Dr Evan Jones 3 December 2013
On 25 November a man called Lawrence Tomlinson issued a report in the UK called Banks’ Lending Practices: Treatment of Businesses in distress. The report, a mere 20 pages, immediately became the subject of significant media commentary. Writes Dr Evan Jones.
What is going on? Behind a cleanly organised and soberly written text, the report claims that the Royal Bank of Scotland is engaged in a dodgy practice indeed.
The experiences of many businesses across the country suggests that, at least within RBS, there are circumstances in which the banks are unnecessarily engineering a default to move the business out of local management and into their turnaround divisions, generating revenue through fees, increased margins and devalued assets. … The bank extracts maximum revenue from the business, beyond what can be considered reasonable and to such an extent that it is the key contributing factor to the business’ financial deterioration. …
Therefore, rather than supporting a business, there are times when it is more profitable for a bank to stress the business. …
… , it became very clear, very quickly that this process is systematic and institutional.
Bear in mind that the RBS is at present effectively a public bank, having been 80% nationalised post-GFC for its follies during the madcap boom years.
The strategy of RBS towards SME customers
Tomlinson highlights that RBS personnel engineer a crisis with its customer (especially asset rich businesses), either through a discretionary devaluation of customer assets, through a technical breach of covenants (plenty of them in the modern loan contract), no matter how minor, and/or by bank changing adversely the terms of its facilities.
Such customers are then sent to RBS’ Global Restructuring Group (sic), which functions essentially as a knackery.
The customers, thus quarantined, are subject to a range of discretionary impositions and charges which dramatically undermine the customer’s ongoing viability (and deny alternatives sources of finance). The assets are then sold under value, sometimes after receivers have also picked over the carcass.
Disgracefully, RBS has its own in-house bottom-feeding entity, West Register, which it has used to buy up assets from customers who the bank itself has defaulted.
Accomplices in crime
Regarding discretionary devaluation of assets, Tomlinson claims:
Not only is the undervaluation itself a concern, so is the relationship between the bank and the valuers. Often, much of a valuer’s work will come from the banks and there is therefore an inherent conflict of interest as there is a natural incentive for the valuer to act in the interest of the bank.
Regarding the marauding character of receiver behaviour, Tomlinson claims:
Not only did some of the businesses we heard from not deserve to be pushed into administration, but once in the insolvency process, the behaviour of the administrators, receivers and/or insolvency practitioners (IPs) was unfair and opaque.
Crooked valuers, crooked receivers, both sectors on the drip of bank largesse (always at customer expense). Tomlinson notes:
The relationship between the bank, IPs, valuers and receivers should undergo careful analysis. The interdependency of these businesses on banks for generating custom establishes a natural loyalty and bend towards the interests of the banks.
Maintaining independence and a fair hand for all parties involved appears extremely difficult. As witnessed most clearly in the case of asset based finance, often nothing is left for any creditors other than the banks as fees typically match the level of funds left in the pot. The impact of insolvency on the business owner’s right to legal redress is highly significant. Once an administrator has been appointed, the directors lose their right to legal redress.
Then there’s the law.
Any law firm that does business with the banks will have a clause in their contract, preventing them from taking action against the banks. This means that for businesses the pool of solicitors available to give them advice and take their case is extremely limited. Not only is it difficult for businesses to find a suitable solicitor, but the costs involved in taking the case are so extortionate that the business is unable to follow their action through to court.
And finally, the bank’s so-called ‘internal complaints procedures’.
Businesses are passed from pillar to post, often with the specifics of their complaint not adequately responded to. They do not receive answers to the questions posed, with the bank specifically avoiding answering direct questions. There is no ‘stoppage time’ within the banks once a complaint has been made so the activity which the bank is complaining about continues throughout. Evidence was even submitted of instances where the individual banker that the business has complained about has in fact run the internal complaints procedure against themselves. … These internal processes are not fit for purpose of resolving disputes and complaints from businesses in regards to the bank’s behaviour.
The implications in general
… the findings of the report do clearly show heavy handed, profiteering and abhorrent behaviour of some of the banks towards businesses. … The evidence received does however indicate a far darker situation than just the existence of conditions which could lead to the mistreatment of businesses …
For many businesses that go through the process outlined above there is no recourse available to them. Every potential avenue of help is shut and they are often left bankrupt, or near enough, and feel betrayed by the financial organisation they have been customers of for many years.
As for the broader significance of this phenomenon:
Given the importance of finance for businesses commercial operability, it seems astonishing that for many there is no independent avenue for them to question the way they have been treated by their finance provider. …
The lack of recourse and experience of their fellow business people creates a climate of distrust and fear amongst the business community. It certainly does not engender a desire to grow and invest in business. This stifles job creation and the growth of the real economy. …
Although there is now more regulation in place, we have seen before that regulation does not always prevent banks from acting inappropriately. Given the lack of any real change in the banking sector [and if RBS and Lloyds are privatised as is], there is nothing that will stop 2018 being the same as 2008 unless radical action is taken now.
