Treasury Committee
Oral evidence: Banks’ Lending Practices: Treatment of Businesses in Distress, HC 1037
Wednesday 29 January 2014
Ordered by the House of Commons to be published on Wednesday 29 January 2014.
Members present: Mr Andrew Tyrie (Chair), Mark Garnier, Stewart Hosie, Andrea Leadsom, Mr Andy Love, Mr Pat McFadden, John Mann, Mr George Mudie, Mr Brooks Newmark, Jesse Norman, Mr David Ruffley, John Thurso
Questions 1-108
Witness[es]: Lawrence Tomlinson, Entrepreneur in Residence, Department for Business, Innovation and Skills, gave evidence.
Q1 Chair: Thank you very much for coming to see us this afternoon and for the hard work that you will have done preparing this report, an independent report that you have prepared for BIS.
We have all had huge problems with RBS in our constituencies one way or another. We have had SMEs who have encountered many of the problems that you have been describing in this report— the dysfunctionality and in some cases the very poor treatment—and they are very familiar to us. Each case is different but they all have that unifying characteristic. I think we agree, between your report and between both the Treasury Select Committee and the Banking Commission, on a core component of the proposals, which is competition. We think that there is far too little competition in the banking industry and there needs to be a lot more. As a consequence of the reports that those two committees have produced, the Government has legislated to improve the conditions for competition.
You have also come forward, though, with a number of very radical proposals in your report and it is with those that I wanted to start. Do you think it is realistic, frankly, in current conditions to try to separate RBS into six banks?
Lawrence Tomlinson: RBS and Lloyds into six banks.
Chair: It is three each, is it?
Lawrence Tomlinson: Three each, yes. I do, and I think to some extent we have already gone down that road with Project Rainbow in RBS. We have seen Antonio have great success with Lloyds, splitting TSB. I don’t think it would be beyond the wit of man, if we had the will to do it, to create six banks. One has to remember that they were individual banks before at one point in time and Coutts itself is also running pretty much as a separate bank within RBS, so you have the components there. I think my greatest concern is about the interference of non-commercial and retail activity in the banks, investment banks and private equity interfering with the running of what are regular businesses that just want to get on, have a debt function and make money grow and export and all do very well.
Q2 Chair: Do you have any analysis? Have you done any preparatory work on the issue of splitting RBS into three banks?
Lawrence Tomlinson: I have made a lot of inquiries around it through Treasury and through senior members of the banking community who also agree that it would not be impossible to do it. As I say, we have seen Antonio already, with great success, split TSB from Lloyds, so in effect it is putting those projects on steroids. It is just making those projects larger and ensuring that they have a commercial division to each and are roughly around the same size.
Q3 Chair: Did you discuss any of the technical problems of splitting up the IT?
Lawrence Tomlinson: Yes, I did.
Q4 Chair: Do you have any documentary supporting work on that?
Lawrence Tomlinson: I have spoken with individuals at RBS who I have known for many years, people who are inside Project Rainbow. I have spoken with people at Coutts. I have spoken to heads of UK banks around the interference of RBS investment bank with RBS main bank.
Q5 Chair: You have already mentioned the conversations but I am really on the question of whether you have any documentary supporting evidence.
Lawrence Tomlinson: I spoke to Treasury officials around it and I could not really get a sensible answer out of that other than it was—
Q6 Chair: But you said that all these people said it would be possible.
Lawrence Tomlinson: That is correct.
Chair: And the Treasury said it would be possible.
Lawrence Tomlinson: No, Treasury said it would cost far too much and I said, “How much is far too much?” and they said, “A lot”. Post that I said, “Who have you asked about splitting the bank up and the costs?” and they said, “We have asked RBS”. I just said, “Turkeys don’t vote for Christmas”.
Q7 Chair: Could I ask the same question I have asked a couple of times: do you have any documentary supporting work to back up the feasibility of this, or at least to counterbalance the inevitable view that will come from the Treasury that this will cost a fortune and is therefore impossible to do?
Lawrence Tomlinson: No, I have no documentary evidence around that, other than the actual fact that Antonio has split out TSB already, Project Rainbow is being split out.
