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Your Voice - how dependency of businesses on banks makes them vulnerable

A little over a year ago, the Department for Business, Innovation and Skills recruited two 'entrepreneurs in residence'. 

This week sees the first major contribution of that positive move, a damning report alleging a very specific banking mis-practice of channelling businesses towards expensive and unnecessary 'turnaround' services. These services, rather than helping businesses to restructure, have contributed instead to their continued dependency on banks and in some cases insolvency. It is the latest in a catalogue of exposed practices that suggest it isn't just lending that's the problem, it's the whole relationship between banks and business.

The financial meltdown of 2008 exposed that most bank lending to individuals and businesses in the UK had a property element, with estimates of up to 80% of such lending in some banks. The painful process of shedding toxic assets and shoring up bank reserves was always going to lead to some casualties. Begbies Traynor estimates that up to 400,000 businesses are barely surviving right now and even the slightest interest rate rise could be enough to push them under. No one envies the banking industry or politicians who have to clean up this market.

But clean it up they must, because like the publication of political memoirs, the banking industry's practices before, during and now - after the financial crisis - continue to spill bad news. The business community has already seen the Libor rate scandal, misselling of swap products, the appointment of under-qualified bank chief executives and the systematic closure of local branches. Now, it has learnt of potentially the most shocking revelation yet, that some viable businesses were manipulated towards using banking products not to help their business but to increase banking revenue.

There is nothing intrinsically wrong with up-selling. There is everything wrong in not making that a transparent process. In practice, the way in which some individuals at some banks sell these products is mired in deceit and obfuscation. Rather than weaning businesses off bank lending, these practices serve only to increase the dependency by reducing the other options available to businesses. For instance, the Forum has been pressing the case of reforming 'deeds of priority'. These deeds make it hard for new lenders to lend money because all the assets are tied up by the initial, normally bank, lending. This is an inhibitor to accessing peer-to-peer financing. As the report states, engineering business defaults closes all doors for that business.

At the extreme end of the allegations made by Mr Tomlinson, banks were deliberating 'distressing' businesses by changing loan terms or undervaluing the business' assets, in order to cream off more money. It should be stressed that this is the exception not the norm. But still, if a practice as extreme as that is tolerated, what other major infringements are more mainstream?

What makes the most recent revelations are all the more galling is the fact that the banking industry is taking positive steps to regain the trust of small businesses. Led by the British Bankers Association, lending and appeals are a more transparent process and many of the challenger banks are seeing barrier lessened to raising their share of the SME market. Even RBS, at the centre of the most recent controversy, has just commissioned a survey into banking relationships, to try and prove it is the best bank out there for small businesses.

The truth is that banks are 'open for lending'; they are just applying stricter criteria than in previous years. What is entirely unacceptable is not being transparent about the customer relationship after the loan is made. And specifically, the attempts to increase the revenue they receive from small businesses.

The problem as ever comes back to competition. Not the existence of it - challenger banks, peer to peer financing, trade finance, Community Development Finance Institutions, business angels, government backed loans for start-ups, asset finance all show there is a wide range available - but accessing it. RBS and Lloyds control the majority of SME lending - over 60%. They don't have to fight to keep customers in the same way the smaller banks need to. Taking steps to ease the transition of businesses from one lender to another is the only way of resolving the current victimisation of small businesses.

The cases highlighted within RBS are not one-offs, either within RBS or the banking sector more generally. The report highlights they are 'systematic and institutional'. If proven, the allegations in the report today show a degree of economic engineering that serves only to entrench the main banks' position as the main lender to SMEs. It defines the very concept of anti-competitiveness.  

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