It is a pleasure to serve under your chairmanship this morning, Sir Roger.
I am pleased to have secured this debate on the Tomlinson report prior to the Christmas recess, because it is important and touches on a lot of my work on interest rate swap mis-selling. The report’s scope is wider than just the interest rate swap mis-selling scandal, and it looks at how a certain part of the Royal Bank of Scotland, namely the global restructuring group, has been operating in relation to small businesses. It is important to place on the record that Lawrence Tomlinson’s findings reflect what I have seen both as a constituency MP and in my work on interest rate swap mis-selling.
Prior to the report’s publication, Lawrence Tomlinson spoke to the all-party parliamentary group on interest rate swap mis-selling, and it is fair to say that many Members in that meeting were shocked by what they heard about banks’ behaviour. What should concern us more than the fact that Members were shocked by Mr Tomlinson’s comments is that many of them were not surprised. When some of the report’s findings were highlighted, it was concerning to see that such activity was recognised by Members from their constituency casework. If MPs are not surprised by allegations of behaviour that verges on the criminal, there is cause for significant concern about banks’ behaviour.
Since the publication of the report and its findings, there has been a certain degree of blow-back. Elements of the press have suggested that Mr Tomlinson might have a personal agenda or vendetta against RBS. I therefore want to place on the record that I have never banked or had any banking facilities with RBS, and have no vendetta whatever against it. My concern lies with the numerous constituents who have been treated in a manner that I find unacceptable. It is important to highlight what the report found and how it resonates with those of us who have dealt with businesses that have been badly treated by their banks.
The report was met with a significant degree of sympathy when originally published, but concerns have been highlighted since then. I want to examine three key issues of concern today; other Members may have different issues to discuss. First, I want to concentrate on the report’s findings in relation to whether the bank deliberately attempted to engineer situations in which businesses defaulted or breached their banking covenants. One of the report’s key claims is that businesses often found themselves in difficulties due to the bank’s deliberate efforts to ensure that that happened, including through revaluations. Once banking covenants were breached, businesses were placed in the so-called supporting hands of the global restructuring group.
The second question that deserves consideration is about the nature of the support that businesses receive once subjected to the support structure of the GRG. Is it really trying to get businesses back on track, or—as in many cases that I have seen, and in many cases highlighted by Lawrence Tomlinson—are businesses subject to unfair and penal rates of interest and charges, and often asked to pay for reports and valuations that are almost never in the businesses’ interests?
The third question is about the impartiality of the whole insolvency process. The report asks significant questions about whether the process and all the professionals involved actually operate in an independent manner. I have seen a number of cases of valuations changing dramatically because valuers have been instructed to undertake a second valuation by the bank. That raises significant concerns about the independence of those valuations. Consultants, solicitors and accountants have been asked to undertake work, paid for by the business, on the instruction of the banks. Time and again, that work has been less than helpful to the survival of the business.
When I conclude my remarks, I will touch on the selection of Clifford Chance to conduct an internal review of RBS. I have no doubt that Clifford Chance is a reputable firm of solicitors, but I have concerns about whether it will pass the smell test of being impartial enough to undertake such a review, given its links to RBS.
Have RBS and the global restructuring group been guilty of engineering a default or a breach of covenant? There are examples. A constituent of mine had a quarry with landfill rights that was valued at £9.5 million. The bank decided to enforce a revaluation of the asset, which came back at £2.5 million. As one can imagine, the impact of a £7 million reduction in value was an immediate breach of the banking covenant. After long and hard-fought efforts by the company, there was a final agreed valuation of £4.5 million. The company agreed to that simply because it was desperate and wanted to try to keep trading. How can a £7 million reduction in value occur when the company undertaking the revaluation was the same one that made the original valuation only a few months previously? That question needs to be answered. Also, why did the company have to pay £14,000 for a valuation that it successfully disputed?
I was contacted by a business yesterday with a large portfolio of flats, one of which was valued by the GRG at £100,000. A sale price of £145,000 was achieved yesterday, but the bank is still unwilling to make any compromise on the valuation of the entire portfolio. When one flat is sold for £45,000 in excess of the bank’s valuation, one must question why the whole portfolio is not re-examined from a banking perspective. The business is paying penal rates of interests on the basis that it breached its loan-to-value covenant, yet the one sale that has been achieved shows that the asset’s value was much higher than the value that the bank placed on it.
Another example, of a hotel in north Yorkshire, landed on my desk because the business has also been affected by interest rate swaps. The hotel was independently valued by Matthews & Goodman at £3.4 million, but the bank was clearly unhappy with that valuation, which gave the business a healthy loan-to-value position, so it instructed the business to get a second valuation within two months. The business was charged £3,500 for the privilege, and the second valuation came back at
£1.65 million. The result was that the business was in breach of its banking covenants. It is unsurprising that the business feels hard done by: an independent valuation suggested a value of £3.4 million, but less than three months later, another valuation, done on the instructions of the bank but paid for by the business, was less than half that.
I thank my hon. Friend for allowing me to intervene. There is a similar example from my constituency. Does he agree that it is often the time scale in which the bank demands a response that kills a business completely? A business in my constituency was given 24 hours to resolve a position that was not a difficulty. The business was bankrupted and its principal has gone to work in the far east, where they have created many jobs and much good business. That has been taken away from mid-Wales.
That is a fair point about timing. Another of my constituents was told that his bank charges would be increased to a weekly fee of £4,000. The letter informing him of that arrived on
I applaud the hon. Gentleman’s work in this area, and it is a joy to work with him. I want to mention a similar case involving a constituent who had a long-term arrangement with a bank. His business, which owns housing, has been told by the bank that it wants to finish his loan on
That is an issue on which the bank would have to respond, because my view is that clearly it is not fair.
I have a fourth and final example of businesses finding themselves in difficulty due to decisions taken by the bank. A company that contacted me recently had net profit of £272,000 on turnover of £3.5 million in 2008, net profit of £281,000 on turnover of £4.4 million in 2009, and net profit of £268,000 on turnover of £3.9 million in 2010. Those are all healthy figures. The company employed about 40 members of staff. In late 2010, however, an agreed overdraft facility with the bank was withdrawn, because a loan agreement under the EFG—enterprise finance guarantee—system was declined. The company was therefore put into GRG support, and the group proceeded to disallow a payment of £14,000 in corporation tax, on which basis the company found itself in difficulties and ended up going into administration. The final set of management accounts for the nine months before the company went into administration showed a net profit of £190,000. The company would argue that its difficulties were caused by the bank refusing the corporation tax payment, even though the final accounts showed a profit.
