Banking RepoRt

BERG

JunE 2014

SMe Banking: towaRdS a new dyStopia

Debate on the future of the uK economy, banking and business practices has been topical for some time and with the General Election less than a year away this will only become more intense.

A word from Berg founder and senior partner, Reuben Berg

unfortunately, debate can sometimes cloud the real facts and good stories hide inconvenient truths. new media and instant expectation often results in uninformed comment, resulting in significant misperceptions about what is actually happening on the street, in the offices and on the factory floor.

One of the myths that seems to be being perpetuated is that the SME sector is being looked after by the encouragement of banks to provide finance and that businesses are being protected by the FCA and PRA regulators. 

The reality is, in fact, very different for many SMEs who are constantly confronted with obstacles against obtaining finance on reasonable terms and barriers to obtaining redress against a backdrop where the banks have taken unfair advantage.

I say this from evidence based on the experience we have had advising hundreds of businesses in the last few years.

The interest rate swap mis-selling scandal and other questionable practices by the banks’ abuse of a dominant position, support the view that a lot of SMEs are still vulnerable to the banks’ drive to charge excessive fees and maintain cosy vested interests with surveyors and insolvency practitioners allowing them to charge wholly disproportionate fees to their customers. We have seen numerous instances of these practices and these views are mirrored in other independent reports such as the Tomlinson Report.

Presently, it still seems that neither the regulators nor Parliament have the will to properly address these issues with the banks and other vested interests.

I do hope our latest Report has resonance with the thousands of SMEs and entrepreneurs looking to build Britain’s future on hard work and innovation. As an independent professional services business, Berg is committed to this sector which, given the opportunity, will be truly world class once again.

SME Banking: TowardS a nEw dySTopia

Dystopia: a CoMMUNity oR soCiEty tHat is iN soME iMpoRtaNt Way UNDEsiRaBLE oR FRiGHtENiNG. tHE oppositE oF Utopia.

SME finance is the coalface of British entrepreneurialism. It is where businesses can either thrive or perish, and the post-recession world for this sector has been very tough.

Alison Loveday, managing partner, Berg

Throughout my career I have been fortunate enough to meet many SMEs who have a steely determination to succeed and to play their part in taking the British economy forward. Regrettably, in recent years, all too often the ‘rug is pulled out from under them’ through no fault of their own.

Berg is bringing such cases to the attention of the Treasury Select Committee which is investigating SME Lending Practices, and also the FCA investigation being carried out by Promontory and Mazars, just as we have with investigations by Panorama, Radio 4, The Sunday Times and the FCA.

Openness and transparency are the bedfellows of better SME banking and it is our hope that the issues raised in this Report will paint a more accurate picture of the current SME banking and financial landscape than that which is currently portrayed in the banks’ own figures and testimonies.

Twelve months ago a significant hurdle for many small businesses was the crippling effect of interest rate swap mis-selling. now, we have uncovered evidence that the systematic manipulation of businesses extends to property, loans, pensions and personal guarantees.

not all SMEs are affected by this and not all banking arrangements are bad, clearly. However, we are on the cusp of a new banking regime that the Government agreed would be a root to tip change in the governance of banking practice. This would be the third extensive amendment of the regulation of banks since the 1980s. Will this work, or will the banks find new ways to put their interests before those of businesses to whom they should owe a duty of care? Our evidence suggests that, despite the noble ideas, the banks will find a way around it.

There is no doubt that the economic recovery will be hampered until new proposals such as these take effect and are properly policed.

“THE IMPACT On BuSInESSES HAS BEEn DEvASTATInG WITH BuSInESS OWnERS LOSInG THOuSAnDS OF POunDS, ASSETS AnD, In SOME CASES, THEIR EnTIRE LIvELIHOOD. THE BAnKS On THE OTHER HAnD HIDE BEHInD THEIR CORPORATE BARRIER, WITH nO PERSOnAL ACCOunTABILITy TO DATE.”

ConTEnTS

4

intRoduction 5

Fca-led Review 2 yeaRS on 6What is within an offer of redress under the FCA-led Review? 7

Aggressive redress 8

Consequential loss claims under the FCA-led Review 8

Litigated cases 9

Financial Ombudsman Service (FOS) Complaints 9

tiMeline: SMe lending iSSueS 10

wideR Banking iSSueS 12Summary of the Treasury Select Committee Report 13

The Global Restructuring Group (GRG) 13

Pushed into administration: What is the real underlying problem? 14

Acorn Finance 15

EFG loans 15

who iS inveStigating the BankS? 16Banking Regulation 17

Investigations and Reviews 17

Lobbying Groups and Government 18

SuMMaRy 18

key contactS 19

contact uS 19

Berg, an independent commercial law firm established in 1980, has a long standing history of acting for SMEs, including complex financial and commercial litigation.

inTroduCTion

5

In recent years Berg has been at the forefront of banking and financial disputes. One of the first to identify the issues arising out of the historic sale of interest rate hedging products (IRHPs), we are supporting hundreds of companies and business owners adversely affected by interest rate hedging products and wider banking disputes.

While operating in this area Berg has noticed many other instances of banks acting inappropriately towards their customers, causing unnecessary financial hardship for SMEs. This includes hidden charges, the withdrawal of overdraft facilities, unreasonable pressure and a complete disregard for long-term banking relationships. These features often arise when a business is placed into a bank’s specialised lending division.

Berg adopts a holistic approach to these situations, ensuring the options we look at take into account not simply potential claims and routes to compensation, but also the financial viability of the business whilst waiting for compensation. This may necessitate restructuring, refinancing and/or insolvency.

