facility letter on its own, as a standalone document, but if the likes of Yorkshire Bank then embed in that a treasury document, it almost makes the thing completely unintelligible. It looks at them as two isolated situations. You have your swap and a loan and then you have the TBL as two separate companies, two separate products. You would say the SME has more chance of understanding the swap and the loan as a standalone product than it has of ever understanding that TBL with an embedded swap. If you sit down and read one, and I have read a few of them—

Chair

So have I.

Tim Murphy

—and I am experienced in the documents, they are very difficult—

Chair

Unintelligible.

Tim Murphy

They are unintelligible. It is completely lost in the small print what these people were signing up to. To keep them out of any form of redress scheme is just completely wrong and for the FCA to hide behind legal loopholes around what a contract for difference is, then it is just wrong.

Chair

We are getting very clear advice.

Jeremy Roe

Could I pick up—

Chair

It will have to be very quick because I have four more colleagues who want to come in and we have to get on to the floor of the House this morning.

Jeremy Roe

If I could just pick up on the point about legal loopholes, there is an issue about whether the hidden swaps are regulated products. It has to be investigated. I believe there is a very good argument that says they are regulated products. What I found extraordinary is we had Clive Anderson of the FCA say to the APG the other day that they have not taken external advice upon whether these are regulated products or not. The regulator should take that advice and should publish it so that people can debate the advice sensibly.

Chair

You are giving clear evidence. It is extremely helpful.

Stewart Hosie

I will come back to that last point in just a moment. Before I do that, the FCA has said that, from a customer perspective, the embedded IRHP products have similar features to standalone ones. What difference is there between the standalone interest rate hedging products compared to the embedded ones? In practical terms for the customer what is the difference?

Jeremy Roe

In practical terms there is not a lot of difference. You get a double payment structure within a swap, so what is happening to you is very visible and I think that is one of the issues in a hidden swap; there is a single payment. It is a flat payment and people do not understand what is happening. I suppose the big difference is the swap and the associated loan are two distinct products. With the hidden swap, you have a loan and then, within it, you have a breakage mechanism and it is the breakage mechanism that is the swap element. Most people do not experience that until they terminate or attempt to terminate their loan. That is the derivative part of the transaction. That is what makes the transaction a regulated product in my view.

Stewart Hosie

Which makes the embedded product, the TBL, more opaque, if I understand you.

Jeremy Roe

In some ways, yes.

Stewart Hosie

Was there a difference to anyone’s experience in the way these products were sold or were they sold on fundamentally the same basis?

Jeremy Roe

The big difference is that with the swaps there was a treasury adviser in every case. Looking at the survey data we have, I would say that the pressure from the bank manager was the same and the representations made about interest rate movements was the same. The encouragement to enter into the transaction because the bank personnel were heavily rewarded was the same. What was different is that in the swaps they were always referred to a treasury person, usually as an adviser, “I can’t deal with this, I have to refer you to someone in the bank who can advise you”; where, with the hidden swaps, the relationship manager plays a far greater part and often there was not a treasury person involved. Again, I think that raises issues about the legality of the actions of the relationship managers. If these products are regulated products there is a problem.

Stewart Hosie

Just to move that on a little further then, what is the difference in terms of end result for the customer? We understand the practical difference. We understand there was unlikely to be a difference in the way it was sold, other than the inclusion of a treasury person, but what was the end-result difference for the customer? If there was a breakage, for example, would there have been an additional penalty with the embedded swap as opposed to a standalone one or would the end result have been the same?

Jeremy Roe

No, in a breakage situation it is the same result.

Stewart Hosie

Now, to come back to the point you were making before about whether or not these are regulated. The FCA have written to the Treasury noting they did not have sufficient powers to look at these embedded IRHPs. You think they do have the powers, that they are regulated, and, certainly from a commonsense point of view, if there is a mis-selling, whether it is as standalone product or an embedded one, surely the mis-selling itself is what they are investigating. Where do you think we are with this and if the FCA do not have the power, if they are not regulated, I presume you would argue that Treasury should give them that power.