Q8 Chair: With great respect, you have made those points. There is not any—
Lawrence Tomlinson: No, that is correct. If I could perhaps just take a step back, if that is all right, Chairman. There seems to be some misunderstanding about my role, so it might be easier if I very quickly told the Committee what I do, or if you all know what I do I am happy not to bother.
Chair: Go ahead. You have started so you should finish, as they say.
Lawrence Tomlinson: I was not put in post by the Secretary of State. I applied for a job to be Serial Entrepreneur in Residence for the Government, working out of Business, Innovation and Skills. 100 people applied for the job. I work there one day a week and my remit is not just around banking. It is interaction with entrepreneurs and businesses with Government and how Government interacts with entrepreneurs. I have a wide-ranging remit, looking at how we can encourage growth through planning policy improvements, red tape, the business bank, mentoring. I have looked at the .gov website. I have been involved with the TSB, the Technology Strategy Board not the bank, and access to finance I have found to be a key element. If I was to go down each route—that is what I do one day a week.
Q9 Chair: Can I come back to the questions I was asking? If we are to act on your report or to argue that there should be action taken on your report, take up the proposals of your report, we need quite a bit of supporting material from somewhere. Should we agree with it, where do you think we could get that? What I am trying to get at is—
Lawrence Tomlinson: What is the next step, in effect.
Chair: I am trying to get at what underlying evidence is there to contradict the widely held view that splitting banks is an extremely difficult task? The simple job, which has already been done at an internal level of the good bank-bad bank split, has been rejected. I take it you think that was also a mistake.
Lawrence Tomlinson: Just from a personal point view, I couldn’t see the benefit of good bank-bad bank apart from enabling RBS to be recapitalised and able to lend more, but it has not been lending much anyway so—
Q10 Chair: Isn’t that a rather good reason? You just said yourself it has not been lending much and this would enable it to lend more.
Lawrence Tomlinson: If that would help, that would be great.
Q11 Chair: I have one last question in this area. You also propose a complete separation of investment banking from retail banking right across banking. In other words, you reject the Vickers proposals and the Banking Commission’s review of the Vickers proposals that were to electrify that ring-fence that Vickers has proposed. You feel that even at this stage those proposals should also be set aside and replaced by a full Glass-Steagall type separation. Is that right?
Lawrence Tomlinson: I think the investment bank would benefit from being separate. The investment bankers could go off and earn whatever they like. It is not going to upset people the way it does currently. I think it would be mutually beneficial. I see the real issue around the separation, the point that concerns me most, is not protecting the savings and the cash that is in the commercial retail bank from being taken out by the investment bank and used in the investment bank and, as we hear, sort of gambled. I am more concerned about the interference of the investment bank down-selling and the absolutely shocking things that have happened that I have seen real evidence of, where investment bank has interfered with commercial bank.
Q12 Chair: We are going to come on to some of that in a moment. I just want to be clear on what the proposals are in the Tomlinson report. They are that investment banking should be hived out of our major banks completely, that we should implement a Glass-Steagall type reform now, and that as soon as possible the retail bank that is left behind for Lloyds and RBS should be split into three each. Is that correct?
Lawrence Tomlinson: Each bank should be split into three, as they almost are now.
Q13 Chair: Did you make any estimate, roughly, of how long you think that set of reforms would take, if I have described them accurately?
Lawrence Tomlinson: No, I didn’t. Looking at the way they have been split up and the way Antonio has split TSB up, I don’t think it has to take forever; a year, 18 months.
Q14 Mr McFadden: Good afternoon, Mr Tomlinson. Can you tell us a bit more about what Entrepreneur in Residence means?
Lawrence Tomlinson: As I say, I am interfacing with the Department and any MPs or Ministers that want any input, want to meet an entrepreneur. I spend time looking at things like the .gov website, as an example, to see what it means to an entrepreneur. One of the first jobs I had was looking at Lord Young’s report and the terminology around some of the information that was going out to see if an entrepreneur, someone outside of Government, understood it and how the message came across, simple things like that, as well as listening to entrepreneurs and feeding their issues back into Government.