We aim to find creative solutions, including helping our clients renegotiate facilities or source alternative finance, and this has helped ensure the survival of our clients through exceptionally difficult circumstances and made their growth once again a realistic prospect.

It is through this provision of support to our clients, and an understanding at a critical business level, that we have been able to identify the bigger issues at play in the banking sector, beyond mis-selling claims.

This Report aims to provide a concise overview of the current state of SME finance, from IRHPs to the abuse of property assets, the sale of unregulated products and beyond.

There is a lot of work to be done if the SME sector is to be given the support it needs – by the banks and the regulators. A lack of transparency and deliberate targeting has shown the SME market to be an ‘easy target’ and it is important that the balance is redressed.

“THIS REPORT AIMS TO PROvIDE A COnCISE OvERvIEW OF THE CuRREnT STATE OF SME FInAnCE, FROM IRHPS TO THE ABuSE OF PROPERTy ASSETS, THE SALE OF unREGuLATED PRODuCTS AnD BEyOnD.”

www.fca.org.uk/consumers/financial-services-products/banking interest-rate-hedging-products

In January 2013 the Interest Rate Hedging Products pilot findings confirmed that there were significant regulatory failures in the sale of IRHPs to SMEs and found that ‘over 90% did not comply with one or more of our regulatory requirements’.

www.fca.org.uk/static/pubs/other/interest-rate-swaps-2013.pdf

The banks and the FCA agreed that all qualifying sales of an IRHP post December 2001 would be reviewed by the bank that sold the IRHP. This review process and the banks’ decisions are overseen and checked by an ‘independent reviewer’, namely one of the big four accountancy firms.

After a slow start, taking a year (August 2012 – August 2013) to make the first 10 offers there have been 19,000 invited to join the review, 14,900 offer letters sent out which include non-compliant sales, 2,180 rejections and 6,005 alternative products as at May 2014.

In 2012 the then Financial Services Authority (FSA) identified failings in the way that some banks sold IRHPs. The banks involved agreed to review their sales of IRHPs made to certain customers since 2001.

FCA-led Review 2 yeARs on

6

7

A typical offer of redress will either contain a refund of interest payments made (known as the ‘cash flows’), an alternative interest rate hedging product (with a refund of the cash flows if applicable), or no redress is offered.

An offer that contains a refund of the interest payments will have included with it an additional offer of payment of interest awarded at a basic rate of 8% per annum. If a customer wishes to pursue a claim for consequential losses as a result of the IRHP the banks have taken different approaches as to whether the 8% interest will be paid. However, banks will not pay consequential losses if the amount claimed is less than the amount of interest.

Any claim for consequential losses should, therefore, only be considered where it is a sum in excess of 8% as it may result in the customer receiving a lower amount than if they made no consequential loss claim. Consequential loss claims are paid instead of the 8%, not in addition to it.

An offer of redress has to be accepted by a customer. Accepting such an offer usually prohibits any further dispute over the issue. Therefore after accepting the offer, potential claims relating to the hedging product cannot be brought in Court.

An offer must be accepted within 40 days or an extension agreed, otherwise it becomes a final offer which precludes any further claim for consequential losses.

The decision to accept or reject an offer of redress is an important one because all redress offers must be accepted in full and final settlement of any and all claims arising out of the sale of the IRHP.

What is Within an offer of redress under the fCa-led revieW?

“An oFFER THAT ConTAInS A REFunD oF THE InTEREST PAyMEnTS wIll HAvE InCluDED wITH IT An ADDITIonAl oFFER oF PAyMEnT oF InTEREST AwARDED AT A bASIC RATE oF 8% PER AnnuM.”

90%did not comply with one or more of our regulatory requirements

over

14,9002,180rejections

6,005alternative products (may 2014)

the banks have sent out

offer letters

finanCial ombudsman serviCe:

an independent service in the UK for settling dispUtes between bUsinesses providing financial services & their cUstomers

WWW.finanCial-ombudsman.org.uk/

finanCial ConduCt authority

an independent regUlatory body formed as one of the sUccessors to the financial services aUthority (fsa) providing regUlation of condUct by both retail and wholesale financial services firms providing services to consUmers

WWW.fCa.org.uk/

british banking assoCiation

the UK’s leading association for the banKing sector, representing more than 240 member organisations with a worldwide presence in 180 coUntries

WWW.bba.org.uk/

serious fraud offiCe:

an independent government department that investigates and prosecUtes serioUs or complex fraUd, and corrUption

WWW.sfo.gov.uk/TAiloRed Business loAns

fixed rate loans were not inclUded in the fca review. tailored bUsiness loans involving embedded strUctUred collars and collars were inclUded. berg has had sUccess at the fos with fixed rate loans. if yoU were not in the fca review yoU may qUalify for a complaint to the fos.

8

In reviewing a consequential loss claim, the banks state that they are applying a strict legal test, as opposed to the regulatory test that was imposed to determine basic redress entitlement. Our experience suggests, however, that the test is even higher than the legal test implemented by the Civil Court system.

A consequential loss claim, therefore, needs to be selective to afford it the credibility needed to ensure the bank takes proper notice of the details put forward. Legal advice should be taken to ensure that only losses that meet the legal test are submitted to the bank.

Additionally, due to the nature of the test, it is not enough to make a statement to the effect that you believe a loss to be a consequential loss. Such losses will have to be properly evidenced, and account taken of other relevant factors, such as the impact of the recession.

