UK finance minister asked to honour promise of resolution for mis-treated SMEs

Rishi Sunak, Chancellor of the Exchequer, will be asked to honour a promise made to small businesses by a predecessor in a letter this week. Former owners of small and medium sized enterprises (SMEs) who believe their businesses failed because of the treatment they received from their lenders will ask Sunak to intervene to ensure their cases are heard by the Business Banking Resolution Scheme (BBRS).

Some 20 business-owners fear they will never be able to bring their cases to the BBRS unless the eligibility criteria are brought into line with those set out by then chancellor, Philip Hammond, in a January 2019 letter to banking lobby group UK Finance.

Jim Shannon (DUP), a member of the All-Party Parliamentary Group on Fair Business Banking (APPGFBB), has long argued for access to the BBRS for these businesses.

"The question is how can BBRS claim to be interested in resolving historic cases, when the 300 or so cases lodged with the scheme since it opened on November 1, 2019 have eligibility criteria which continue to exclude most of those banking victims. It is clear to us that BBRS will not meet the simple instruction from chancellor Philip Hammond in [the January 2019 letter] to expand the eligibility criteria," Shannon said.

Shannon was referring to Hammond's instruction to the banks that HM Treasury should be informed if it appeared the scheme would not "achieve its objective of bringing closure to past complaints", and his expectation that if this were to prove the case, then he would "expect there to be further discussions around the scope and eligibility for the backward-looking scheme".

Purpose

The BBRS was set up in preference to a financial services tribunal, which was originally proposed by the APPGFB. The scheme's purpose is to resolve historic and future disputes between SMEs and their banks. The BBRS's eligibility criteria were set by its implementation steering group (ISG) and have not been amended, despite Hammond's instruction. Lewis Shand-Smith, chair of the scheme, also chairs the steering group.

A statement on the BBRS website says its eligibility criteria would be finalised at the end of the pilot. A report has been prepared for the ISG, a BBRS spokesman said. It does not however recommend a redrawing from that used in the pilot. If the criteria are left unchanged, cases including that of Scottish businessman John Guidi will be excluded. In July 2019, when he was chief executive of the FCA, Andrew Bailey, now Governor of the Bank of England, said he thought Guidi's case was exactly the type that should be heard by the BBRS.

Shannon is calling for Sunak to intervene.

"[BBRS] is set for failure by Christmas. It is certainly not what the DUP and the APPG for Fair Business Banking pressed for during the last parliamentary period of our confidence and supply agreement. We continue to suggest a simple solution for those 300 or so cases. Now is the right time for chancellor Rishi Sunak to step in," Shannon said.

Historical cases remained a vital focus, Shand-Smith said.

"The historical cases that have already registered for our service, and those who might register over the next three years, remain a key focus for our organisation. These cases are central to our public interest role and we remain dedicated to helping them achieve resolutions to their disputes," Shand-Smith said in an emailed statement.

The BBRS ran a live pilot to test its processes and procedures with 48 businesses. The final report into the pilot as well as the results of the focus group of those taking part in the pilot have been published in the last month. The BBRS concluded that its service had been well received by the businesses taking part.

"We have undertaken an in-depth consultation and received user feedback from anonymous customer focus groups. The feedback on the performance of our Customer Champions in particular has been universally positive. We are confident they are adding real value to a process where customers require specialised support and attention as their cases move through the service," Shand-Smith said.

Cost question

There is also concern about the mounting cost of the scheme, which has to date reached an agreement with just three SMEs. Of the 48 cases in the live pilot 80% remain unresolved, according to an update posted to the BBRS website September 13.

In July, Shand-Smith said the BBRS was on budget; however, the BBRS said details of salaries, remuneration of non-executives and costings for the contract with the Centre for Effective Dispute Resolution (whose adjudicators will decide cases) are commercially confidential and will not be disclosed.

The BBRS accounting year-end is December 31 and its audited accounts will be published in line with reporting requirements thereafter, it said. The cost of the BBRS will ultimately be picked up by shareholders of its seven founding banks (Barclays, Danske Bank, HSBC, Lloyds Banking, NatWest Group, Santander UK plc, Virgin Money).

The BBRS added Stephen Pegge, managing director for commercial finance at UK Finance, as a non-executive to its board yesterday.

It is also in the midst of recruiting two separate panels to advise. Details of the terms of reference for the panels will be released soon, the BBRS said.

COVID-19

Shand-Smith said last month that the BBRS anticipated handling 5,000-6,000 historic cases over the next three years and also new cases as a result of the economic fallout of the pandemic.

"We are concerned about the impact COVID-19 is having on the UK's SME community. And while the government-backed loans themselves are unlikely to result in a large number of complaints for the BBRS, we do expect cases to arise from more generic loans as the economic impact of the virus takes hold," Shand-Smith said in an emailed statement.

HM Treasury is in discussions with UK banks about how they treat businesses which experience repayment difficulties with COVID-19 bailout loans. The first repayments on bounce back loans do not fall due until May, but there is already concern that banks will parcel up pre-pandemic SME bad debt and sell it to private equity businesses which do not have to adhere to the same conduct standards as Financial Conduct Authority-accredited lenders.

"We will continue to look at ways to support firms as they recover," an HM Treasury spokesman said by email yesterday.

The sale of bad loans to private equity firms is not just a concern in UK. Last week, during a confirmation hearing at the European Parliament, Mairead McGuinness, European Commissioner for Financial Stability, Financial Services and the Capital Markets Union, was asked whether she was in favour of blocking the sale of COVID-19-related bad loans to Cerberus, a private equity firm.

"I would be completely opposed to separating borrowers from the institution they borrowed from," McGuinness said.

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