Q15 Mr McFadden: I want to ask you about the report in a second but how did you come to do it? Were you asked to do it or was it your initiative? How did this come about?
Lawrence Tomlinson: It is my report and my initiative.
Q16 Mr McFadden: So you said, “As part of my role, this small and medium-sized business lending issue is huge. I want to do a report on it”?
Lawrence Tomlinson: Yes. It became very evident early on that the biggest impact I could make in helping growth and helping businesses was to look at the disconnect between what the banks were saying in terms of what they were lending and what businesses were telling me on a day-to-day basis. I then contacted businesses and asked them how they were finding access to finance and what came back did not particularly shock me, as you say in your postboxes as MPs, but what did shock me was that businesses that came back were saying, “Not only am I finding access to finance difficult, I am having my existing facilities taken away from me by RBS GRG” and lots of issues around West Register. That postbox just grew and grew.
Q17 Mr McFadden: That disconnect is something I think everybody around this table would be familiar with, having been involved with this ever since the crisis began, banks telling us one thing and the banks’ customers, who are our constituents, telling us another. Going back to the Department of Business, what was the interaction with the Department during the research and writing of the report? Did they supply you with some of the material and case studies or did you garner all those yourself?
Lawrence Tomlinson: The vast majority came to me. Some people started writing in to the Department and they were passed to me, but the vast majority came to me. I ended up with this dossier of evidence. We have all heard in the past Angela Knight, on behalf of the BBA, saying on the radio or whatever it is that the banks are lending and then we have many people saying on behalf of RBS that nine out of 10 businesses who apply for a loan get it. It did not stack up for me so I started to look at it and I built up this dossier of evidence around it. The dossier of evidence led to lots of traits and I identified this particular disturbing trait in the Global Restructuring Group of RBS, which is what I have highlighted in my report as being the main and most worrying thing.
Q18 Mr McFadden: Perhaps others will come on to the detailed recommendations but I want to stick with the way it was produced. In advance of the report’s publication, did you meet with the Secretary of State for Business and go over this with him and say, “This is what I have found, this is what I am going to be publishing”? Was there a conversation like that?
Lawrence Tomlinson: Yes. The conversation that we have just had around the disconnect between that, and also Michael Fallon was aware that I was looking at this disconnect and seemed to kind of joke around the fact that, “Well, we all know about that, don’t we?” but there did not seem to be any real evidence around it. So I built up this dossier of evidence and I said to the Secretary of State, “This dossier of evidence is growing. It is really worrying for me and I have decided to write a report on it”, which I did, and then I gave my initial findings to the Secretary of State prior to the publication of the report. Is that helpful?
Q19 Mr McFadden: Yes, it is. There has been a suggestion that the Treasury were less happy with your report, that they did not want it published. They did not think it was rigorous enough. Have you heard that, read that anywhere? Is this the first time you have heard that expressed?
Lawrence Tomlinson: No. I have heard it in the press. The Treasury had a copy of the report. I met with Sajid Javid and John Kingman and they did not come up with any reasons for me not to publish a report and obviously backed the publication of the report, because it was published.
Q20 Mr McFadden: So you discussed this with the Treasury Minister in the same way as you discussed it with Department of Business Ministers?
Lawrence Tomlinson: Yes, just saying I had found these alarming traits in RBS GRG, which I had previously discussed with different people in Treasury around breaking up RBS and Lloyds. I spent a lot of time discussing that with different people in Treasury.
Q21 Jesse Norman: Mr Tomlinson, your findings struck a chord among many Members of Parliament who have experienced apparent mistreatment of businesses and small businesses in their constituencies, and I have certainly had that experience. I want to ask you a little bit about the basis of the evidence that you described a moment ago in response to Mr McFadden. How many companies in all approached you as part of your—
Lawrence Tomlinson: In the initial batch of dossier of evidence there were about 200 companies.
Q22 Jesse Norman: Did that get larger over time?
Lawrence Tomlinson: It continued to grow. Prior to publication it just continued to grow and since publication well over 1,000 people have contacted me now.