With a large proportion of hedging products being sold amidst the recession, there is an easy defence for the bank in question to attribute the businesses’ losses to the state of the economy, rather than the hedging product. A forensic analysis of the business and its finances is essential in ensuring that any claim overcomes this defence. Furthermore, banks such as Barclays appear to have no intention of paying out consequential loss claims and the FCA is allowing this, stating it is happy with the independent reviewer who is overseeing cases. Barclays’ final year accounts for 2013 state that they have set aside less money than expected because they are paying out less than first anticipated. It should be noted that their consequential loss process was only put in place in December 2013 and this raises questions as to their willingness to pay out consequential loss claims.

Alison Loveday believes the process is anything but fair.

She said:

“The FCA says the redress offers and consequential loss rejections are both fair, citing the independence of the reviewer. We do not accept this as a fair system as the reviewers appear to be focussing on the banks’ own version of events.

The startling lack of appeal for those businesses denied consequential losses is a real hindrance to the SME economy, and the fact that provisions for consequential loss have not appeared in any of the major banks’ accounts and recent financial projections suggests that they have no intention of paying the same. This is despite the real devastation and significant losses IRHPs have caused businesses, losses which go way beyond the direct interest payment and break costs paid in relation to the IRHP. In some instances, business owners have lost their ‘life’s work’.

The FCA seems to have ‘washed its hands’ of this important issue, meaning that the compensation being paid out to SMEs is falling well short of their true entitlement. notwithstanding, many businesses are out of time, or do not have the energy or funds to pursue a consequential loss claim through the Courts.”

According to Berg’s client based evidence, banks such as RBS and Barclays have been offsetting redress payments by reducing those clients’ overdrafts, or restructuring their loans so that they have a much higher repayment profile, and increasing payments to the same level or above what they were at when the IRHP was being paid.

The FCA’s jurisdiction does not cover the manner in which redress is delivered, meaning once the review has concluded banks will be masters of their own destinies once again.

Alison Loveday, managing partner at Berg, fears this is a major oversight from the FCA.

She comments:

“The banks are paying out more than £1billion in redress and it seems as though they intend to get that money back with what I would deem ‘aggressive redress,’ which manipulates already vulnerable businesses into even worse positions. If the FCA allows this to happen unchecked then one might beg the question, what was the point in the review process in the first place?”

conSequential loSS claiMS undeR the Fca led Review

aggReSSive RedReSS

neil and David Taylor are owners of Port Medway Marina in Kent. They pursued a successful IRHP claim against Barclays for £144,000, but have since seen their claim for consequential losses rejected outright.

Barclays has also reduced their overdraft by £90,000, from £140,000 to £30,000. This has left their business effectively starved of cash.

David Taylor said: “All we have done is try to prove that we were mis-sold the swap and that our business has suffered because of it. The way the bank is acting is killing our business and we feel that the FCA is turning a blind eye because it knows that one consequential loss claim against the banks could open the floodgates.

“The Chancellor talks about small businesses as the backbone of the economy but this feels like a stitch-up and I fear for the business we’ve worked so hard to build.”

caSe Study: poRt Medway MaRina

9

Berg are experiencing large numbers of clients who have been precluded from participating within the FCA-led Review due to their size or being deemed arbitrarily ‘sophisticated’ and outside the scope of the Review. This does not in our view affect the underlying strength of a mis-selling claim, and the mis-selling strategies used by the banks tend to be consistent, irrespective of the size of the business. Other businesses are looking to the civil courts to prove their consequential loss claims if their claims are rejected as part of the FCA-led Review, which we strongly suspect will be the case for the majority of claims.

There are many issues to be taken into account for any business considering litigation including cost, insurance, funding, the merits of the case, the knowledge and experience of the solicitors and barristers and, most essentially, time. understanding limitation is key for anyone that is considering litigation. If the IRHP was sold more than six years ago (for a company) or the advice for the sale of the hedge was more than six years ago (for individuals) it may mean the business or individual being time barred and unable to bring a case in court.

As many IRHPs were sold pre 2008, until recently many business owners believed they were out of time. Our experience demonstrates, however, that the question of limitation is not straightforward, and needs to be analysed carefully. There are exceptions to the normal six year rule which need to be examined.

The High Court recently allowed the business owner in the Kays Hotels case (Kays Hotels Ltd (Trading As Claydon Country House Hotel) v Barclays Bank Plc [2014] EWHC 1927 (Comm) (16 May 2014)), to continue with their claim, despite the fact that the IRHP had been sold in 2005, more than six years before legal proceedings were commenced. The Bank’s attempt to strike out the claim on the basis of limitation was rejected.

litigated caSeS

For cases that are out of time to bring a case in the civil court, the only option left to a business owner will be to complain to the FOS. Recent figures have shown that the FOS is now finding in favour of the consumer more often than two years ago, rather than finding in favour of the banks, this being a significant change from the past.

www.berg.co.uk/our-services/interest-rate-swap- mis-selling/irs-fos-complaints-data.aspx

Compensation is limited to £150,000 and this money can no longer be used to pursue further litigation in the courts. However it is a viable option for some SMEs left bruised by the FCA-led Review process.

It is essential to understand that the FOS has an initial six year limitation period, the same as the litigation process. However, as the FOS is only required to do what is fair and reasonable in all the circumstances, they are allowed to take cases that are more than six years old if doing so is considered fair. This is why it is essential that advice be sought before submitting a complaint.