Jeremy Roe

The Treasury should give a person that power. There needs to be an investigation. This is a problem or a potential problem. There are allegations that are very serious. For goodness’ sake, the Government have to get in and investigate the issue. Frankly, who does it is secondary to that but, logically, it should be the FCA. Our response to the FCA’s statement that it is not within their jurisdiction is very simple. There is a lot of literature from the FCA about how they have moved to principle-based regulation and that deals with issues about the conduct of the banks. We are saying, “Two years ago we came and said there was a problem about the conduct of the banks and we have demonstrably been proven right. Over 80% of the people have had their product effectively torn up.” We are saying, “Again there is an issue about the conduct of the banks. If you have a principle-based regulation system the conduct of the banks, the propriety of that conduct, is something that you have authority to investigate so do so.” Then you move to a technical argument where the FCA—we know they have professed to be a principle-based regulator—are taking a technical issue and saying, “No, this prevents us dealing with this matter.” I think there is a very good argument for saying that the technical argument they are making is defective, but it is not up to a small business and the half a dozen lawyers I have spoken to. It is up to the regulator to ensure that that argument is effective. Get an opinion from a topflight silk, publish it and everybody can understand what they are saying. When I go through the Financial Services and Markets Act 2000, the Regulated Activities Order and the Markets and Financial Instruments Directive I think there is a very good argument for saying these are regulated products, but I am not the one to determine it. Someone appropriately qualified is.

Stewart Hosie

Very briefly, because others have questions, why do you think the FCA are taking this approach?

Jeremy Roe

Why do I think the FCA needed to be pushed into reviewing—

Stewart Hosie

No. Why do you think they have not jumped into this and investigated it?

Jeremy Roe

In our submission Bully Banks refers to the DNA of the regulator. We think that is an issue. In our experience the FSA/the FCA approach an issue with a very friendly attitude towards the banks. Their DNA, their natural approach, is that the banks are responsible, sober, contributing citizens.

Chair

I have to say it is not what the regulators here tell us and, of course, it is particularly not what the banks tell us about the conduct of the regulators.

Jeremy Roe

It is what we see.

Chair

It is a fascinating triangle in which each party sees the other two in a completely different light.

Jeremy Roe

It is a very strange but a very simple issue which is indisputable. When the FSA announced their scheme they put in place a concept that you would get 8% simple interest if your product was cancelled and you were refunded money. You would separately receive consequential loss. We have Barclays Bank insisting that that 8% covers consequential loss and effectively pressurising people to whom they mis-sold a product to accept it. The regulator stands back and allows that to happen. That is wholly wrong. The regulator does not have the approach to regulation that the banks’ conduct requires.

Chair

Well, we are not going to form judgments on all this right now, but I am sure the Committee is taking note of what you are saying. We must give other witnesses an opportunity to chip in and with that in mind, and I am sure he does have it in mind, I pass you to Brooks.

Mr Newmark

Yes. I am highly sympathetic to what the friends of Bully Banks have certainly gone through and, notwithstanding the point highlighted by the Chairman, the vast majority of people out there probably have not been abused, but that does not negate the point that there is a significant minority of people that have faced abuse, whether it is swaps or invoice discounting and so on, and something does need to be done about this. Now turning to you, Mr Roe, a survey by Bully Banks suggested that the average fees charged due to entering a special situation division such as GRG was £327,000 per business. This does not sound like chopped liver to me. It is a big number. Does this match your experience from cases presented to your firm?

Jeremy Roe

We have complained about the conduct of the special management groups within each of the banks. RBS and GRG have been a particular focus of attention. We have had 177 of our members reply to a survey, which is still in draft—still in process. We have found that there is an average charge to these businesses—and some of them are quite modest businesses, so the average is very important—of £345,000. These are businesses who are in financial distress, according to the bank. They are moved into a specialist management function, the principal consequence of which is that the bank charges very significantly more fees, more costs.