Such businesses feel extremely hard done by as a result of the way that the GRG and RBS have behaved towards them. My evidence could be described as anecdotal—I am more than happy to accept that—but it is important to emphasise that the cases highlighted in the Tomlinson report are the tip of the iceberg; they are not representative of an issue created by Lawrence Tomlinson himself. I have seen these issues in my constituency, and other Members have seen them in theirs.
Once businesses are in the GRG, the concern is that its attitude and behaviour is less than helpful. RBS argues that the whole purpose of the group is to put businesses back into health, but it is difficult to see how a business allegedly subject to cash-flow problems is helped by having an additional £250,000 in fees in a six-month period. Time and again, I have seen the fees charged by the bank go up when businesses go into the GRG, and they apparently bear no relation to the amount of work done in support of the business.
So-called independent reviews are forced on businesses by the bank, whether through a valuation, accountancy work or solicitors. Professional fees are charged to the business, but the instructions come from the bank and, often, the reports go to the bank first. We have to be concerned about that. Furthermore, the businesses often have no say whatever in who the reviewers will be. There is a question about the conflict of interest faced by those professionals: if they are being paid by a business, but instructed by the bank, surely they are conflicted in their work.
The other thing that I have seen time and again is payments by suppliers not being prioritised. There is almost never a case in which a payment to suppliers would be allowed if that took the business beyond the terms of its overdraft or facilities, and yet I have never seen a case in which charges due to the GRG have not been taken because they will take the business over its overdraft limit. That is a fair point to make, because if a business can go over its agreed limit in order to pay the bank charges, why on earth will the bank not allow a payment to a supplier if that supplier is crucial to the continuation of the business in question?
I have already mentioned a constituent of mine struck with a £4,000 weekly fee for the continuation of his banking facilities. To return to him, after three months of negotiation, the GRG agreed that it would accept £2,000 per week. There was no explanation as to why the fee was initially £4,000, or why £2,000 was now acceptable. I get the impression that the reason why it was £4,000 to start was that the bank thought that it could get away with it; the fee was subsequently £2,000, because the business put up a fight—its accountants and solicitors argued the case, as did the MP.
Given all that, does the hon. Gentleman agree that removing the cash flow that assists in running the business when it is under pressure simply creates additional problems?
Absolutely. When a business is taken into the GRG in order to help with cash flow, it is difficult to envisage why there is therefore justification in imposing a £4,000 or even £2,000 per week charge for support.
There is no indication of what that support entails, but it certainly does not support the cash flow—let us put it that way.
The company I mentioned was also expected to produce new accounts. It had monthly management accounts produced by its accountants, but that was not good enough for the bank, which had to have KPMG to do the work. Again, it was not good enough for the bank for the company to use its solicitors to value assets that were subsequently sold; it had to use solicitors chosen by the bank. That is oppressive behaviour by the GRG towards businesses that it is allegedly meant to be supporting.
It is important to bear in mind that when we highlight such cases, the concern is that we have examples from throughout the country, which makes the case that there is an issue here that needs to be looked at. I am pleased that the regulatory authorities are taking a look at the Tomlinson report, but I hope that they also take on board the comments made today by me and other Members on our experiences of businesses not included in the Tomlinson report. This is happening throughout the country and it needs to be highlighted.
I also want to highlight an interview with Derek Sach, the founder of the GRG, by Debtwire in October 2012, which is rather chilling to someone who is of the view that the bank ought to be there to support small businesses. He describes the steady flow of “new distressed businesses” into the GRG as an opportunity. That is a key point. If the head of the GRG considers that distressed businesses coming into his organisation are “opportunities”, his view is that the group is there not to support businesses, but to gain commercial advantage on the back of those businesses. Furthermore, if any Members present represent a shipping business, they should be concerned, because Mr Sach also emphasised that he sees significant “opportunities” in that sector, because shipping is going through a difficult period—in other words, the GRG vultures are hovering, waiting for a further supply of distressed businesses of which to take advantage.
Throughout the process, I have also seen numerous examples of instructions by the GRG not to prioritise the Crown on VAT, corporation tax or pay-as-you-earn payments. That is concerning from any high street bank, but to see such an instruction to businesses coming from a bank that was supported and saved by the taxpayer should cause serious concern to Government. I hope that the Minister will respond to that specific point.
I have a final point to make before my brief comment on Clifford Chance. The whole insolvency process is a concern. When an insolvency practitioner or administrators go into a business, the poor old creditors will often receive little in return, because the fees will take the vast majority of what is available. Hon. Members need not take my word for that, because in a recent article, James Nicholls of Nicholls & Co, an insolvency lawyer based in Birmingham, highlighted the fact that the insolvency business is complicit in what is, in my view, an abuse of small businesses. He made the point that
“we in the insolvency industry have been complicit, collaborative and have completely failed in what our true roles should be. Almost everyone in our industry has effectively been ‘bought off’ by the Banks—accountants, IPs”— that is, insolvency practitioners—“lawyers, surveyors—everyone.” That is not my comment but a comment from somebody involved in the insolvency industry. His argument is that the industry has turned a blind eye to the behaviour of the GRG and other turnaround companies: it has been bought off by the fees and affected by the culture that has existed in the past decade.
If we are serious about supporting small businesses and supporting the growth of our economy through their development, we have to ask ourselves whether that sort of attitude towards them—seeing them as opportunities to make money rather than as businesses to be supported—is the right way forward.
Everything my hon. Friend is saying is familiar to me. I have been supporting a decent-sized manufacturing business in my constituency. The bank concerned is not RBS but another major bank; I want the Minister to be aware of that fact, and I might speak with him afterwards. When a business needs support and is feeling a bit vulnerable, perhaps because it has just lost a contract or is restructuring, instead of getting support from its bank it gets a hike in interest rates and has extra costs imposed on it—for example, an extra £10,000 a month in accountancy costs—and there is no pathway for returning to regular lending.
The circumstances my hon. Friend has described are ones I am seeing with a business in my constituency; instead of getting the support it needs, the bank’s behaviour is creating worry and concern. I am supporting that business as best as I can. This debate is a timely one.