The FOS will consider cases based upon the applicable financial regulations. Berg is regularly contacted by clients who have been rejected by the FOS. Review of those cases almost always indicates that the case has been lost as a result of a failure to appreciate what the FOS will consider, which is more than just the factual matrix of the case.

As with the FCA-led Review, customers only have ‘one shot’ at making an FOS complaint so doing it right and maximising the prospects of success, is critical.

Financial oMBudSMan SeRvice (FoS) coMplaintS

£150kand this money can no longer be used to pursue further litigation in the courts

compensation is limited toliMiTaTion & daTE oF knowlEdgE

two exceptions apply in terms of the time limits for bringing a claim in coUrt. the first applies to date of Knowledge. this is the date that yoU became aware of the negligence and may allow a limitation period of three years from first becoming aware. in the Kays hotels case, the high coUrt said that the starting point for the limitation period was not necessarily the moment that the prodUct was sold, bUt coUld be the moment that Kays had reason to investigate maKing a claim. the second applies if fraUd or deceit are involved. here the time limit is six years from the date when yoU became aware in civil proceedings.

10

FSA (later, the FCA) announces it has found serious failings in the sale of interest rate hedging products to SMEs. Agreement is reached with the banks to provide an appropriate review of historic sales of IRHPs and redress where appropriate.

Banking Standards Commission publishes long awaited report ‘Changing Banking for Good’ criticising the entire banking regulatory scheme in the UK and recommends that the whole regulatory regime be abolished and a new regime implemented.

Government response to Parliamentary Commission on the Banking Standards Report agrees with majority of recommendations to re-organise banking regulation in the UK.

FSA launches initiative to see an end to mis-selling created by sales incentives.

FSA fines Barclays a record £29million for ‘LIBOR rigging’.

Financial Services Authority (FSA) replaced in part by the Financial Conduct Authority (FCA).

Businesses in the dark about what compensation they will receive. What is appropriate redress? What will be included as a consequential loss? Who will undertake the review at the bank? What criteria are being applied?

FCA pilot study results announced. Regulatory breaches found in over 90% of cases reviewed.

16,000 invited to join FCA-led Review, 65% opt in, 32 offers accepted, £2m paid out.

112 to receive no redress. 95% of reviewed sales breached regulations.

17,500 invited to join FCA-led Review, 70% opt in, 125 offers accepted,

£15.3m paid out. 253 to receive no redress. 95% of reviewed sales breached regulations.

FSA announce Allied Irish Bank (UK), Bank of Ireland, Clydesdale Bank, Yorkshire Bank, Co-operative Bank, Northern Bank and Santander UK have ‘volunteered’ to review their sales of interest rate hedging products to SMEs.

FCA-led Review begins. Total number of sales to be reviewed is 29,450, not including tailored business loans or embedded swaps.

15,000 invited to take part in the FCA-led Review, 50% opt in. 10 offers received, £0.5m paid. 78 to receive no redress. 93% of reviewed

sales breached regulations.

29 JUNE

19 JUNE

JULY

5 SEPT

27 JUNE

Bob Diamond, chief executive of Barclays, forced to quit because of scandals such as LIBOR rigging and IRHP sales.

3 JULY

1 APR

NOv

31 JAN

PERIOD - 30 SEPT

PERIOD - 31 OCT

23 JULY

MAY

PERIOD - 31 AUG

www.www.fca.org.uk/consumers/financial-services-products/banking/interest-rate-hedging-products

www.publications.parliament.uk/pa/jt201314/jtselect/jtpcbs/27/2702.htm

www.gov.uk/government/uploads/system/uploads/attachment_data/file/211047/gov_response_to_the_parliamentary_commission_on_banking_standards.pdf

www.fsa.gov.uk/library/communication/pr/2012/084.shtml

www.fsa.gov.uk/static/pubs/guidance/gc12-11.pdf

www.fca.org.uk/static/pubs/other/interest-rate-swaps-2013.pdf

TIMELINE: SME LENdINg ISSuES

2012 2013

11

House of Commons debate the Tomlinson Report.

RBS Independent Lending Review published by Sir Andrew Large.

Banking Standards Review is published by Sir Richard Lambert.

Lawrence Tomlinson publishes The Tomlinson Report into the lending practices of RBS.

Berg submit evidence to the Treasury Select Committee SME Lending Enquiry.

18,700 invited to join FCA-led Review, 78% opt in, 1,040 offers accepted, £158.6m paid out. 672 to receive no redress. 96% of reviewed sales breached regulations.

18,400 invited to join FCA-led Review, 76% opt in, 547 offers accepted, £81.2m paid out. 438 to receive no redress. 95% of reviewed sales breached regulations.

18,800 invited to join FCA-led Review 83% opt in, 3,430 offers accepted, £482m paid out. 962 to receive no redress. 96% of reviewed sales breached regulations.

Berg achieve landmark ruling for clients the Hockins whose business was forced into administration by RBS and its GRG unit. The administrators refused to pursue RBS over the sale of IRHPs but also refused to assign the right of action against RBS to the Hockins. The Court directed the administrators to assign the right of action.

19,000 invited to join FCA-led Review, 86% opt in, 6,726 offers accepted, £1,059.2m paid out. 2,180 receive no redress.

18,800 invited to join FCA-led Review 84% opt in, 4,573 offers accepted, £598.4m paid out. 1,485 to receive no redress. 94% of reviewed sales breached regulations.

17 DEC

25 NOv

19 MAY

19,000 invited to join FCA-led Review 85% opt in, 5,732 offers accepted, £797.6m paid out. 1,971 to receive no redress. 93% of reviewed sales breached regulations.