Banking stocks should therefore become utility stocks, not racy stocks to gamble on. The returns should be a steady and sustainable yield, in the region of 6%. This would reverse the perverse culture which incentivises the banks to harm the financial position of a good business if doing so will help their commercial position.
The man behind the report
Tomlinson built his report on the evidence of victimised customers and one whistle-blower from within RBS.
But who is the author of this report?
The report reads as if written by an outsider to the finance sector – and that intuition is accurate. Lawrence Tomlinson is an engineer by training, and subsequently has become a highly successful entrepreneur. From that latter status, Tomlinson had been selected by the UK Government’s Business Minister (the Secretary of State for Business, Innovation and Skills), Vince Cable, to explore why the SME sector in Britain was sluggish and whether bank lending practices might have anything to do with it.
Tomlinson himself is reported thus:
… conversations with affected businesses had made a big impact on him. "I feel really sick sometimes. It is really disturbing," he said. "It is ruining people's businesses for sure, and in some cases having a huge impact on their personal lives too, even leading to family breakdown."
Reactions to the exposure of RBS corruption
The report has naturally generated much hubbub. The financial authorities are making noises of concern through gritted teeth. Thus, notes the Serious Fraud Office: “The only thing we're saying is that we're aware of the issue and we are monitoring developments.” Bank of England Governor, Mark Carney ‘urged the country’s financial regulator [the Financial Services Authority] to prove RBA over the “deeply troubling” and “extremely serious” claims.’ Moreover, ‘Britain’s former Bank of England deputy governor [Andrew Large] says the regulator is likely to take action against the RBS if accusations that the lender engineered business bankruptcies for profit, are proven to be true.’
This same (Sir) Andrew Large has written a contemporaneous report, significantly larger. It is an insider’s report. It faults RBS for its significant post-GFC reduction in SME lending and cumbersome procedures, but blames the GFC for higher SME defaults. The two reports could be referring to different entities.
RBS itself is dissembling mightily. Said the bank: “GRG successfully turns around most of the businesses it works with. RBS did more than its fair share to fuel this and commercial property lending was one of the key drivers of our near collapse as valuations rapidly plummeted. Facing up to these mistakes has been a difficult, but essential part of making RBS a safe and strong bank once again.”
It was the GFC wot dun it. The newly appointed CEO of RBS, Ross McEwan, has instigated an investigation into the bank’s workings. But Tomlinson (at whose office the complaints from RBS victims are still rolling in) has immediately criticised the choice for the job of the law firm of Clifford Chance.
The Independent newspaper notes, acerbically, of Clifford Chance:
Few names in the legal world state in bigger capital letters, ‘guardians of big business’. From its glittering skyscraper HQ in London’s Canary Wharf to the famous £1m-plus salaries of its partners, Clifford Chance is a byword for establishment power. Big banks are among its core customers. According to The Lawyer magazine, it acted for both Barclays and RBS on the Libor scandal. Not to mention the British Bankers Association.
The ersatz shock horror reactions to Tomlinson’s report point to a financial establishment bent on marginalising Tomlinson and burying his findings. The City of London is at the centre of the Establishment. Since Britain’s industrial powerhouse gave way to American and German ascendancy in the late 19th Century (and later industrial upstarts like Japan), finance has been the prop of the British economy (with the brief exception of the revival of British manufacturing between the World Wars). Governments of every stripe have kowtowed to the City (and the elevated status of the pound sterling) to the detriment of other sectors, and the North of England in particular. This upstart Tomlinson will meet his match.
It is relevant that Vince Cable, the Business Minister and Tomlinson’s employee, is a Liberal Democrat and reputedly a decent individual. He is not a Tory. Whether Tomlinson gets support for what will be a significant battle for the SME sector will depend on the distribution of power within Cabinet.
The profound imbalance between SMEs/farmers and their corporate financial lenders
SMEs (including the family farmer) have always had problem getting appropriate finance. To use SMEs and banks in the same sentence is to invoke dissonance.
Moving past the historical SME dependence on family or related party finance, perennially generating conflict, SME financial needs require specialist institutions. These institutions require specialist staff, with the inevitable implication that such institutions will not generate rates of return expected in the glittering world of high finance, with the prospect that the criteria will only be satisfied by government or government supported institutions.
The British situation was memorialised from the 1929 [Harold] Macmillan Committee, or Committee on Finance and Industry. Thence arose the lasting phrase - ‘the Macmillan Gap’. The Post-War UK Labour Government acted on the issue, and created in 1945 the Industrial and Commercial Finance Corporation, specifically oriented to SME finance. (Comparable developments occurred in other countries – Canada, Australia, West Germany, the US – but that’s another story.)
Over the years, however, this early Post-War initiative has been gradually transformed. The ICFC’s latter day incarnation is as 3i, a privatised financier devoted to high-end equity deals. The bread-and-butter SME has long disappeared off the radar.
The typical SME/farmer is now left to the tender mercies of the now indifferent, incompetent and perennially rapacious high street trading banks. Worse, as Tomlinson notes, RBS and the Lloyds Group (which includes the failed HBOS, acquired in 2009) have 60 - 65% of SME business lending (and a comparable share of retail banking), an extraordinarily unhealthy market dominance.