I appreciate my hon. Friend’s intervention, as it highlights the fact that this is not only an issue for those businesses highlighted in the Tomlinson report but something that we are seeing in our own constituencies.
James Nicholls concludes the article I mentioned by saying that the insolvency industry—by that he means accountants, solicitors, insolvency practitioners and so forth—needs
“to stop defending practices that on close and moral scrutiny just do not stand up to the ‘smell test’.”
I say, “Hear, hear,” to that.
I will conclude my comments by discussing Clifford Chance. I have no doubt, as I said in my opening remarks, that it is a reputable firm of solicitors, and make no comment about its behaviour, which I am sure is of the highest standard. However, by choosing Clifford Chance to undertake an internal review of the allegations made against the GRG, RBS is doing itself a disservice and is not creating any confidence in that review process.
Let us think of the relationship between Clifford Chance and RBS over the past couple of years. Clifford Chance worked on the sale of £80 billion of toxic UK commercial real estate by RBS, which was called Project Isobel internally; it acted on behalf of RBS on the sale of RBS Aviation Capital; it was instructed by RBS to deal with the recent IT outage suffered by RBS and NatWest; and it advised RBS on the LIBOR scandal.
I have no doubt that Clifford Chance feels that it could act impartially on the review, but businesses up and down the country genuinely feel that they have been treated badly by the GRG and RBS and they need to feel confident that the bank is taking their concerns seriously. I would argue that the impression given of a conflict of interests between Clifford Chance and RBS is enough of a reason for RBS to think again and appoint another firm to undertake the review. I welcome the fact that RBS is willing to undertake an internal review, and it has argued that it is creating an independent internal review; but that independence must be beyond reproach. Given the commercial relationship that I have highlighted between Clifford Chance and RBS, it is difficult to make the case that the review will be truly independent and will be able to gain the confidence of the business community. I ask the Minister to convey my concerns on that matter to RBS.
Thank you, Sir Roger, for allowing me to speak for so long on this issue, as I am aware that other Members wish to contribute. My concerns are simple. I believe that the issues highlighted in the Tomlinson report are worthy of consideration, and that it is good that the regulatory authorities are investigating on the basis of the report. But it is also important that Members of this House from all parts of the country highlight their experiences with Global Restructuring Group. RBS is not, in my view, the only bank to have behaved badly, but RBS and the GRG are the focus of the current report.
I am grateful to the hon. Gentleman for giving way just as he is concluding his remarks, which have been very thoughtful. He is right to say that the GRG might not be the only perpetrator of this kind of behaviour, but it is the focus of the report. Does he think that the evidence that he has heard from colleagues and has read in the report is enough to say not just that there might have been bad practice but that, as Tomlinson appears to allege, systematic fraud is being perpetrated by RBS—is that the case that he is making?
I would be extremely wary of using the word fraud. In my view, there has undoubtedly been systematic bad behaviour and I could speak at some length about West Register, which is part of RBS, and the way in which assets have been taken from businesses by the GRG and West Register—there is a conflict there. However, even with the privilege afforded by being in the House, I would be careful about using the word fraud.
Does the hon. Gentleman agree that we could summarise the matter in this way? Customers have trusted their banks over so many years and that trust has been built up through generations. People still think that they should trust their banks, but there is now a complete imbalance in that relationship, as a practice has grown up in which highly commercially minded organisations are managing personal money and business money. People are now not qualified to understand what they are being offered by their so-called friends, the business or relationship manager and their bank.
Undoubtedly. That imbalance is something I have highlighted time and again in relation to the issue of interest rate swaps. I do not think it is reasonable to assume that we are talking about two equal parties when one is a banking organisation that has the ability to pull someone’s livelihood away from them at the stroke of a pen.
To conclude, the attention focused today on the GRG and RBS reflects the fact that RBS was bailed out by the taxpayer to such a great extent. With that taxpayer support comes added scrutiny. We should not take our eye off the behaviour of other banks and there are issues within those banks, but the key point is that the bank that we are talking about today is supported by the taxpayer and so has an obligation to justify its behaviour, over and above what is expected of other banks.
It is a pleasure to serve under your chairmanship, Sir Roger. I am delighted that Guto Bebb has secured this important debate on what is an absolute shocker of a report. He has led a campaign to expose the bullying tactics that were often used by banks on interest rate swaps. We have all been quite shocked to discover that interest rate swaps were just the tip of what is a very large iceberg.
The Tomlinson report gives us an insight into behaviour that, if it is not systematic fraud, certainly reflects a culture and set of practices in the banking sector that are shocking in the eyes of most right-minded people. Small and medium-sized businesses are already struggling in a difficult business climate; to find that the very institutions that are supposed to help them through that difficult time are using practices that make their situation even more difficult—and often force them into insolvency —is truly shocking.
On interest rate swaps, is my hon. Friend aware that tailored business loans sourced from the Clydesdale bank, for example, have been excluded from regulations and from the review? Businesses taking out those loans are just as badly affected as everyone else, so does she agree that such loans should be included in a review?
Absolutely, and I will conclude later by saying that that means we really have to look at the whole banking sector. The Banking Commission has done a good job of starting to expose some of these malpractices, but they are very worrying. The issue does not affect just RBS, and it needs to be looked at more widely.
What is really worrying is that RBS would, arguably, not exist if not for the fact that it was bailed out, and is 80% owned, by the taxpayer. However, some of the practices exposed by Tomlinson represent a double whammy for the taxpayer. I can cite examples of RBS using the GRG to take money out of bank accounts that businesses had set up expressly to pay Her Majesty’s Revenue and Customs. The bank was, therefore, not just taking taxpayers’ money so that it could continue to exist, but taking money from accounts specifically set up to pay HMRC.
I started to get involved in this issue as a result of constituents coming to see me about interest rate swaps. One particularly big example involves a man who owns care homes, which are disproportionately affected by interest rate swaps. He was a solvent customer running a successful business, but RBS bullied him into taking on loans that included interest rate swaps. He wanted to refuse, but RBS bounced his cheques until he took the loans on. He is now involved with the GRG, even though it was expressly set up for severely distressed customers. He is not in severe distress now, but he soon will be, because the money he has to use to pay back the interest rate swaps RBS forced him to take on should be going into investing in his care home business. In addition, when RBS first forced him to take on the loan, the exit fee was £10,000. Only a few months later, it was £150,000. Given the amounts involved, we really need to start taking a serious look at what RBS is doing.