PERIOD - 30 APR

19 MAR

PERIOD - 31 DEC

PERIOD - 30 NOv

PERIOD - 28 FEB

20 MAR

PERIOD - 31 MAY

PERIOD - 31 MAR

www.tomlinsonreport.com/docs/tomlinsonReport.pdf

www.berg.co.uk/blog/news/systematic-fraud-house-of-commons-debate-the-tomlinson-report.aspx

www.berg.co.uk/blog/news/berg-celebrates-a-landmark-court-ruling.aspx

www.independentlendingreview.co.uk/RBS_ILR_Full_Report.pdf

www.bankingstandardsreview.org.uk/assets/docs/may2014report.pdf

www.fca.org.uk/static/documents/banks-progress-position.pdf

www.tomlinsonreport.com/docs/tomlinsonReport.pdf

BBC Radio 4 File on Four investigation, ‘Default by Design?’ investigates RBS.

21 JAN

news.bbc.co.uk/1/shared/bsp/hi/pdfs/ 21_01_14_fo4_defaultbydesign.pdf

Clifford Chance Report announces investigation has found ‘no evidence’ of wrong doing by RBS.

18 APR

www.rbs.com/content/dam/rbs/Documents/News/2014/04/Clifford-Chance-Independent-Review.pdf

18,700 invited to join FCA-led Review, 81% opt in, 2,092 offers made, £306.3m paid out. 682 receive no redress. 96% of reviewed sales breached regulations.

FCA imposes new code for bonuses paid to bank staff following years of abuse being linked to the bonuses paid to bank employees.

PERIOD - 31 JAN

10 JAN

www.berg.co.uk/documentcache/ treasuryselectcommittee.pdf

2013 2014

The Financial Conduct Authority has found, through a series of reports, that the banks offered cash incentives to staff to sell financial products, which is generally how sales staff earn bonuses. However, the FCA has found that the incentives were disproportionate and as a consequence the bank staff sold inappropriate products to customers with no regard to customers’ best interests. Berg has made submissions to the Treasury Select Committee in respect of the banks’ actions towards SMEs.

www.berg.co.uk/documentcache/treasuryselectcommittee.pdf

In addition to providing loans, mortgages and other credit, which generates profit through interest, banks also sell financial products.

widEr Banking iSSuES

12

13

Berg identified that there were numerous causes for concern in respect of the banks’ treatment of SMEs.

Here we report some of the issues contained in our Report accepted by the Treasury Select Committee.

the Royal Bank of Scotland plc (RBS)

Berg are of the opinion that due to RBS’s own difficult financial position, it continues to exploit its SME clients in order to generate profit for the bank. There are various ways in which RBS goes about this but the underlying features are the systematic removal of low interest loans and their replacement with loans with much higher rates of interest and the implementation of higher fees in order to boost profits. RBS also sought to remove medium and high risk debt from its balance sheet by any means necessary.

The Global Restructuring Group (GRG) division is seen as the prime facilitator of the above and we will discuss this in further detail opposite.

lloyds Bank plc (lloyds)

It would appear that Lloyds has taken a similar, if not identical, approach to RBS in order to tackle its own legacy and balance sheet issues.

Berg has found over the last 2 years that Lloyds have been demanding new valuations on SME assets where the SME is asset rich and, usually, cash poor. Berg has challenged the validity of many of these valuations and can evidence from the cases we have reviewed that a significant number have resulted in a valuation approximately 50% (or sometimes lower) of the value given to the asset by the customer.

Lloyds have entered into agreements to sell these ‘non-performing’ loans to Cerberus Capital Management LP (‘Cerberus’), its European subsidiaries and also to Deutsche Bank. Many of these loans are only classed as ‘non-performing’ due to the valuations placed on them by Lloyds, thus creating a breach of the LTv covenant. Therefore, it seems possible that Lloyds have engineered these defaults in order to sell these loans onto Cerberus for what is usually a higher price than the industry standard for ‘non-performing’ loans.

Once Cerberus has the loan it usually, if not always, demands immediate repayment and puts the business into administration when payment is not received. The assets used as security for the loans are then sold, meaning a very fast return rate on loan debts for Cerberus, and a lost generation of entrepreneurs who are frightened of taking risks as a result. In addition, any claim the business owner may have against the bank, may also be lost.

There has been significant media attention on the GRG division of RBS since the Tomlinson Report was published in november 2013.

GRG was meant to be a division of the Bank where struggling businesses were given the support they needed to trade through their problems, restructure and be returned to ‘normal’ banking in a much healthier position. However, the Tomlinson Report suggests that GRG’s true purpose was in fact the opposite of this. RBS have been accused of deliberately distressing SMEs in order to obtain financial profit. The Tomlinson Report stated that RBS targeted companies to be placed into GRG and then systematically charged large fees and put them out of business to generate an ‘easy profit’ for the bank, with many assets being sold at a loss to create a healthier balance sheet for RBS.

There are numerous ways through which GRG and RBS distressed SMEs. Below are a few examples:

The Bank indulging in what has been described as the ‘engineering’ of defaults, particularly with LTv covenants (e.g. with a low unjustifiable ‘desk-top’ valuation) so that the customer is placed into GRG where new products and much higher fees can be imposed.

In some cases, no breach has been cited – the Bank has just become uncomfortable with the business or sector.

The Bank telling customers that GRG is there to assist and being less than transparent about what GRG ‘s principle role is.

