It has taken a decade, but small and medium-sized enterprises (SME) caught up in a scam involving staff at the Reading branch of Halifax Bank of Scotland (HBOS) have finally got some justice. But while fraudsters – including two former HBOS bankers – were last week sent to prison for their role in the scandal, which saw struggling SMEs stripped of their assets, the businesses affected are still waiting to hear what compensation HBOS owner Lloyds Banking Group thinks they should receive.
More broadly, the case shines a light on the frustrations experienced by SMEs that believe they have been unfairly treated by their banks. The HBOS fraud is an extreme example, but SMEs have been hit by a string of banking scandals in recent years, from the manipulation of the forex markets to the mis-selling of interest-rate swaps. The common theme of such scandals is that SMEs have struggled to persuade anyone to listen to their complaints. That’s prevented them seeking redress and has also meant scandals have dragged on when early regulatory intervention could have put a stop to the problem.
There is no independent complaints resolution scheme for SMEs to turn to when the relationship with their bank turns sour. A small handful of “micro-enterprises”– defined by the European Union as businesses with an annual turnover of up to €2m and fewer than ten employees – are covered by the Financial Ombudsman Service, but larger SMEs are on their own. Very often, when confronted by a banking injustice, their only option is court action, which is daunting when the other party is a bank with deep pockets and in-house legal expertise.
Andrew Bailey, the chief executive of the Financial Conduct Authority (FCA), the chief City regulator, acknowledges this is a real problem for SMEs. Bailey said last month that as the FCA is responsible for policing the activities of the banks, it makes sense for it to have more powers to investigate complaints from these institutions’ SME customers as well as from individuals.
That may yet come to pass – the FCA chief says he is in “active discussions” with the government over how to address the issue – but concrete proposals have yet to emerge. One possibility could be an arrangement with the new small-business commissioner, which the government is committed to launching as part of a crackdown on companies that pay SMEs’ bills very late, though here too the detail of the scheme is yet to be finalised. In the meantime, businesses that are poorly treated by the banks must continue to fight their corners individually, lobbying regulators, MPs and even the police to take their cases up – or risking expensive legal action.
What to do if your bank refuses a loan
Access to financing is one area of banking where small firms have made some progress recently, after concerns in the years following the financial crisis that lenders were starving growing businesses of the capital they needed to expand. Since 2011, SMEs that believe they have been wrongly turned down for a loan by their bank have had the right to appeal via an independently monitored process, though the scheme is used relatively infrequently. And from the beginning of this year the nine largest banks in the UK have all signed up to a new initiative that aims to guide SMEs towards alternative sources of funding when the banks themselves feel they can’t help.
Under the bank referral scheme, these banks are now legally obliged to refer those SMEs they refuse to finance to potential alternative providers of finance. Three online platforms – Funding Options, Business Finance Compared and Funding Xchange – now exist to match such businesses with a lender that might be able to help.
The lenders on each platform range from specialists in SME finance, such as niche players in banking and commercial finance providers, all the way down to crowdfunding businesses, which offer small-business finance through the increasingly popular peer-to-peer lending industry. It may be that none of these options prove viable for a firm seeking funds, but the new system is the first time that SMEs rejected for finance by a bank have ever been able to access a centralised database of alternatives.
The appeals service is still running as well. Businesses with turnover of less than £25m that are turned down for finance have 30 days within which to make an appeal against the decision. All major UK banks are part of the scheme. See BetterBusinessFinance.co.uk/appeal for details.