The hon. Member for Aberconwy was reluctant to use the word “fraud”, and I understand why, because it is a serious accusation. However, what I would like to hear about from the Minister is the reverse: what makes him confident that systematic fraudulent activity is not happening in RBS? I am focusing on RBS because that is what the Tomlinson report focused on, but also because RBS is more than 80% state owned. What makes him confident that the bank is not forcing people into the arms of the GRG, with the result that perfectly solvent businesses are not solvent any more, and asset stripping them at the same time? What makes him confident the bank is not taking huge fees from companies that bank with them, asset stripping them and making sure they can no longer exist properly?
On that point, the bank sold the business of one of my constituents, which was bought by another of the bank’s customers, who then found themselves in exactly the same situation as their predecessor. The bank therefore profited from not only the distressed sale, but what happened afterwards. Worse still, the sale happened as a result of interest rate swap mis-selling, but there is another interest rate swap agreement with the new company, so something that happened in 2005 happened again in 2007. Very often, these things are happening to the people who provide large numbers of jobs in our constituencies—the businesses that will provide the jobs and the growth.
Indeed. Those responsible are laughing all the way to the bank—ha, ha! The engineering of loan defaults allows a company to be put into the GRG. What we find, and what we see in the Tomlinson report, is that the lending is refinanced—companies are forced to refinance—and the bank gets far higher margins on the new loans. The bank also prioritises taking disproportionately high penalty fees from companies.
All of that is chipping away at small and medium-sized companies, which just want to get on with their business; they do not want to have to worry about what these massive organisations are doing. The banking sector is supposed to help people. Before the crash, banks were over-generous in flinging money at people; after the crash, they have become highly reluctant to lend even to perfectly good businesses. Where they do make business loans to companies, they are behaving, if not fraudulently, then at least appallingly badly, as I think we can all agree.
The all-party group’s investigation into interest rate swap mis-selling revealed not just the banks’ bullying tactics, but many cases that highlighted the imbalance between the size of the banks and the size of small and medium-sized enterprises, which Tessa Munt mentioned. We recently had a meeting with the Minister about that very issue. Can we really say that individuals have access to justice, when RBS—I repeat that it is mainly state owned—can call on some of the best legal minds in the country to support it against tiny businesses? I would say that those businesses do not have access to justice, and I would like the Minister to look at that.
To return to interest rate swap loans, which is where all this started, another problem is the foot dragging by the banks, which are looking into this, and which would say they are dotting the i’s and crossing the t’s; by the Financial Conduct Authority, which is also making sure it gets everything absolutely right; and by the Treasury, which is not putting enough pressure on the banks and the FCA to make sure this issue is dealt with swiftly. As we have seen, exit fees can go from £10,000 to £150,000 in only a few months, and interest rate swap mis-selling is costing businesses vast amounts, so every day matters, because all this money is going to the bank, not the businesses.
We cannot be confident—the Tomlinson report highlights this—that systematic fraud is not going on, perhaps in the wider banking sector, but certainly in RBS. I would really like the Minister, when he responds, to say what he is doing to make sure we can be confident that systematic fraud is not going on at RBS and more widely in the banking sector. I will conclude there, because I would like to give him as much time as possible to respond.
I congratulate Guto Bebb. I must be honest: I had not intended to speak, but given that there are so few contributors, I want to say a little about my experiences and, more importantly, those of some of my constituents. I also congratulate the hon. Gentleman on the work he has done over a sustained period with the all-party group on interest rate swap mis-selling, which is what initially drove me towards the all-party group.
I want to tell Members about the sad experience of one of my constituents four or five years ago, although I suspect that one or two people in the room will be sick of hearing about it. The story initially confused me, and that is part of the problem: this is a complex issue, which makes it all the more difficult for a layperson to understand. As anyone who has had a constituent come to them to explain their difficulties will know, it takes considerable time to plough through what the constituent is saying, and to begin to understand the complexities of the banking system that has been operated for businesses for a considerable time. The lack of understanding that MPs will have initially, coupled with the fact that perhaps some sectors of the media do not understand the problem, means that light has not been shone on the issue in the way that it deserves to be. Stuck in the middle are businesses, which are going to the wall. As a result, people are losing their jobs. That is having an impact on family life across the length and breadth of the country.
A gentleman who was banking with Barclays bank got in touch with me about a family-run business that had been around for more than 20 years. It operated caravan parks in four parts of the UK: one was in my constituency, a couple were in the south Lake district, and one was in the Yorkshire dales. The company was encouraged, by almost a separate arm of Barclays bank, to look at investment in the business; the offer came in that guise. It was told, “We have set up a special arm of the bank to assist you; we can do some good business here and develop your business further.” The end result was the bank shifting products; it asked its client to sell one product back to it and to take out another. It ended up with three of the parks having to be sold so that the company could retain one, which continued to operate in Dumfries and Galloway for a period.
The businessman was reluctant for me to create any kind of a storm, because he could see that the first thing the bank would do was immediately move to close the business down. However, time passed and eventually administrators moved in. It all happened at and around the time of the LIBOR scandal and the involvement of The Daily Telegraph and Guardian Care Homes. That very much drew the issue into the spotlight, and as a result, I had a closer look at the case that my constituent had brought to me. I went to the administrators and said, “Quite clearly, this is a case of mis-selling. If this is mis-selling by the bank, and you are conducting business on behalf of this bank, you are doing nothing more than driving this business to the wall.” The administrators could not work quickly enough; basically, they drove the business into the ground.
That comes back to the point that the hon. Member for Aberconwy hinted at. The administrators were fine; their cheque was signed off. However, anyone else who was owed money was left waiting in the wings. The administrators and anyone dealing with the insolvency are absolutely guaranteed their money, despite the plight that many businesses are in. The shocking thing about the business that went down was that it did so owing £1.2 million, of which £900,000 was bank charges. That was punishing—crippling—and it destroyed that business. Goodness only knows how many other businesses the length and breadth of the country have experienced the same thing.
The Tomlinson report’s title is “Banks’ Lending Practices: Treatment of Businesses in distress”. Businesses in distress is one thing, but businesses being driven into distress is completely different. We heard this morning from the hon. Gentleman, and from my hon. Friend Natascha Engel, about some experiences; I have three cases before me. One involves a gentleman whose small business—the family have a number of businesses—is some 200 yards along the street from my office in my constituency town of Dumfries. He discovered that the bank was dipping into other bank accounts—not only those that were relevant and related to his business, but those of family members. It had taken total control of all his finances. That poses a serious question mark about how banks are carrying out their business and what they are doing to people.