Turning overdrafts into loans and effecting other alterations of the SMEs facilities. This includes the imposition of fees/charges on the customer, increases in interest rates, insistence on expensive third party fees being incurred such as accountants, valuers and insolvency practitioners’ review.

The Bank reneging on past agreements to refinance and to provide long-term support.

Insolvency practitioners and valuation experts acting for the Bank and not the business owners, resulting in business owners not being kept updated about what is going on.

The Bank sold assets that were undervalued.

The Bank sold assets to West Register or to other Bank customers.

There is currently an ongoing Financial Conduct Authority investigation into the practices of RBS and GRG that is being carried out by an independent reviewer pursuant to s. 166 Financial Services & Markets Act 2000. This will look at whether or not RBS deliberately targeted these SMEs in order to obtain a profit.

Berg are contributing to the s.166 investigation, and also lobbying Parliament, as appropriate. We have discussed the general circumstances detailed above with Leading and Junior Counsel and it is clear that these facts give rise to a considerable number of potential claims and causes of action, some of which are already being pursued by our clients through the Civil Court process.

SuMMaRy oF the tReaSuRy Select coMMittee RepoRt

the gloBal ReStRuctuRing gRoup (gRg)

50%lower than the value given to the asset by the customer

berg can evidence from the cases we have reviewed that lloyds valuations are approXimately

In April 2014 Clifford Chance announced it found ‘no evidence’ to support the claims that RBS set out to defraud their business customers. The Bank commissioned the review after Government adviser Lawrence Tomlinson accused RBS of pushing struggling small businesses into its ‘turnaround’ unit, GRG, so it could charge higher fees and take control of their assets.

www.rbs.com/content/dam/rbs/documents/news/2014/04/clifford-chance-independent-review.pdf

At Berg we have received over 150 complaints from businesses affected by RBS & GRG behaviour, with many businesses being pushed into administration by the Bank. Whilst Clifford Chance has called into question some of the practices undertaken by GRG staff, the investigation itself seems to have missed the opportunity to really uncover what was, and is, happening in GRG.

Importantly, we have noticed that it is not just RBS who has been operating like this. We have examples of clients of Lloyds, Barclays and HSBC with similar experiences. In these cases, other business support units have operated in a similar way to GRG, and some clients have seen their bank debt sold to foreign based asset and debt management groups. These debts are sold in very large debt portfolios, meaning hundreds of businesses at a time are subject to this process and vulnerable to enforcement from someone they have had no previous relationship with whatsoever.

So, while GRG has rightly had the spotlight on it, it has also acted as a shield for the activities of the other banks.

Once a business is in administration, the business owners lose control, including control of any potential claims. Administrators, typically appointed by the banks, have demonstrated a marked reluctance to pursue claims against the banks, meaning that many valuable claims have been stifled or lost altogether, as a result of the administration. When in an insolvency situation there are also other difficult issues to overcome, such as any compensation being paid back to the bank to offset the underlying loan liabilities.

puShed into adMiniStRation: what iS the Real undeRlying pRoBleM?

£60,000 – total uneXplained charges received by one business

70%received uneXplained charges

18 yrSthe average length of businesses’ relationship with bank before being sold off

in addition to client caSeS & RequeStS FoR SuppoRt, BeRg alSo caRRied out a SuRvey oF BuSineSSeS aFFected By RBS & gRg:

“yOu ExPECT TO BE ABLE TO TRuST yOuR BAnK, SO yOu ARE OFF GuARD FOR THESE TyPE OF TACTICS.”

“I WAS TOLD THAT GRG WOuLD BE A PLACE WHERE THE BAnK WOuLD ASSIST ME AnD HELP ME WITH WHATEvER WAS REquIRED. THIS InSTEAD TuRnED OuT TO BE A WAy WHERE THEy COuLD LEGALLy STRIP ME OF ALL My ASSETS AnD LIvELIHOOD.”

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landMark CourT ruling

berg secUred a landmarK decision in the case of london and west coUntry estates (hocKin & ors v marsden & ors [2014] ewhc 763 (ch) (19 march 2014)). in that case, the administrators, ernst & yoUng were ordered by the coUrt to assign a mUlti-million poUnd claim arising from the mis-selling of irhps and inappropriate treatment by rbs’ grg division to the bUsiness owners, marK and diane hocKin. the hocKins are thUs now able to pUrsUe the claim throUgh the coUrt, which they are in the process of doing.

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Berg is currently advising farmers across the uK who are facing financial ruin after borrowing money from Somerset-based finance company, Acorn Finance.

Acorn Finance sold high-interest loans with the promise that cheaper finance would follow. However, this promise failed to materialise and farmers were left with spiralling debt that could not be repaid.

Acorn Finance has received loans and financial support from both Lloyds and Barclays, and we question how the banks could not have known what was happening, or make any attempt to stop it.

Some farmers have had their land repossessed, sold off at auction or even left homeless. It is an issue Berg believes has ramifications for wider commercial banking relationships, especially if it can be proved this was a complicit fraud, supported by the professionals involved.

acoRn Finance

Similar to Acorn Finance, Berg has also seen evidence that banks have misled businesses into applying for Enterprise Finance Guarantee loans from the Government, when those businesses were in fact not eligible or appropriate businesses to apply for those loans.

These same businesses then saw loans used to pay down overdrafts, rather than support business growth, which is the aim of the scheme. In another case the bank appears to have received the loan monies but refused to pass these on to the business because they were in the bank’s turnaround division.