Mr Newmark

Why do you think these fees are so high? It seems to be a pattern here.

Jeremy Roe

I believe that the special situation groups have become a profit centre of the banks and, as a result of that, they take the opportunities they have to make profit and they do that by imposing charges on businesses. We have businesses who have as many as eight different levels of charge that have been imposed upon them.

Mr Newmark

You note that business reviews that SMEs are often forced to pay up for in special situation divisions are often not even made available to the business. Can you give an example of that?

Jeremy Roe

Yes. Again, it is something like 40% of the businesses that have access to the reports for which they are charged. Again, this is RBS/GRG specific. I should say we are going out to the other banks as well and investigating their conduct, but with RBS/GRG we have the results in draft form. The majority of businesses, in other words, do not see the reports that they pay for.

Mr Newmark

Just moving on because I have a lot of questions here, unfortunately. To what extent do the high fees charged in the special situation division contribute to the business ultimately collapsing?

Jeremy Roe

A tremendous contribution. In our survey the GRG’s annual charges were over 10% of the turnover of the business in 32% of cases. They were over 40% of net profit in 38% of cases. In 20% of cases GRG charges accounted for 100% of or more than net profits. These charges are a very substantial burden on a business that has been moved into what is laughingly called a support function because they have financial issues.

Mr Newmark

God, I do not have enough time.

Chair

No, I am glancing at it, Brooks. Keep going for a bit.

Mr Newmark

It is a philosophical question. Why do you think it is that banks, which are in the business of helping businesses because keeping a business alive should be a long-term proposition because they can earn fees over 10 or 20 years—why do you think we have come to this situation in which at least the perception is there according to evidence from you guys and others that the culture changed, where it is easier to make a quick buck by pushing a business into distress and ultimately forcing it to collapse?

Jeremy Roe

It is improper incentivisation. If you incentivise this group on the basis that they have to get maximum fees out of the fees for which they are responsible that is what they will do, but that should not be the proper incentivisation of individuals within the bank. Of course the bank should look at incentivising its staff so that they nurture, they nourish, they assist businesses to develop.

Chair

A very interesting point that the Banking Commission went into in some depth. Sorry, Brooks.

Mr Newmark

A submission to the commission from the legal firm Bird noted that broad wording of covenants and contractual provisions have allowed RBS to “find fault where none on a commonsense analysis exists.” Do you agree with this assessment?

Jeremy Roe

In certain cases the answer is yes. Statistics are wonderful. The data is out there. 47% of our survey individuals were not told that they were being transferred to GRG. 90% were not in default prior to the transfer to GRG. 33% were never told of the reasons for the move to GRG. Each one of those statements I find extraordinary.

Chair

We are going to have to move on. One last question. We have couple more colleagues to get in.

Mr Newmark

Of the cases you have seen where businesses are unhappy about their treatment after being placed in a special situation division, how many are from GRG and how many are from the rest and do you think this is a reflection of RBS’s—I am assuming it is the majority.

Jeremy Roe

We have focused on GRG/RBS because of certain events required us to focus upon them. I think they are likely to have been worse than the others, but the conducts complained of are complained of by customers of all of the banks and I believe that you will find, when we do surveys of each of the other banks, data that is broadly similar.

Mr Newmark

It just happens to be because RBS is particularly big that you are seeing more from RBS, but is it a consistent theme throughout the industry?

Jeremy Roe

It is also the Lawrence Tomlinson report, the independent person who has been appointed by the FCA. That has prompted a focus on RBS/GRG and we are reflecting the results of our efforts to respond to that focus.

Chair

Before passing the questioning on to George Mudie, I am going to ask Mr Beere and Mr Murphy if you have anything you want to add to what you have just been hearing. You are not obliged to, but anything you do say will be taken down in evidence.

