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  • The low-hanging fruit on SMEs as users of financial services Posted on 24 January 2018

    Few involved in business lending will have missed the press reports of a highly emotive debate in Parliament last Thursday on the treatment of small and medium-sized enterprises (SMEs) by the Global Restructuring Group of the Royal Bank of Scotland.

    The tone of the debate was set by Labour MP, Shadow Treasury Minister and Chair of the All-Party Parliamentary Group on Fair Business Banking, Clive Lewis, who said the GRG was not an ‘intensive care unit, it was more like an abattoir”. Sir Vince Cable said that the FCA’s (unpublished) final report into GRG concludes that RBS management “knew or should have known” that the mistreatment of business customers was a result of an “intended and co-ordinated strategy” within the GRG.  

    The MPs called for an independent inquiry into the treatment of SMEs by financial institutions and the protections afforded to them, and the rapid establishment of a tribunal system to deal effectively with financial disputes involving SMEs.

    John Glen, newly appointed Economic Secretary to the Treasury, said that he would be doing everything he could to ensure that the “injustices” discussed at the debate are addressed. He would “look carefully” at a statement to be published by the Financial Conduct Authority dealing with matters it raised in a discussion paper on SMEs as users of financial services in November 2015, which he noted was a “long time ago”.

    On Monday, the FCA published its long-awaited response to the 2015 consultation. It confirms plans to extend the scope of the Financial Ombudsman Service to include around 160,000 additional SMEs. These are firms with (in general, as there are three criteria) 10 to 50 employees, in addition to the over 5 million that have (in general) fewer than 10 employees. The FCA points out that it would be for Parliament to decide whether an independent tribunal (as called for in the debate last week) is needed.

    In the 2015 paper, the FCA consulted on whether it should issue guidance on what is expected of firms providing services or products to SMEs under the regulators’ Principles for Businesses. In the new paper, the FCA reports that it has concluded that it would not be proportionate to provide such guidance.

    This is important because it goes to the heart of the question of whether the FCA has any existing powers to deal with issues with lending to unregulated small limited companies. The 2015 paper noted that the FCA’s Principles provide a framework for the conduct of firms even when specific rules do not apply. In a letter to banks chief executive officers in November 2013 following the earlier reports into the GRG by Sir Andrew Large and separately by Dr Lawrence Tomlinson, the FCA noted that commercial lending is not a regulated activity, but that the regulator still expected firms to act with integrity across all their activities. It required the CEOs to satisfy themselves that their groups did not engage in any of the poor practices alleged in the reports and to address any issues.

    There are eleven Principles in the FCA regulatory Handbook that apply to the carrying out of regulated activities. Some are specific to regulated customers, but key ones are not.  Firms authorised by the FCA must conduct their business affairs with integrity (Principle 1).  Firms must also conduct their business with due skill, care and diligence (Principle 2).

    What does this mean in practice? Could it be that authorised firms are free to act without integrity, or without due skill, care and diligence, when providing financial services to unregulated SMEs? That seems an unreasonable conclusion, as a firm either has integrity and acts diligently, or is doesn’t. It’s difficult to imagine any authorised firms even contemplating such an argument.

    What both SMEs and lenders need more than anything now is clarity on how to apply the Principles when dealing with unregulated SMEs. Far from lacking proportionality, new high-level guidance on this could be the most proportionate and effective solution at this stage.

    Extending the scope of the FOS or launching a new tribunal are still possibilities, but either option only deals with problems after they happen. It’s also likely that without clearer guidance on the standards firms should meet, decisions from the FOS or a tribunal will be inconsistent and unpredictable. That could cause banks and other firms to be less confident in lending to SMEs.

    What would the new guidance look like? It could be as simple as a page or two of high-level examples of areas of the existing rules for regulated business that should be relevant considerations when dealing with all SMEs and others that should not.

    The need for financial promotions not to be misleading seems relevant to all SMEs, for example. The need to explain that brokers may earn commissions seems irrelevant to unregulated SMEs, as business people would already know that’s how brokers work.

    The need for firms to have clear, effective and appropriate arrears policies and procedures seems relevant to all SMEs. The need to demonstrate forbearance as a matter of course, for example allowing customers to miss payments or to take additional time to pay, seems irrelevant to unregulated SMEs, as this would be a matter of commercial negotiation.

    No change to the law. No change to the FCA Handbook. No new code of conduct. Just a dozen illustrative examples set out in a discussion paper of how the existing high-level Principles apply to authorised firms when dealing with all SMEs would be a big step forwards.

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