Berg will be providing an update on both these issues in the coming months and we are set to shed new light on just how widespread SME banking malpractices were, and in some cases, still are.

eFg loanS

65%of assets sold as undervalued

“THEy TRIED TO RE-vALuE THE EnTIRE PORTFOLIO, CHARGED ExORBITAnT FEES, AnD IMPOSED MALICIOuS TERMS WHICH SEEMED DESIGnED TO BE IMPOSSIBLE TO ADHERE TO. FOR ExAMPLE, THEIR TERMS DEMAnDED THAT THE COMPAny SELL 18 PROPERTIES PER MOnTH AT A TIME WHEn THE AvERAGE ROyAL InSTITuTE OF CHARTERED SuRvEyORS (RICS) ESTATE AGEnT WAS SELLInG 10 PROPERTIES EvERy 3 MOnTHS.”

“THEy TOLD ME THEy KnEW WHAT THEy WERE DOInG WAS ILLEGAL BuT COuLD DO IT AnyWAy.”

“THE REPORT GAvE OuR BuSInESS A CLEAn BILL OF HEALTH, yET WE WERE STILL FORCED OuT OF BuSInESS.”

whaT oThEr Banking iSSuES arE undEr invESTigaTion?

in oUr experience, it is not simply day to day banKing that has been caUsing difficUlties, bUt also issUes involving:

personal gUarantee claims investment claims acorn finance and other short-term lending claims arising oUt of efg loans invoice discoUnting/factoring card payment services director disqUalification proceedings

“THEy WERE ABLE TO ACT In THIS MAnnER, AS THERE WAS nOBODy PREPARED TO CHALLEnGE THEM. I BELIEvE THERE WAS An ABuSE OF THEIR POWER, SHOWInG COMPLETE DISREGARD FOR THEIR CLIEnTS’ TRuST In RELATIOnSHIPS.”client coMMent aBout theiR expeRience with theiR Bank, BeRg gRg/adMiniStRation SuRvey

On 19th June 2013 the finance sector, and principally the banks, was rocked by a report issued by a select committee, the Banking Standards Commission.

who iS invESTigaTing ThE BankS?

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The report was scathing in its condemnation of the regulation of banks and the constant failures of agencies to regulate the out-of-control actions of the banks. It confirmed that greed and excessive bonuses had led to a ‘free for all’ in which customers’ interests were ignored in the pursuit of ever greater profits. The Report found that this failure and the banks’ activities led to the 2008 recession.

The banking sector has incurred costs of more than £20bn for misconduct according to a report on standards in the uK banking industry by Sir Richard Lambert issued in May 2014.

17

The 2013 Banking Standards Commission’s Report looked in detail at the regulation of bank activities. Principally, its findings indicated that the regulation of banks and financial institutions was not working and that banks had been allowed to run with “no checks or balances.”

It highlighted that the Statements of Principle and Code of Practice for Approved Persons (APER) was and continues to be ineffectual, with virtually no one being disciplined as a result of the mis-selling and LIBOR issues which hit the headlines.

The Report also raised concerns that the FSA (as it then was) either had no power or had no appetite for enforcing the rules and highlighted the fact that most of the people with most of the power working for the regulators were ex-bankers.

As a result, the 2014 Lambert Report made the recommendation for the make-up of the new regulatory body, whose creation was recommended by the Banking Standards Commission. The Report also included the statement that such new bodies should not include ex-bankers within their senior management.

The Lambert Report published in May 2014 (following the Banking Standards Commission’s Report in 2013 and the Government’s response issued shortly afterwards) recommends setting up an independent panel, a Banking Standards Review Council (BSRC) that will act as an independent champion of better banking standards in the uK. The banks involved in the programme will follow set criteria including the competence of staff, the culture within the bank, and the effects of banking practice on customers. They will then self-report to the BSRC. nevertheless, the BSRC will not have powers to independently verify the banks’ reports, or to impose any sanctions on banks that fail to adhere to the new, as yet unpublished, regulations or the BSRC’s criteria, prompting the question: “What can BSRC actually do?”.

This again means that the lack of regulation for SME banking will continue to cause problems for the sector. This current gap in the market has been exploited through issues such as Tailored Business Loans, and the mis-use of asset finance. Berg believes that the Government must address the need for proper regulation or the SME sector will be held back, along with the economy which it underpins.

In response to the Banking Standards Commission Report, the Government gave its agreement that it would totally overhaul the entire regulatory regime. A year later we have the Lambert Report recommending a toothless ‘council’ with no impending legislation to address the central concerns about the failure of the regulations and the regulators.

Banking Regulation

inveStigationS and ReviewS

the Fca Review into inteReSt Rate hedging pRoduct SaleS

www.fca.org.uk/consumers/financial-services-products/banking/interest-rate-hedging-products

the goveRnMent’S ReSponSe to the paRliaMentaRy coMMiSSion on Banking StandaRdS

www.gov.uk/government/uploads/system/uploads/attachment_data/file/211047/gov_response_to_the_parliamentary_commission_on_banking_standards.pdf

the cliFFoRd chance inveStigation: independent Review oF the centRal allegation Made By dR lawRence toMlinSon in BankS’ lending pRacticeS: tReatMent oF BuSineSSeS in diStReSS

www.rbs.com/content/dam/rbs/documents/news/2014/04/clifford-chance-independent-review.pdf