Laurence Beere

Again, I talk around my own business, so take of it what you will. In answer to the point about a reason behind why the banks behave in the way they do, I know from conversations I had with my bank the conditions of banking were one of the things that changed. When we took our loan of £3.9 million, it was pre-Basel III. What happened, as far as I understand it, is the bank has lent £3.9 million, then there is then a European banking directive that says, “Now you have to assess that loan in this risk-weighted sector and we now need you to put additional capital into your balance sheet.” The problem for my business is then the bank sits there and goes, “Well, the ROI on £3.9 million was X but now it is £6.9 million and this loan is underwater.” The relationship with your bank has fundamentally changed, not through fault of your own and not necessarily through fault of the bank. The simple truth is they now look at my loan as something that costs them and it is of greater value—

Chair

It is the fault of the bank for having got their balance sheet so weak.

Mr Newmark

If I can say, that sounds like a financial form of Stockholm syndrome.

Jeremy Roe

You should not be making excuses for the bank’s behaviour, seriously.

Chair

But, anyway, we have the point. Mr Murphy.

Tim Murphy

On the TBL point and the rights and wrongs of the FCA’s approach to it, I think the bottom line is that no regulatory authority is looking at TBLs currently on behalf of the consumer. That is what needs addressing. It has been lost between organisations and people keep talking about it. This has been going on for two years and nothing is happening with it. The only recourse for those people with a TBL is to go via a lawyer and incur very expensive legal fees. That cannot be right.

Chair

We are taking a look at it right now.

Tim Murphy

On GRG and costs of underperforming assets, that is a topic all on its own. I do not recognise the numbers.

Chair

We should not have to play this long-stop role, but it does seem to have become part of what the Treasury Committee does these days.

Mr Mudie

Since we started this inquiry, I have been just totally puzzled by the phrase “commercial lending is not covered by the regulator”. Mr Murphy, Bird, who are a reputable specialist firm, in the evidence they have given us quote at least 10 themes where the banks are deliberately screwing small businesses. Finishing them off, interfering with their contacts, manoeuvring them, engineering defaults, pretending to comfort them but, by comforting them, they change and finish them off, overdrafts into loans with fees and so on—all designed to finish them off and they pull the money back. Why is that not a straightforward matter for the Financial Conduct Authority if they are living up to their names and the banks’ conduct is within their remit? How do they come with this magic “commercial lending is not dealt with by the regulator”? They are the Financial Conduct Authority. All those things might be legally challengeable if you wish, and that is what some of the companies are told to do, incredibly, small business, but it is morally and economically quite disgraceful conduct by the banks. They are happening bank after bank after bank. Tell me why these complaints are not immediately taken by the Financial Conduct Authority and investigated and, if it needs legislation for the Financial Conduct Authority, demand legislation from us? It is disgraceful. We are having good, hardworking people—and we need to be hardworking people—coming here and saying their businesses are sterilised, controlled or wiped out because of disgraceful behaviour by banks. I have seen it first-hand.

Tim Murphy

I agree and we regularly ask the FCA and challenge the FCA on their role in this and they regularly just bat it back. Where a lot of companies have been caught out is when a bank has taken a negative-sector view, whether it be hotels or property or whatever that may be, and then they have picked up the facility letter and they have used that facility letter to exit businesses from the bank because they are not in a sector that they like. That is fundamentally wrong and this is where the behaviours cross the line and they do start using subjective clauses in facility letters, which the FCA should remove. You have either breached the financial covenants in a facility letter or you have entered administration. All these weasely words around “material adverse change” and “dropping of values in businesses” should be stripped out of facility letters. I am doing a deal at the minute, because I am on both sides of the fence, and we are borrowing off NatWest. We are supposed to be completing this deal this week and their argument, when we are trying to get these clauses changed and we have only recently had the facility documentation, is, “You have to go back to credit to get that changed.” In other words, “We will go back to credit but you will not hit your Friday completion date.” These weasel words, and we are professionals at this, stay in the facility letter. They have these material adverse change clauses and they are not that material.

Chair

On that point, do you think it is common for banks to take advantage of the knowledge of the completion date in order to change terms or tighten terms as the sand is running out of the hourglass?