When my constituent contacted me, I said, “Come back to me in a couple of days”—because he was scheduled to meet the bank—“and let me know what action I need to take.” He came back saying, “It look as if they are prepared to move and assist.” The fact was that those were mere platitudes. The bank did not help him one iota, and that business, which is down the street from my constituency office, is closing down.
Another businessman who is, again, involved in caravan and camping sites has been mis-sold products. He does not have a kind word to say about the global restructuring group. His view is that the bank will quickly move to settle with him on the products that he was mis-sold. There has been an admission, but he also knows what is waiting in the wings. If he takes that early settlement, it will move in on other aspects of his business and close him down. That is no way to treat people who have probably been loyal customers of these banks for many years.
The most shocking case I have concerns a gentleman who is involved in property and is a private landlord. In the mid-1990s, his business had a value of about £300,000 to £400,000; gradually, over the years, he built that up into a business that provides jobs, of course, as well as a roof over the heads of individuals and families, and it was worth several million pounds. He then fell foul of the bank. He made me aware—he is an astute businessman—that he was always wary of the bank’s promises that what it was selling him was good for his business. The value of that business has fallen dramatically, and it may be worth somewhere in the region of £1.5 million to £2 million. However, stuck in the middle of all that are people living in homes that he is providing as a private landlord.
Does my hon. Friend agree that private landlords seem to be targeted by the banks? I had a constituent in that business who was taken to a hotel in Glasgow and treated to a big presentation about how the loans could help with the business. They were not told all the facts and then ended up getting into difficulty. Does he agree that this has been a conscious effort to dupe people?
I can only agree with my hon. Friend. I do not think there is any doubt that certain sectors have been targeted. I mentioned at the start of my contribution the caravan camping leisure sector, which Barclays had created a separate arm for, so there is no doubt there. Let us be honest: the types of businesses that can grow, even under difficult financial circumstances, appear to be targeted. There is an indication in the Tomlinson report that there have been elements, if I can put it this way, of predatory practice.
Again, I want to emphasise the point made by the hon. Member for Aberconwy: this is about businesses being told what is good for them. It is about businesses, once they get into financial difficulties, being told, “We need a report. We need someone to come in and do some work on how you’re running your business. We need valuations—and, by the way, you’ll pay for them at our behest.” The cost is not a few hundred pounds, or a couple of thousand pounds. These are significant sums of money. In any other world, we would call what the banks are doing an absolute rip-off. They actually gerrymander the valuation of businesses. That is simply not acceptable.
On the last couple of occasions on which I have attended meetings of the all-party interest rate swap mis-selling group, chaired by the hon. Member for Aberconwy, I have made this plea. The Royal Bank of
Scotland—I should have declared at the beginning of my speech that I have banked with the Royal Bank of Scotland for more than 40 years; I try my best to keep on the right side of it—is 80% state controlled. We cannot release it back to where it was before the banking crisis. I have been pleading with the chair of the all-party group, and there is a Minister here this morning, so I plead with him: do not release the Royal Bank of Scotland and send it back to whence it came, because we need some kind of control over this bank until some of the problems that it has caused are sorted out.
I know that the hon. Member for Aberconwy was anxious about the language that we should use in this place, despite the cover that we have, but I think that there is a culture of predatory business that is destroying businesses and, more importantly, destroying people’s lives. I apologise if I have missed a piece of work that the Select Committee on the Treasury has carried out, but I think that we need some of these people back in front of the Treasury Committee, explaining some of the charges that they are imposing on business. They are crippling business, not helping it. These big banks are organisations that we all looked at years ago, before the crash, and thought, “These are decent people that we can all do business with.” Frankly, they have been wolves in sheep’s clothing. They do this nation and the economy of this country no good whatever when they take businesses down.
It is a pleasure to serve under your chairmanship, Sir Roger, as we discuss a subject that is vitally important for small business owners across the country. As someone who was a small business owner before coming into this place, I like nothing more than the opportunity to reflect on what is happening with small businesses and, of course, the vital relationship between small businesses and their banks.
I congratulate Guto Bebb on securing the debate. Everyone in the House will know how much of his parliamentary energy he has dedicated to the cause of small business redress, most notably through his campaigning on the interest rate swaps issue—an issue about which he and the Opposition share many concerns.
This debate and this report go to the heart of several big questions that Government and society need to address. What are banks for? Whom should they serve? What is the role for Government in that relationship? Where does the balance lie for banks in protecting their own interests and those of their customers when a conflict is seen to exist? A key question is not whether there has been any wrongdoing, but whether, as has been alleged in the Tomlinson report, there has been systematic fraud by Britain’s largest bank. We need to be clear that that is what Tomlinson is suggesting in his report. It is an incredibly powerful and potentially huge allegation from someone who sits at the heart of Government as an entrepreneur in residence at the Department for Business, Innovation and Skills.
The report also poses questions about how a responsible Government should balance the need to expose wrongdoing and scrutinise questionable practices, which has come across loud and clear in this debate, with the need for a measured and considered approach to evidence gathering, particularly when the allegations are as serious as those made in the Tomlinson report. The report is clear in its call for a change in the culture of British banking. Indeed, Tomlinson echoes concerns and remedies that the Opposition have already called for.
Mr Tomlinson is a much respected entrepreneur who has won admiration from across the business sector for his own business success as a British manufacturing success story, but he is involved in a long-running and bitter dispute with RBS. Given the way in which his report changed between the original draft that was sent to RBS and its subsequent publication, many people feel disquiet about the independence of the report and the strength of the evidence base that led to a report as hard-hitting and potentially damaging to UK plc as this one.
As my hon. Friend Mr Umunna has said and few will disagree, there were many things wrong with banking practices and many causes for concern about the way in which the relationship between businesses and the banks has been conducted in recent years and continues to be conducted today. That was why my hon. Friend publicly called for those guilty of LIBOR rigging to face jail, and why Labour has led the way in calling for decisive action on the mis-selling of interest rate swaps. We have been very much with the hon. Member for Aberconwy on that. We have been resolute in calling for speedier action to bring about closure and settlement for companies that were mis-sold products, and concerned at the way in which the Financial Conduct Authority has failed to ensure that the banks complied with timetables that they had promised to adhere to. At this stage, I would like to place on the record my admiration for the work done by Bully-Banks to highlight some of these issues and to ensure that the matter is kept under the glare of public scrutiny. Indeed, as we meet today, banks have paid out less than 3% of the amount that they have set aside for compensating the victims of that scandal.