Financial conduct authoRity (Fca) appointed independent Skilled peRSonS RepoRt undeR Section 166 oF the Financial SeRviceS and MaRketS act (FSMa) 2000: pRoMontoRy Financial gRoup and MazaRS

www.fca.org.uk/news/update-on-independent-review-of-rbs-treatment-of-business-customers-in-financial-difficulty

the toMlinSon RepoRt: BankS’ lending pRacticeS: tReatMent oF BuSineSSeS in diStReSS

www.tomlinsonreport.com/docs/tomlinsonreport.pdf

andRew laRge RepoRt: RBS independent lending Review

www.independentlendingreview.co.uk/ rbs_ilr_full_report.pdf

Banking StandaRdS Review May 2014 By SiR RichaRd laMBeRt

www.bankingstandardsreview.org.uk/assets/docs/may2014report.pdf

the tReaSuRy Select coMMittee enquiRy into SMe lending

www.parliament.uk/business/committees/committees-a-z/commons-select/treasury-committee/news/sme-lending-tor/

BeRg’S SuBMiSSion oF wRitten evidence to the tReaSuRy Select coMMittee SMe lending enquiRy

www.berg.co.uk/documentcache/treasuryselectcommittee.pdf

the Banking StandaRdS coMMiSSion RepoRt ‘changing Banking FoR good’

www.publications.parliament.uk/pa/jt201314/jtselect/jtpcbs/27/2702.htm

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“A nuMBER OF OuR CLIEnTS HAvE vERy SuPPORTIvE MPs CHALLEnGInG THE BAnKS AnD THE PARLIAMEnTARy GROuPS On THE LACK OF REDRESS AnD InEFFECTIvE HAnDLInG OF CLAIMS.”

There are a number of independent and sector based lobby groups such as The Tomlinson Action Group; the Serious Banking Complaints Bureau; Bully Banks; The Dunbar Action Group; and Insolvency Assist, who are championing the resolution of various banking issues on behalf of their members and constituents.

In Parliament, the issue has had two recent debates, prompted by the work of many of the MPs and Select Committees:

appg

An All Party Parliamentary Group was established specifically to look at the IRHP mis-selling scandal following the launch of the FCA-led Review.

Mps

A number of our clients have very supportive MPs challenging the banks and the parliamentary groups on the lack of redress and ineffective handling of claims.

We regularly provide MP briefing packs and work with clients and their MPs to agree on the most effective and co-ordinated approach.

parliamentary Spotlight and debate

There have been two dedicated Westminster debates in the House of Commons around the sale of interest rate swaps by the banks and the RBS/GRG allegations put forward in the Tomlinson Report.

treasury Select committee

Berg has submitted its findings to the recent Select Committee hearings and was mentioned in dispatches by its members. The select committee has, importantly, considered the issues within a context of SME banking, which Berg supports.

www.berg.co.uk/documentcache/ treasuryselectcommittee.pdf

loBBying gRoupS and goveRnMent

SuMMaRy

The FCA had been alerting businesses to the fact that they only have until May 2014 to join the review into the historic sale of IRHPs by the banks. This deadline has had to be extended – as two years on, the review is still incomplete.

The FCA hoped the review would avoid the need for litigation but with the obvious flaws in the Review process, wide scale litigation is inevitable.

To expect SMEs who have already been badly damaged, to commence litigation against a major bank, with the attendant cost, risk and delay, is unreasonable.

It is not only the financial damage that mis-selling claims have caused, but also the breakdown in the trusted relationships business owners believed they had with their banks. The erosion of trust has left a significant imbalance in the relationship. It is likely that further regulation in the commercial banking sector will become necessary if that imbalance is to be redressed, given that it is in the area of unregulated products that SMEs appear to have been most vulnerable. It is clear, however, that these issues are not limited to SMEs, with large businesses also being affected.

Without this, the view of a slide towards a new dystopia in our financial markets, looks ever more real.

The effects of this have implications far beyond banks’ balance sheets. If the Treasury, FCA and banks do not support businesses that have had their financial services arrangements compromised then this could have serious long-term implications for the uK economy.

Whilst failing businesses need to be allowed to fail to maintain the natural order of the economy, the strangulation of perfectly healthy businesses has a ripple effect throughout the SME sector, one which could very well see a so-called ‘lost generation’ of entrepreneurs.

And what is Britain, but a nation of entrepreneurs?

If you have been affected by any of the issues covered in this Report then advice and support is available. Whether you wish to litigate, make a formal complaint to your bank or the FCA, or are unsure about the outcome of the FCA review; a solicitor specialising in this area can assist you in presenting your case and ensure that your legal position is fully protected.

For some customers the limitation date, along with the opportunity to be properly compensated for the losses they have suffered, will be fast approaching. It is therefore essential that advice is sought at the earliest opportunity so that a proper assessment of the case is made and full consideration given to the options available to you and your business.

what to do neXt

key contactS

contact uS

reUben berg ReuBenB@BeRg.co.uk

ian mendelsohn ianM@BeRg.co.uk

alison loveday aliSonl@BeRg.co.uk

John colvin Johnc@BeRg.co.uk

damian carter daMianc@BeRg.co.uk

Kalvin chapman kalvinc@BeRg.co.uk

Disclaimer

The information and opinions contained in this article are not intended to be comprehensive, nor to provide legal advice. no responsibility for its accuracy or correctness is assumed by Berg or any of its partners or employees. Professional legal advice should be obtained before taking, or refraining from taking, any action as a result of this article. The sections in this Report entitled ‘Summary of the Treasury Select Committee Report’ and ‘The Global Restructuring Group (GRG), are a summary of the evidence submitted to, and accepted by, the Treasury Select Committee, and are therefore subject to absolute Parliamentary privilege.

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Banking RepoRt SME BAnKInG: TOWARDS A nEW DySTOPIA