Q23 Jesse Norman: From how many companies roughly, do you think?
Lawrence Tomlinson: About 1,000 companies have contacted me. I am counting companies and people as being one thing, because some people are one-man bands.
Q24 Jesse Norman: How many examples do you use in the report? Obviously some of it is redacted so it is not absolutely clear.
Lawrence Tomlinson: Yes, and on that point, the reason the evidence is redacted is because of the anonymity that I have had to give to people, the whistle-blowers from RBS and GRG, and also the fear that people have of the Global Restructuring Group. That is why it is anonymised. The traits and core people who went into the initial body of evidence I think were 23.
Q25 Jesse Norman: So 23 examples were drawn in the original report?
Lawrence Tomlinson: Distilled from the 200-ish in round figures.
Q26 Jesse Norman: Of the 200 or the 1,000, if you have done the analysis, how do they split between the major banks?
Lawrence Tomlinson: I have not been able to do the split on the 1,000. I cannot keep up. As I was at pains to point out, I work as Entrepreneur in Residence one day a week. I have had to employ an assistant myself who is going through that. As soon as we get the mailbox down, it goes up. The vast majority are around RBS and particularly GRG.
Q27 Jesse Norman: Do you think over half would be RBS and GRG?
Lawrence Tomlinson: Yes.
Q28 Jesse Norman: That might be because they have seen you have written about it and therefore they have a concern or it might be because that was their place in the market or their misbehaviour.
Lawrence Tomlinson: It is a much greater proportion. Even though they were the biggest lender in the market, it is a massive amount, massively disproportionate. In the initial dossier of evidence and initial findings that I presented, out of the 23 cases, 20 were RBS GRG and they were the only ones that followed a clearly identifiable pattern, which was what really disturbed me.
Q29 Jesse Norman: How many of the 200 were healthy businesses that you thought were being rammed through this process?
Lawrence Tomlinson: I discarded lots of businesses. As you will all get as MPs in postboxes, when a business fails it is an emotive time. It was perhaps never their fault and we always hear people blaming the bank. I tried to take a judgment on what I thought was a clearly viable business and those are the ones I concentrated on. When I say a viable business, I am talking about a business that was meeting its interest payments and capital payments and was quite often ahead of its business plan that was put into the Global Restructuring Group.
Q30 Jesse Norman: How many of those 200 might have fitted that description?
Lawrence Tomlinson: It is very difficult to say. Let’s say well over half, something like that.
Q31 Jesse Norman: It might be 100, of which 20 from RBS and three from other banks made it into the final report?
Lawrence Tomlinson: Yes, that kind of thing, but it is very difficult because as well as just getting a piece of paper, I have had to interview these businesses and at the very least phone them up and chat to them to make sure, and then there is the—
Q32 Jesse Norman: Did you speak to all of the ones you included?
Lawrence Tomlinson: A lot of them have come in and seen me at BIS, and thank you to the Chairman. He let me go to Belfast to meet Ulster Bank people.
Q33 Jesse Norman: You did an evaluation of the ones that you included to make sure that they genuinely were healthy?
Lawrence Tomlinson: Yes, absolutely, as best as I could. The other part of it is I do not pretend that my report is a full forensic analysis of all these businesses at all. I am quite at pains in my report to point that out. That is what I am asking for.
Q34 Jesse Norman: Do you think small businesses understood the covenants, either the idea of the covenants or what they amounted to, in every case?
Lawrence Tomlinson: I think there is a huge amount of trust that smaller businesses put in the bank. RBS has grown the trust of all of us and our forefathers over 300 years and is seen as a trusted establishment. The loan documentation that you get is identical and can’t really be changed by a small business, so what you get is what you sign. Do they understand it? They are very complicated documents and it depends on the sophistication of the borrower.
Q35 Jesse Norman: We can be fairly clear that in the parallel case of swaps they did not understand, in many cases, what the swap was and what they were signing up to. The question is how far did you find a parallel lack of understanding in the case of loan documentation?
Lawrence Tomlinson: I think they have a fair understanding of the general terms of what the covenant is. I feel that they feel powerless to discuss it or change it and if they ask their lawyer if it is all right, they will say it is the RBS document.
