A recent report released by the All-Party Parliamentary Group (APPG) on Fair Business Banking and Centre for Policy Studies highlights the struggles that SMEs have encountered when seeking access to justice for victims of bank mis-selling.
The current civil justice and financial regulatory system has largely failed SMEs seeking redress for banking mistakes and has highlighted problems that business owners face when battling banks for fair compensation.
The APPG report provides recommendations including suggested major revisions to processes to correct the short falls in the current complaints system, which are costly and time consuming for SMEs seeking an impartial review enabling recovery of losses.
Although taking correctional action now will have a positive outcome for businesses in the future, it provides little recompense for owners who have already been stung by the banks and have found no effective cure in the system.
The suggested introduction of an alternative justice process in a new Financial Services Tribunal to support businesses wishing to raise a complaint regarding commercial lending practices, should help them reach a fairer outcome more quickly, cheaply, and efficiently.
Many SMEs that have suffered due to bank mis-selling have also become insolvent or lost considerable financial strength as a result. As litigation is prohibitively expensive to most SMEs, this presents a David and Goliath situation, where struggling SMEs are seeking damages against highly-resourced banking institutions, often rendering compensation or financial recovery efforts a futile exercise.
The report makes a number of good recommendations to help SMEs get access to justice. The key proposal around the creation of a Financial Services Tribunal will not only focus on resolving banking disputes but will do so in a less costly and more efficient manner. This tribunal process would be legally binding on the parties whilst also ensuring that claims are acted upon quickly.
Existing financial services regulation of lending covers individuals and enables the Financial Conduct Authority (FCA) to take action against mis-selling to individuals. However, a significant failing within the current system is that commercial lending to businesses or limited liability partnerships is not similarly regulated.
This has been a major failing in the system restricting corporate victims’ ability to raise a claim or concerns. Amending the existing rules so that such lending falls within the same regulatory regime will ensure that SME owners obtain greater protections too.
This would require a fundamental shift in the law, but it would mean that the FCA could take enforcement action against unlawful commercial lending.
It should mean that SMEs will then be able to remedy the terms and conditions of highly-complicated lending contracts and seek amendments if subsequently found to be unfair.
Tightening regulation in this area will also protect businesses from being pressured into agreeing to unfavourable lending criteria because they have few alternative options.
Changes to the current system will take some time, however businesses can assist and show support by contacting local MPs and relevant lobby groups such as the victim support groups for swap mis-selling and other Bank victim groups.
If SME business leaders stay abreast of the progress of the report’s recommendations and continue to voice concerns over the current system, then it makes it more likely that Parliamentary action will follow.
Although this report is a step in the right direction, it suggests that there must be a supplementary review of the insolvency system too. In the vast majority of swap cases, no recovery has been made for the real extent of the losses suffered, meaning that inadequate compensation has been obtained for the companies and their creditors.
To date, there have been very few insolvency practitioners – who are often appointed by the large banks – that have taken action against the unfair treatment of SMEs and this has shown a systemic problem with the industry and its approach to remediation as a whole.
If the proposed alterations take place, it is unlikely to open a new route to retrospective claims, some of which date back more than ten years. However, it should recognise the failings of the system that has been severely stress tested as a consequence of the 2008 global economic collapse.
If so, then there is a real prospect that SMEs might be able to obtain affordable and swift access to justice and protection against banking malpractice in the future.
Gavin Cunningham, head of the forensic services team at Menzies LLP.