Sunday, 24 November 2013

Major high street bank “killing off small businesses to seize assets for its own property empire" - The Sunday Times 24/11/2013

An incredible story in The Sunday Times today! As stated by the newspaper, a major high street bank “is killing off small businesses to seize assets for its own property empire, according to evidence referred to financial watchdogs by Vince Cable, the business secretary”. Not only is this the sort of story that newspapers should be publishing, it contains a warning to the whole business community.

On first read, the stories are truly shocking. They appear to relate to the difficult period 2007 through 2010 and most of the stories relate to falling property valuations, where the property was used as security for a substantial loan. Nothing surprising there, you might think!

The surprise is in the suggested collusion between the bank’s “special measures” team and the banks own property division. The paper suggests that in at least one example, the property division identified a development for which it had an “appetite” and two days later, the developer’s loan facility was withdrawn. In another example, there are allegations that the property division where given access to “sealed bids”, so that it could purchase properties out of administration at the lowest price. Other allegations relate to interest rate swaps and inferences about changed property valuations.

Although the allegations of mal practise are shocking, the underlying stories are not. Banks are businesses that owe a greater duty of care to their shareholders than any duty they might owe to their clients. Even though your bank manager might well be your friend, the bank never is. It’s relationships with its clients are covered by the contractual terms of the agreements that the bank and the client “agreed”.  Yet how many small businesses actually read those “agreements”, let alone understand the terms. If they understood the terms, why did so many businesses agree to interest rate swaps and if the banks truly felt a duty of care to their customers, why did they introduce such complex products for the SME market?

In employment law, the law recognises that the relationship between employer and employee is unequal and that the level of inequality can allow even reputable employers to take advantage of the relationship. Best practise therefore has always been for the employer to ensure that the employee takes independent legal advice before entering into an agreement where the employee forgoes rights, even when the agreement is clearly to the employee’s advantage. 

But for some strange reason, the same logic doesn’t seem to apply to the unequal relationship between a bank and its SME client. Banks are businesses, nothing more, and nobody should enter into complex business contracts without fully understanding the implications of that agreement, and if the client doesn’t have the expertise, they should take advice from an appropriate person, who might well be their part time consulting finance director!

(Also published at blog.fdexcel.com) 

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