Q36 Jesse Norman: Just to be clear, it was not so much the fact that they did not understand the covenants but that they trusted that the banks would be more honourable in discharging their side of the bargain.
Lawrence Tomlinson: Yes. They have not all broken covenants, as they would see it, to get into their restructuring department. It is a mixed bag of who understands what, but they just accept that the bank will be honourable.
Q37 Mark Garnier: Before I start, I am inclined to echo the same point that I think all my colleagues on the Treasury Committee are going to make, which is that this absolutely resonates with many Members of Parliament who get exactly this type of thing in our mailbags.
When we look at this, sometimes you have to turn it slightly round on its head. I noted that you said on a number of occasions that you picked 23 companies of the 200 companies who had been in touch with you and there are 1,000 companies that have got in touch with you after this, but I think there are some 4.9 million private sector businesses in the UK. In one of your statements a bit earlier you also alluded to that people don’t get in touch with their MP, or indeed you, to say what a fantastic job the bank is doing. That is not strictly true actually, sometimes they do, but it is very infrequent and people will usually come to the Entrepreneur in Residence at BIS or their MP when something has gone wrong. You have also alluded, very helpfully, to the fact that of the people who were coming to you there were a number who clearly were running businesses that probably were not viable, or indeed definitely were not viable, and were looking for somebody else to blame.
Given that, and given that there are nearly 5 million private sector businesses in this country, to slightly play the devil’s advocate in this do you think that it is a vanishingly small number of businesses that have a complaint and that the system is not as broken as perhaps your report suggests?
Lawrence Tomlinson: The short answer is no. I have had so many cases wherever I go that I think it seems to be systematic to me. The cases with RBS GRG are all pretty much identical and follow a system, which is completely different to the other banks. I had complaints from other banks but they did not follow the same system. They were not as worrying. The actions of GRG were so disproportional to a breach of covenant.
Mark Garnier: If I may, I would like to test some of your assertions, as I say not by way of trying to pick holes in it but by way of trying to play devil’s advocate.
Lawrence Tomlinson: Yes.
Q38 Mark Garnier: For example, you talk about covenant breaches merely being intended to be flags in the system to give the bank the ability to monitor a business’ performance, but if it is monitoring and the business’ performance has been breached surely, even by that statement, that is a problem for the bank. How would you respond to that? The bank actually has to do something about it, arguably.
Lawrence Tomlinson: Yes. It depends on the covenant breach, I think. If you are four days late sending your accounts in you should not really be put in GRG. You don’t need restructuring for that breach. If you have missed six months payments and you don’t look like you are going to make it then it is a material breach and you should be in GRG. What we see is GRG having their own valuation department, doing desktop valuations on perfectly viable businesses and creating a breach.
Q39 Mark Garnier: One of the things that I have suggested in the past, certainly as part of the Banking Commission, is that one seems to have three different types of businesses. One type of business has a strong balance sheet and a strong cash flow and therefore is not in breach of any of its covenants, and these tend to be the businesses that are almost preselected for large overdraft facilities. You then have another type of business, which has a poor balance sheet and a poor cash flow, so this is where a bank may find itself with a £10 million loan against £5 million worth of assets and therefore this is a problem. It seems to be the case that those businesses have been given huge amounts of forbearance and been looked after quite well because obviously the bank at some point does not want to crystallise that loss. The third type of business is a business that I think you are describing here, which is where you essentially have a strong balance sheet but something wrong with the covenants, maybe something wrong with the cash flow, that type of thing, so the bank can recover money but is being tripped up and pushed into the GRG or some type of restructuring.
Lawrence Tomlinson: A typical business that GRG and West Register seem to like is any business that has good assets, whether it is—
Mark Garnier: So a strong balance sheet.
Lawrence Tomlinson: Yes. It is whether it has good assets that they can recover their debt on. Whether or not it is meeting its cash flow requirements is not—
Q40 Mark Garnier: Is it the covenants then that is—
Lawrence Tomlinson: The asset values can be valued at whatever if you are the bank valuing them for yourself.
