Small firms face 'regulatory black hole' for bank lending

Some small businesses have been treated very badly by banks and action is needed to prevent it happening again.

That's the conclusion of a parliamentary inquiry that was set up in the wake of scandals over how Royal Bank of Scotland (RBS) and HBOS treated their small-business customers.

In the summer, the Financial Conduct Authority (FCA) said it lacked the powers to take action against RBS despite the “widespread inappropriate treatment” of up to 12,000 small firms by the bank’s Global Restructuring Group (GRG) between 2008 and 2013. The bank was accused of exploiting small businesses after the financial crisis by pushing them into restructuring and then profiting from buying their assets.

At HBOS, a multimillion-pound fraud involved small businesses being given inappropriate loans and charged high consultancy fees. Six individuals were jailed over the “utterly corrupt scheme” that the judge said left hundreds of small business owners “cheated, defeated and penniless”.

Highlighting the impact of the RBS scandal, the Treasury Committee's Report on SME Finance argued that commercial lending should be regulated as the current regime leaves many small firms without adequate protection against unfair treatment.

The justification for not regulating lending to small and medium-sized enterprises (SMEs) – for example, to encourage innovation and that SMEs can fend for themselves – is "feeble", the committee claimed.

"Many small business owners are no more financially sophisticated than everyday consumers, so to deprive them of regulatory protection is wrong," it said. "In addition, the personal and business finances of many SME owners are often closely intertwined, increasing the potential for personal catastrophe due to SME banking misconduct."

Commenting on the report, Treasury Committee chair Nicky Morgan MP said: "A regulatory black hole for commercial lending to SMEs has led to numerous cases of poor treatment of many small businesses, including the scandalous events at RBS’ GRG.

"The Treasury should bring commercial lending inside the regulatory perimeter, allowing the introduction of a regulatory regime that adequately protects SMEs."

The FCA confirmed in October that access to the Financial Ombudsman Service will be extended to more SMEs. To handle more complex disputes, the Treasury Committee called for a Financial Services Tribunal to be established.

"This will provide the UK’s small businesses with access to justice and reassurance that they are not vulnerable to exploitation and mistreatment," Morgan said.

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