Those concerns were also why Labour tabled an amendment to what was then the Financial Services Bill that would require Ministers to bring forward proposals to help firms to pursue collective redress against the mis-selling of swaps, which the Government combined on to vote down.
I think that many important points have been raised during the debate and that is certainly one of them.
We share the disappointment at the continued excesses in bank bonuses and the failure of the Government’s bank bonus levy to yield the returns that it promised. After all, we are having this debate just a day after publication of a survey showing that managing directors at banks in London are expecting a 44% rise in bonuses for 2013.
I turn now to some of the contributions made by hon. Members to the debate. Unsurprisingly, the hon. Member for Aberconwy made a series of significant contributions to the debate that he initiated. It was interesting that he reflected on the fact that Tomlinson had spoken to the all-party group on interest rate swaps. I was surprised to discover that during this process, Tomlinson never spoke to RBS and never gave it an opportunity to put the allegations that he was making in an alternative light.
The hon. Gentleman refused to take the bait that I generously offered him to say that the behaviour highlighted in the Tomlinson report would have verged on the illegal. I think that he understates the case. Tomlinson is fairly unequivocal. He is clearly alleging systematic fraud on the part of Britain’s largest bank—in effect, it is feathering its own nest by bringing down businesses that without the intervention of the bank would have survived and thrived.
It is fair to say that the allegations in the report are extremely serious. That is why, in my initial remarks, I welcomed the fact that the Government have referred the report to the relevant regulatory authorities—because I think that it is important that those allegations are looked at very carefully. However, the purpose of this debate was to highlight the significant effort in the media to portray Mr Tomlinson as a gentleman with a vendetta against RBS. The opportunity today was to highlight the fact that constituency MPs have seen behaviour by RBS and the GRG that is identical to that highlighted in the report.
There is no question about it: we have heard a lot of evidence of that sort. I agree, of course. I welcome the fact that the Government have referred the report on, but it is hard to see how they could have done anything else, on the basis of the strength of the report. The way in which the situation has been handled poses questions about judgment in terms of the seriousness of the allegations being made.
The matter will now be looked at by the Financial Conduct Authority. We are talking not about an external report to which the Government have to respond, but about a report written by someone at the heart of Government, which is apparently based on anecdotal evidence and which does not give RBS much of a right of reply. That is why I have questions.
The hon. Member for Aberconwy raised a legitimate question about the impact of the charges levied by banks on businesses that are already struggling with cash flow, and the powerlessness that businesses feel when they enter the restructuring process. In some cases, a business enters the process knowing that it is in trouble and feels as though the process is making the situation worse. I also recognise that Tomlinson highlights, as my hon. Friend Mr Brown has said, the fact that some businesses did not consider themselves to be in crisis until the moment they entered the process. The report raises many questions and we need to hear the Government’s response. It is important that we continue to put pressure on the banks, and indeed it is hard to see how that pressure will be alleviated.
My hon. Friend Natascha Engel highlighted suspect practices by RBS that were experienced by a business in her constituency. She repeated Tomlinson’s claim that systematic fraud was taking place. Interestingly, she asked the Minister to explain why he was certain that such practices were not occurring. Given that the report has come from the heart of Government, I imagine that he must be pretty clear that such fraud existed. I do not want to prejudge his comments, but I would be interested to hear what he has to say on that. My hon. Friend also made a significant point about the imbalance and unfairness of the relationship between banks and firms that are battling to stay afloat and do not have the resources to take on a major bank.
My hon. Friend the Member for Dumfries and Galloway raised an example from Barclays that it made it clear that such practices are not confined to RBS, although the Tomlinson report was entirely about RBS. My hon. Friend focused on businesses being driven into distress. He said that RBS was 80% state controlled. Although RBS is state owned, it has become clear under successive Governments that the bank is not state controlled; it is run in its own way. Perhaps we need to consider the fact that an organisation owned by Government is not always working in the best interest of British businesses and UK plc.
As I have said, we share many of Mr Tomlinson’s concerns and conclusions, and I now turn to the areas on which we agree. The Tomlinson report recognises the fundamental faults of the lack of competition in the British banking system, on which the Opposition wholeheartedly agree. Some 89% of small businesses are locked into the big five banks. The report also speaks of the need to change banking culture so that banks see small businesses as partners rather than merely cash cows, and so that the two can grow locally together. Such a model would not only be good for small businesses but lead to a stronger and more durable overall economy. That is why Labour proposes a new generation of local banks based on the Sparkassen model to add genuine competition on the high street. That would create a major new player that would not operate according to the same lending models as all the other banks, and would boost local decision making.
Although net lending has fallen every year during the crisis, our biggest European competitor, Germany, has seen an increase in lending over the same time. After the crash in 2008, a crisis occurred in bank lending, and far from being improved in the years since, it has continued to constrict. Tomlinson is right to say that we need greater competition. Alongside the new local entrants to the banking market, we are calling for greater bank account portability to ease the path into the market. Even a huge bank such as Santander found it exceptionally difficult and expensive to gain a foothold in the UK market.
We also agree that the culture of selling additional products and services alarmingly supersedes that of best serving customers’ needs, as was demonstrated by the interest rate swap scandal. Britain is currently facing a mutual crisis of confidence in small business lending, and in the relationship between banks and businesses more widely. A survey of members of the Federation of Small Businesses found that more than half of small businesses believe that banks do not care about small businesses, and, similarly, banks fear lending money to businesses. Such mutual distrust is one of the reasons why we have had the slowest recovery for 100 years. The Tomlinson report will, indisputably, further damage the confidence between banks and businesses. The Government have a grave responsibility to ensure that, when such damaging criticisms are made, every possible step has been taken to verify and scrutinise those criticisms before the Government endorse them.
In that context, we have significant reservations about a report that contains such serious allegations of systematic and widespread corporate fraud. There are concerns that, at best, the Tomlinson report will not be seen as being truly impartial. We have reservations about the Government’s endorsement of the report when its evidence base has not been subject to any public or, as far as we are aware, departmental scrutiny. The Secretary of State for Business, Innovation and Skills told the House during recent Business, Innovation and Skills questions that Tomlinson’s
However, the Tomlinson report states that businesses rarely survive the global restructuring group process, and that they never come out again. Tomlinson highlights the fact that
“a whistleblowing ex-RBS banker confirmed that they could not think of any occasion in which a business entered RBS’ Global Restructuring Group and came back into local management.”