Australia takes note of the hubbub
The Tomlinson report has reached the Australian media, via Richard Gluyas in the Australian, 29 November. Gluyas describes the report as ‘a searing indictment of the treatment by British banks of those businesses in distress.’ Quite.
But the associated commentary verges on the bizarre. Gluyas leads his article with the claim ‘The financial system inquiry will look at any local examples of the brutal treatment meted out to small business customers by banks in Britain.’ This claim takes a lead from an interview with Australian Banking Association CEO Stephen Munchenberg, who claims: “We will address those issues in the inquiry when they arise”.
On the contrary. The forthcoming inquiry will do no such thing. It will be chaired by David Murray, who as senior manager and then CEO of the CBA participated in the debauchment of the public then privatised CBA. Similarly, Munchenberg’s role is to bury bad news about banking malpractice.
The fact is that the practices described by Tomlinson also prevail in Australia, and most dramatically in the CBA takedown of almost 1000 BankWest customers after CBA took over BankWest in December 2008. Like Tomlinson, I have been sickened by receiving and reading about accounts of comparable practices in Australia, and this for well over a decade.
Even more bizarre, Gluyas quotes Senator John Williams as having ‘”no doubt” that issues similar to those in the Tomlinson report would be brought before the Murray inquiry. “I would hope that no financial institution in Australia is found to have behaved in the way that's outlined in the Tomlinson report,” Mr Williams said.’
Yet Williams, as member of the Senate Economics Committee Post-GFC Banking inquiry in 2012, witnessed first-hand the shocking hearing testimony and submissions from CBA/BankWest victims – displaying transparently that the CBA had behaved in precisely the way that is outlined in the Tomlinson report. How could Williams deny the parallels?
Gluyas is probably the only Australian journalist currently reporting on bank malpractice against SMEs but he has never joined the dots, to conclude that the accumulated evidence (not least from my writings) constitutes ‘a searing indictment’ of entrenched Australian banking practices. It’s easier to write about banking scandals on the other side of the world than of comparable scandals at home. We’re all right, jack – these horrible things only happen elsewhere.
Coincidentally, the current CEO of RBS is one Ross McEwan, having been hired from previous employment with the CBA. McEwan joined RBS as head of Retail in August 2012 and was made CEO in October 2013. Given McEwan’s recent elevation it is improbable that McEwan oversaw the corrupt strategy within RBS, but his CBA background would make him entirely familiar with the RBS’ corrupt modus operandi.
It appears that McEwan’s response to the Tomlinson exposures will be comparable to the CBA’s senior management’s response to BankWest victim complaints and litigation – he hasn’t yet attacked the victims or attempted to destroy their reputations, but the victims will be held culpable for their own demise as unwitting casualties of the GFC and the whole thing will be swept under the carpet.
Understanding of the past and prognosis for the future a little too glib
The Tomlinson report displays a certain undue optimism, both in describing purportedly normal bank lender – SME borrower relationships, and in charting changes that will usher in a better future.
There is no longer a level playing field on which banking agreements can take place with each party making informed decisions on risk and reward.
And that with suitable reform:
Instead banks would once again adopt a more traditional approach to lending in which the banks growth is in line with that of the business and customer, not at their expense.
Tomlinson has been too complimentary to the conventional bank-SME relationship. There was never a level playing field. Although the scam that Tomlinson has unearthed at RBS may be atypical in the strategic-ness of the operation, the brutality of the practices have always been around and have been enhanced with generalised financial deregulation since the 1970s. The brutality has been perennial because the bank-SME relationship is one of the most asymmetric of all commercial relationships. SME borrowers are intrinsically ripe for the picking.
Tomlinson puts much faith in the restorative powers of greater competition. And the first cab off the rank should be the breakup of the giants RBS and Lloyds. Quite so.
But greater numbers of SME lenders per se won’t resolve the dilemma of the gross power imbalance between bank and SME borrower, nor the adverse culture that pervades contemporary bank behaviour (note that the NAB’s UK subsidiary, displaying both gross incompetence and corruption, remains part of the UK banking mix). With respect to SME borrowers, banks do not compete on competence and/or integrity.
Tomlinson’s battle is of seminal importance
Tomlinson does note: ‘Allegations of previous abuses require thorough independent investigation and, if there have been abuses, the instigators should face the full consequences.’ Quite. Fines are no deterrent at all, because they are paid by the institution, which in the case of RBS means the taxpayer. Tomlinson has unearthed serious white collar crime, documents need to be supoeanaed to trace the command chain, and the instigators deserve to be gaoled. Let the punishment fit the crime, and the deterrence effect hit home to the suits on grotesquely inflated incomes and comparably inflated egos.
In the meantime, Tomlinson faces a long haul against the financial Establishment and its power. He needs the long term full backing of his Minister (and the Minister’s Department) and the full backing of the media. Can Tomlinson the successful entrepreneur become also the successful champion of genuine financial reform in Britain with respect to the SME sector?
Long suffering victims from the banking scene in Australia will be watching the battle in Britain with much interest.