Tim Murphy

It was common in interest rate mis-selling undoubtedly. That was a common feature because it came in late. This is the fundamental point. When a bank is bidding for business—and we have three banks lined up, we are comparing terms and trying to get the best deal—you will get term sheets out of the banks and they are quite woolly around key points. The company then narrows down to one bank and it runs into completion. Whether he is buying his property, buying his business, whatever he is doing, re-banking, the final facility letter comes out and the terms in that are different in the sense that the nuances in the legal wording is much more favourable to the bank. That is where you get caught out and then you do not have time to get that changed and the bank turns around and says, “Well, tough. Take it or leave it.”

Mr Mudie

We have gone through this with the consumers, the bank customers. In the last Parliament they came and we had the same sort of tales. The banks were brought in here and the banks were told and the regulators were told and things changed. Now, why are you not demanding the same sort of status as the individual customers have? I will give you an example. I get a mortgage on a £100,000 house. The market goes down. I am in negative equity. I never heard of a bank pulling me in and saying, “The loan to value has changed so therefore,” but it happens with you. Why? And why do you put up with it?

Tim Murphy

If you think of it, it is not logical. If a bank offers a 10 or 20-year property loan, they have taken a 10 or 20-year view on property prices and they know that it goes up and down. To pick a point in the cycle to pull the loan when it has dropped is just completely counter to the actual point of the loan.

Mr Mudie

Exactly and if you know that, Mr Murphy, why on earth are you not screaming at us as legislators to do something about it?

Tim Murphy

I think you give up. The regulators are the FCA, as far as I am concerned, and the regulator does not respond to these things, “It is not my problem.” Where do you go? It there was a FOS/SME entity that was responsible for SMEs, then perhaps that is the proper voice and that is where we need to go.

Mr McFadden

What we have had for the last however long you have been sitting here, three-quarters of an hour or so, is a tale of where you think redress stops or cannot be accessed by banks who have mis-sold these products. I just want to ask you to make some recommendations to us as to how to fill in these gaps. We heard from Mr Roe earlier about what the regulator will do and will not do. The other piece of this you just mentioned, Mr Murphy, is the Financial Ombudsman’s Service. Can you just recommend to us what change you would like to see in the Financial Ombudsman’s Service remit that would allow them to play the role you want?

Tim Murphy

There are two legs to that. I think internally banks need complaints procedures that have teeth and are viewed as independent. That is difficult because they are being paid by the bank.

Mr McFadden

How do you view this Russel Griggs process?

Tim Murphy

I have not looked at it in depth but we have no faith in the internal procedures now. We just do not get anything out of internal bank procedures. They have just disappeared. Then you are into FOS, but FOS is for micro-businesses. My point is that the vast majority of SMEs and businesses have no recourse to an independent external body.

Mr McFadden

What would be the change in the FOS remit you would like to see?

Tim Murphy

I think they are different businesses. Where FOS is now up to €2 million turnover, fine, keep that, but then you have FOS Mark 2 that that goes up to, say, £25 million turnover sterling for an SME—so it tracks SMEs—and that will hopefully keep banks’ internal procedures on their toes. At the minute they know you have nowhere to go.

Mr McFadden

Because they do not fear an appeal to FOS, you think they can just dismiss appeals. Is that what you are saying?

Tim Murphy

Well, you cannot go to FOS. If you are outside €2 million turnover you have nowhere to go.

Mr McFadden

What about the regulator? What would be the change you would want to see in the regulator’s remit? If the regulator is saying, “On one type of interest rate hedging product we have a locus to act but on another, which from the customer’s point of view can look quite similar, we don’t,” what is the change there then?

Tim Murphy

The regulator to me is hiding behind loopholes in what is regulated and unregulated. He just has to get off the fence and act commercially and if it walks like a duck and quacks like a duck it is a duck and he can damn well get on with it and get it in the scheme, instead of just hiding behind words, frankly.

Mr McFadden

As Mr Mudie said, with or without any legislation that might come from this place. Mr Roe, same two questions: what would you like to see from the FOS remit and the regulator’s remit?