The report by Sir Andrew Large showed that 50% of businesses traded out of the GRG, and that only about 10% became insolvent, so it is difficult to see how the Secretary of State could use the Large report as a justification for the publication of the Tomlinson report.
The Parliamentary Private Secretary to the Secretary of State for Business, Innovation and Skills appeared to be supportive of what the hon. Member for Aberconwy said, so I do not know whether his contribution has the Secretary of State’s implicit support. Tessa Munt certainly appeared to be working collaboratively. The allegations in the Tomlinson report are incredibly serious, and they clearly carry the stamp of Government.
If Labour had been in office when the issue came to prominence, we would not have been as quick as the Secretary of State has been to rush out this departmental report, about which there are many questions to answer. I am told that if Tomlinson had chosen to speak to RBS, he could have been referred to companies such as Samsonite, Fairline, Independent Slitters Ltd and many others, which would have told him that the GRG process was positive for them. He chose not to do so, and as a result the report represents serious concerns but does not reflect all points of view in a balanced way.
Had Labour been in office, we would have ensured that the FCA, which is the appropriate body to investigate such grave allegations, was immediately commissioned to conduct a full and proper inquiry before the trust between banks and businesses could be damaged by a sensational report such as the Tomlinson report. I do not suggest that bad practices do not exist or that we have not been pushing the banks to identify where they have failed their business customers, but we consider that the anecdotes in the report provide a pretty tenuous basis for such serious allegations to be made with the stamp of Government approval.
With that in mind, I ask the Minister to address the following questions. Was the Secretary of State aware of Mr Tomlinson’s ongoing dispute with RBS when he was commissioned to produce the report? If so, what assessment did the Secretary of State make of any potential conflict of interest before giving it the departmental stamp of approval? Why did the Secretary of State trumpet the report as independent when it was produced in his Department by someone with a close interest in both the party and the issues under discussion? Why were earlier references to malpractice at Lloyds removed from the final version of the report so that it focused purely on RBS, the bank with which Mr Tomlinson is in dispute, and why was RBS not shown the final report, nor given a chance to submit evidence to it?
The report is sadly lacking in detailed referencing and evidence. Given that the basis of the report seems to be that many of the businesses will have collapsed—presumably, that is on the public record—will the Department be publishing detailed citations for where the allegations have come from? Is the Minister personally satisfied that due diligence was carried out by his Department before it promoted the report? Does he agree that if the report’s claim that RBS was systematically involved in deliberately distressing businesses that would, without its intervention, have thrived, that would be a matter of corporate fraud on a huge scale, and such an allegation should be thoroughly investigated before being produced in a Government-backed report? Does he think that the appropriate level of scrutiny was given to the report prior to publication?
Finally, as we head towards a general election, I suspect we will hear from Ministers why they think the way in which the Secretary of State operated was not the way things would have been done under a Conservative Government. If we had a purely Conservative Government, would they have handled the report in the same way? If not, in what way would it have been different?
I will start by welcoming you to the Chair, Sir Roger, and congratulating my hon. Friend Guto Bebb on securing this important debate. I will try to address the concerns raised, and I thank all hon. Members for their contributions in this debate.
SMEs are a vital part of the UK economy; they contribute significantly to economic growth. Access to finance is important for funding investment, ensuring businesses reach their full potential, and for facilitating new business start-ups. As hon. Members who have contributed to today’s debate have made clear, it is essential that our banking system works in the interests of SMEs and treats them fairly.
I will turn specifically to the report. Lawrence Tomlinson is one of BIS’s two entrepreneurs in residence. His appointment was made by BIS officials, not by Ministers, following an open competition for which there were more than 200 applicants. Mr Tomlinson is independent of BIS, but, as an entrepreneur in residence, he has the scope to explore and raise matters that he regards as important to SMEs. His report was prepared in that context, so it was not commissioned by the Department or by Ministers. It was a personal report by Mr Tomlinson; it is not a Government report.
I will deal with the questions asked by Toby Perkins, which were all in the same vein. He referred to the report coming from the heart of Government, so it is worth restating that this is a personal report by Mr Tomlinson. It is not a Government report, so Mr Tomlinson was free to publish whatever he saw fit. No Ministers or officials were involved. What was eventually published by Mr Tomlinson was entirely his own choice. It was also his own choice whether to involve the banks that he refers to in the report and what resources he wanted to use.
Guto Bebb referred a few moments ago to the smell test. I do not know whether the Minister is attempting to distance himself from the report, but anyone applying the smell test would say that an entrepreneur in residence at the heart of BIS was the person selected by BIS officials to do a report that was promoted and welcomed by the Secretary of State for Business, Innovation and Skills. It does not feel independent.
I disagree with the hon. Gentleman. The value of the report is that it is entirely independent. It was done by Mr Tomlinson in a personal capacity. He was free to look at any of the issues that he saw as important to the SME sector. I will look at the important issues he has raised, but at this stage I want to make it clear that it was a personal report by Mr Tomlinson and not a Government report. Once that is taken into account, the answers to the questions that the hon. Gentleman asked become clear.
The allegations made in Mr Tomlinson’s report are deeply concerning, and they have raised questions as to whether banks—particularly RBS—are treating their customers appropriately. We expect all banks to act with integrity across all the business activities that they engage in. Separately, as we have heard, the new management of RBS also commissioned Sir Andrew Large to conduct an independent review to examine RBS’s support to SMEs and the decisions that they make on SME lending. Following that review, a report was published on
The reports, which were not Government reports, contained some very serious allegations, as we have heard from various hon. Members, particularly from my hon. Friend the Member for Aberconwy. It is now the responsibility of the Financial Conduct Authority to undertake investigations into allegations surrounding RBS’s lending practices and treatment of small businesses.
The FCA has now considered both reports. It has notified RBS that an independent skilled person will be appointed in accordance with the FCA power under section 166 of the Financial Services and Markets Act 2000 to review the allegations made against RBS.
Is there a time limit on the investigations being launched by the FCA? Foot dragging is a really serious issue, and every single day means more money lost to small businesses, so is there a specific time frame to which that person is working?
