Fair Banking: a bit of an oxymoron
Figuring out how our banking system became so perverted is probably fruitless. Banking is essentially simple – but bankers have done everything they can to make it complicated. In the process of making themselves stacks they’ve forgotten their original purpose: to help businesses grow. Gary Mead looks at one effort to bring fairness back to banking.
You never know who you might bump into at the annual Social Stock Exchange investor conference. Maybe I’m a very ignorant person, but until I was introduced to Heather Buchanan last week I’d never heard of the “All Party Parliamentary Group on Fair Business Banking”. Not the snappiest of titles; let’s abbreviate it for our purposes to APPG/FBB.
What it disguises beneath the title, however, is a promised revolution. If it happens, we’ll all be better off – not by having more money in our pockets, but by being more confident that what money we do have will be better protected when it comes to doing business with banks.
You might say ‘we’ve been here before’ – and you would be right. I sat in the lecture given by Sir Richard Lambert when he launched the UK’s ‘Banking Standards Council’ in early 2014. Lord McFall said that on that occasion the Commission which led to establishing Lambert’s Council “found a culture which was rotten and standards which are intolerably low.” Lambert posed a rhetorical question that day: “what would success for this new outfit look like?” He answered: “In five to ten years’ time, success would perhaps be a world in which public trust in the banking system had begun to shift in a more hopeful way…You have to have credibility before you can start exercising discipline.”
That seemed to me then, and still does today, to be precisely the wrong way round. Until discipline is imposed on bankers (whether from within or without) they will never have credibility. The scandals have just kept piling up. It’s been almost three years since Lambert wagged his finger at bankers’ ‘rotten culture’ – a euphemism that covers everything from money-laundering to deliberate lending money to people who bankers knew would never be able to pay it back – yet at the start of this month we saw six people, including some HBOS bankers, sentenced to prison terms for defrauding customers. The headlines about the case typically called them ‘rogue’ bankers; for me, ‘rogue’ usually suggests abnormal activity. Right now we have no idea if the HBOS scoundrels were indeed ‘rogue’, or just had the bad luck to get caught. Credibility in banking seems right now like the expanding universe – zooming ever further out.
But there is hope. Enter APPG/FBB. Chaired by George Kerevan MP, the group’s vice chairs are Steve Baker MP, Michelle Thomson MP, Mark Williams MP, Calum Kerr MP, Helen Goodman MP and Jonathan Edwards MP. I spoke to Heather, Director of Policy and Strategy, after the conference to find out more.
The APPG/FBB started out in 2012 and was then focused on the issues raised by the banks’ involvement in interest rate swap mis-selling; for anyone with the stamina to read more on this, a good starting point is here. “During the course of that it became evident that there are a lot more systemic issues with business banking,” says Buchanan. An SNP MP, George Kerevan, an economist by training and who sits on the Treasury Select Committee, now chairs the APPG/FBB. “We now have 135 members, MPs and Peers, with good cross-party representation,” adds Buchanan.
For the APPG, the “game-changers” that will help combat systemic risk in business banking include the formulation of a standardised contract for lending to business, with perhaps a [BSI] ‘kite-mark’ attached to it, so that “it’s known to be fair and transparent.” According to Buchanan: “Right now it’s almost impossible for most businesses not to be in breach of their banking covenants at some point during the lifetime of a loan. Even if they go into the contract with a regulated entity, the banks more and more are selling off commercial debt they don’t want, to clean up their balance sheets. So these contracts can often end up in unregulated entities. You have a situation where a small business person has entered into a contract in good faith with a high street lender, and find their debt has been sold onto an unregulated lender, are stuck with all kinds of onerous terms and conditions, being owned by an off-shore ‘vulture’ fund.” A ‘vulture’ fund is aptly named; hanging around for easy pickings.
I studied law and for me, a contract is a contract. But here’s the rub. A contract is only as good as the money you can throw at it to enforce it. You can spend years fighting what you think is your contractual entitlement – only to lose everything you own if the other side has a stack of money bigger than yours and simply stays the course longer than you can.
“You get to a point,” says Buchanan, “where someone who owns a small hotel in Wales with 14 employees is considered the contractual equal by the courts as the counterparty. They are considered to have the same resources, knowledge, and capability as say Lloyds, or RBS, HSBC, which is nonsense. But that’s the legal reality. That’s why we are pushing for change in this area, so that if these small business contracts do get sold on, at least the business will be less open to abuse. Bear in mind there is no ‘good faith’ or ‘duty of care’ terms in these contracts, it’s all caveat emptor. We think there’s a massive disconnect between the rhetoric regarding all these banking products – all the talk about ‘relationship banking’ – and the contractual reality of what you are actually undertaking.”
Another area being tackled by the APPG/FBB is dispute resolution. At the moment any dissastisfied customer of a bank is required to go through the bank’s own internal complaints’ procedures. The reality is that the bank is only required to resolve the dispute within a certain time, to close the file, even if that merely means they come back and say ‘we don’t think you have a complaint’.
The next step in a complaint is to go to the Financial Ombudsman. But their compensation pay-out limit is only £150,000, which sounds a lot but is small beer for a business. And, as Buchanan points out, the Ombudsman’s rules about who can seek their help eliminates 3.7% of businesses, “which represents 67% of employment and 82% of the turnover in the private sector.” That’s a huge chunk of people and business outside the Ombudsman’s jurisdiction. Often, the only recourse for those businesses that have a complaint against a bank is to go to court.
Good luck with that. Banks can simply shrug off complaints, fully aware that the costs of legal action for most businesses – never mind the emotional strain – are simply too great to bear. With their vast resources and teams of lawyers, banks can play the waiting game, hoping that people taking action against them in court will just give up, have a nervous breakdown, or simply die.
“We need a two-stage process in this,” says Buchanan. “Contracts need to clearly set out how disputes will be resolved, with binding mediation. And we need to have a financial tribunal system. Ad hoc compensation schemes by the Financial Conduct Authority [FCA] are ‘after the horse has bolted’. The FCA can only really act after they see systemic risk. By the time that happens there’s blood on the streets. We need to prevent such risk before it gets to that.”
There’s much more than this that the APPG/FBB is getting its teeth into, not least dealing with insolvency, the laws around which currently work to demolish trust and – whether intended or not – wreak havoc on individual lives. You really need to have a look at the APPG/FBB’s website.
If we are going to get to a point where the UK’s banking culture really has changed for the better, it can’t be left to a hope that bankers will ‘do the right thing’. That’s proved to be a vain hope. And we really don’t need any more grandstanding speeches. Instead we need to understand the reality of how the structural nature of the current legalities surrounding banking and business operate – and to give the AAPG/FBB all the support we can, so that the rules change to ensure that everyone in this game of borrowing money from the big regulated lenders is treated equally.