Jeremy Roe

I think you have to put in place a holistic system, if I use that terrible word. You start with a bank’s complaint process that is open to assessment and that means publication by each bank of the date about what is happening within its complaint processes. You put that in place to encourage the banks to have an effective complaint process. The next step is you put in place a FOS that has appropriate jurisdiction levels and those need to be substantially increased and the FOS have to also give detailed information not only about their conduct but about the conduct of the banks. One of the problems with anything going through the ombudsman at the moment is the delay that is created by the banks regularly being very dilatory in meeting obligations to disclose documents and make submissions. So you have an effective disclosure. It is all about measurement of performance.

Mr McFadden

What size of business do you think? Mr Murphy mentioned a figure of £25 million annual turnover compared to the €2 million at the moment. Would you think that is the right ballpark or is there a number of employees? How should the FOS draw this line?

Jeremy Roe

I think you would look at the European legislation. You talk about £250 million. You talk about 250 employees. You put in place a jurisdiction that enables small and medium-sized businesses to challenge these goliaths. The banks have immense power. Like all power, it corrupts and it has created a set of relationships that is not equitable, which is not fair, which is not helpful to this country. They damage the economy of this country through those relationships. Put in place a series of processes that give power back to the people, power back to the small businesses, so they can conduct themselves with their banks on a more even scale.

Mr McFadden

From the regulator?

Jeremy Roe

A change in culture from the regulator so that they become much more assertive. Now, they stand back and say, “Our powers are not sufficient”. Right, give them the powers.

Mr McFadden

It is the powers thing that I am focused on. I am looking for a specific from you beyond change in culture. What is it that you would like to see in the regulator revamp that you think is needed?

Jeremy Roe

Well, if they say commercial banking is outside their jurisdiction, for goodness sake put in place a set of provisions that is absolutely clear that if they see misconduct by the banks in any area, it is within their jurisdiction. They are the Financial Conduct Authority. That is what they are supposed to do.

Mr McFadden

Okay, thank you. Mr Beere, the same questions. Shall we start with the FOS? What do you think their remit should be in this?

Laurence Beere

I think all of this comes back to the question you asked me about is there trust between business and banking, and at the moment there is not. What would I want to see from FOS? Imagine how I feel when I sit just above the threshold of €2 million and I have nowhere to go. I do not trust my bank and I do not trust that, at the moment, Government legislators and so on are listening to the needs of the SMEs. It gets highly frustrating when you hear constant rhetoric saying how important SMEs are to the recovery of this economy and then you say, “Well, where is my—”

Mr McFadden

I am giving you an opportunity to make a concrete recommendation to regulators or the FOS remit.

Laurence Beere

As Tim and as Jeremy have said, create a FOS that takes in SMEs.

Mr McFadden

I am not expecting you to write the legislation here, but what ballpark of turnover or employee numbers or—

Laurence Beere

I am not the person to answer that question. I am here representing my own small business, to talk about what happened to me. There are others that have far greater knowledge, but I think it is appropriate to hear that you have a small business saying, “Why am I excluded?” It is wholly unfair that our business is dragged through this situation and we have no source of redress and banks are allowed to get away with it, and they are getting away with it.

Chair

It is extremely valuable evidence that we have heard again this morning from our second panel and we are very grateful to all three of you. What we are hearing is a set of problems that the Treasury Select Committee hoped would at least be partly addressed and we still think can be partly addressed through competition. We put forward a set of proposals to deal with it that way, but we were then hit by or shocked by a series of appalling conduct scandals that have led to the standards commission that was created—the Parliamentary Commission on Banking Standards. What you have described in microcosm is only more of what we heard in the extensive evidence that that commission took. This is unfinished business. There is a heap of work to be done to put banking back together again in a form that can help the small business sector and you have given us some interesting evidence to further the cause to take some action. Thank you very much indeed for coming today. Oral evidence:SME Lending, HC 1008 2