First, the FCA has yet to appoint the skilled person. I am not aware of a specific time limit, but it is fair to say that the FCA understands the urgency of the situation and the need to look into the allegations as quickly as possible. However, the hon. Lady will agree that it should take whatever time is necessary to get to the bottom of such serious allegations. The FCA will need to be satisfied that the skilled person appointed to review the allegations is sufficiently independent to carry out the work.
I am sorry to press this, but one of the very serious issues is the foot dragging, and the more time that is taken, even if it is under the guise of making sure that every i is dotted and every t is crossed, means more small and medium-sized businesses are unnecessarily going under, so the time pressure is really serious. I want to re-emphasise that the FCA must be put under pressure by the Treasury to ensure that the review is done as quickly as possible.
I agree with the gist of the hon. Lady’s comments, but I am not sure what she means by foot dragging. The report was published on
The hon. Lady and other hon. Members mentioned the allegations of fraud in the report. They will understand it is not for Ministers to determine whether criminal activity by any institution or individual has or has not taken place. That is something that the courts and authorities must look into. If she or other hon. Members have been contacted by businesses with concerns, it is timely to remind her that micro-enterprises can go to the Financial Ombudsman Service with any such concerns. Businesses can also raise concerns directly with the FCA, which will investigate if it is appropriate, and of course any organisation is free to go to the police with any concerns about criminal activity. The police may involve other authorities such as the Serious Fraud Office.
In respect of some of the issues that hon. Members may be hearing about, as the Minister is aware, the arm of RBS operating in Northern Ireland is Ulster bank. Customers of that bank talked to Tomlinson, and other issues have arisen since the report. Will the skilled person appointed by the FCA look specifically at questions about the practices that seem to have been instilled into Ulster bank as well?
I also mention, as my hon. Friend did, the Clifford Chance report commissioned by RBS and described by RBS as independent. I note my hon. Friend’s concerns about Clifford Chance; I listened carefully to what he said. Although it is for RBS to decide whom to appoint, I will ensure that his concerns are conveyed to RBS.
Mr Brown discussed the future direction of RBS. He and others will be aware that on
The Tomlinson report also recommended that state-owned banks be split into small banks focusing solely on retail and commercial lending as a means of improving competition in the banking sector. The Government are already committed to greater competition and diversity in the UK banking sector both locally and nationally, which is why we asked the Independent Commission on Banking to investigate competition issues in the UK banking sector as part of its work.
The ICB uncovered a number of issues, and we are taking forward its recommendations in the Banking Reform Bill and through other legislation. We are removing the competitive advantage that big banks get from the “too big to fail” system by introducing ring-fencing in the Bill. We have also secured a new seven-day switching service delivered by industry that will allow both consumers and SMEs to switch businesses accounts far more easily, and we have introduced a strong competition objective for the regulator, the FCA, to help it promote competition much more effectively.
The new regulators have already introduced big changes on the regulatory side to make it easier for new banks to enter the market, grow and compete with the large incumbent banks. We are also taking further action in the Banking Reform Bill by creating a new payments regulator to ensure that new and smaller banks have fair and transparent access to the payment system, and giving the Prudential Regulation Authority a secondary competition objective to strengthen its role in ensuring competitive banking markets. The Bill will also give the FCA further competition powers.
Hon. Members mentioned the future of Lloyds and RBS. At the national level, both RBS and Lloyds are in the process of divesting part of their UK banking businesses, creating new challenger banks. The Government have taken the first steps to return Lloyds to the private sector and are actively considering options for further share sales. The reintroduction of the TSB brand on the high street is great news for competition. That action is further evidence of the Government’s stated aim not to be a permanent investor in the UK banking sector.
The Government do not believe that there is a strong case for breaking up the core operations of any bank in which we have a stake. The cost of reorganisation would be attributable to the banks, and consequently to the taxpayer. The time required to execute such a reorganisation would also be lengthy, further delaying the Government’s ability to return the banks to private ownership.
Before I conclude, I turn to a couple of the other issues raised by hon. Members. My hon. Friend had concerns about insolvency, relating not just to the Tomlinson report but to the process more generally. His comments show how much he has researched the subject, so I take what he said seriously. He will know that the Department for Business, Innovation and Skills is the lead on insolvency issues, but I will ensure that my colleagues in BIS are aware of his concerns. Perhaps, if he finds it useful, I could arrange a meeting for him with the relevant Minister to discuss this important issue.
My hon. Friend will know, however, that insolvency procedures can be commenced only by a court order, and that the whole process is subject to supervision by courts. It is deliberately designed to ensure transparency, make the process legitimate and provide a forum for any disputes, as they often occur throughout such a fought process. I will take the issue forward for him and see whether more can be done to listen to his concerns.
I suspect that the extent to which the Minister has attempted to distance himself and the Government from the report speaks volumes. Does he believe that how BIS and the Business Secretary have handled the Tomlinson report and its impact on RBS’s performance is ultimately helpful to this Government’s future success, or does he think that it should have been handled differently?
I say again for the record—I hope that I have made it clear to the hon. Gentleman—that this is a personal report by the entrepreneur in residence at BIS. That has always been the Government’s position, and neither BIS Ministers, Treasury Ministers or any other Ministers have ever said anything different. Nevertheless, it is an important report. He will know that the entrepreneurs in residence initiative was started by this coalition Government in order to allow further analysis of what can be done to help the SME sector.
In that vein, we welcome the Tomlinson report, which is why we take its allegations seriously and why we are pleased that the FCA has acted quickly so far to consider them. This debate has shown how much parliamentary interest there is in the issue on behalf of our constituents, due to the number of small businesses in our constituencies that have come to us with similar concerns.
Sir Bob Russell highlighted concerns about the fact that there was no advance consultation with RBS, but in his comments, Sir Andrew Large said that managers at RBS had very little understanding or scrutiny of the Global Restructuring Group. In view of the fact that the report highlights concerns about the GRG, is it really a huge loss that consultation did not take place with a group of managers who did not know what was going on within the GRG, according to Sir Andrew Large?
My hon. Friend raises an important point. I hope that all that will be considered in the independent inquiries taking place.
I congratulate my hon. Friend once again on securing this important debate on issues about which he and many other Members feel strongly. Those issues will be seriously considered by the FCA, and further as required. It is important at this stage, though, to allow the FCA, as the conduct authority, to investigate the claims made in the Tomlinson report.