Q41 Mark Garnier: I accept this. Similarly, if you challenged RBS, or indeed any bank, about this, because we have these problems coming through, we have a business that is stumbling a little bit but generally speaking doing okay and one of the complaints is that they get put into a business support group, GRG, whatever it happens to be, and a charge comes with that. The banks would counter that to say that if you are a normal business you are one of 500 customers for a relationship manager, but if something is going slightly wrong for your business you should have better care given to you by your relationship manager and they can’t do that. That is why they put them into business support where you probably have 20 customers per relationship manager, but that of course comes with a cost. I must say I am not entirely certain I agree with their logic on that, but it is not an unreasonable one. Does a business that is stumbling need more help?
Lawrence Tomlinson: I absolutely agree with your logic and that would be great if the businesses were getting that help in GRG and were being turned around. I haven’t come across any businesses that get that. I get two kinds of whistle-blowers. One is from the main bank who are saying, “I can’t remember the last time I had a business that went to GRG and came back”. There is a very different approach to the restructuring department in RBS to any other bank in the UK. As Sir Andrew Large pointed out in his report, there is this conflict of interests all the way down. I am not sure if it was you who described them as judge and jury. I believe someone on the Committee did and Sir Andrew agreed with that. He also agrees there are structural deficiencies within GRG that need looking at and need forensic examination.
Q42 Mark Garnier: A couple of technical questions. You also claim that property valuers have an incentive to undervalue properties due to the penalty structure they are held to. There is a redress for over-valuation so therefore they are incentivised to do that. Is that a significant problem?
Lawrence Tomlinson: We do get the term, “No one ever got sued for over-valuing”, but the valuations are an issue in GRG because GRG are known to do their own desktop valuations, charge a business £10,000 and not give it a copy of the valuation, and when you ask for it you don’t get it. These are the sort of things that are going on. I am under no illusion how shocking the revelations or the assertions in the report are and I was truly shocked when I came across them. I did not believe them. When I got the first 10 I started to see a pattern with GRG. Then I had other people coming along and telling me things that had happened to them and evidencing them and seeing businesses with strong cash flow and assets, who were meeting their payments, being put in there. There is also a real worry that if businesses who have been missold swaps go into GRG and go into administration, they don’t have to pay out for the misselling or get rid of the swap because the business has gone. So there are lots of benefits to a bank. I know it sounds very—
Q43 Mark Garnier: There is a circular argument because, of course, the bank in the consequential loss redress will have to pay itself back, effectively. But just to follow up on your point, you are making some pretty serious allegations. Are you summarising this as a conduct issue or do you think this will ultimately end up with the Serious Fraud Office?
Lawrence Tomlinson: That is for the Serious Fraud Office, but what I see is—
Q44 Mark Garnier: What would you like to see? Again, it is an important question: is it in your opinion just very bad conduct and they should tidy up their act or are you, in your report—and you have obviously looked into this a great deal—alleging that there is criminal activity going on?
Lawrence Tomlinson: It is very difficult for me to define criminal activity, but what I do think happened—and I think it ties in very well with Sir Andrew Large’s report—is we all don’t quite understand how RBS’s lending to SMEs has gone from £55 billion to £38 billion over this four-year period. In fact, Sir Andrew did not come up with a reason or who was responsible for it. I think what we have seen, and this is the area that I think is really shady or the bit that is not transparent, shall we say, is that at some point about 2008, 2009 RBS decided that they were out of lots of businesses, which we all know they were out of businesses. But they were not just out of businesses that were not performing, which we would have hoped they were as a Government, or as a country in fact. We would hope that if they had dodgy businesses that were going to fail, fair enough, take them off your balance sheet, do the best you can. I think what happened is that GRG was turned into basically a debt collection agency to deal with the non-core, as described by the board of RBS and agreed with UKFI in about February 2009. If you look at the numbers, for example GRG in the period 2011-12 was working on £14.5 billion of debt of which only 6% returned to performing portfolio. That is a pretty stark number.
Q45 Mark Garnier: Are you suggesting that GRG was a profit centre in its own right?
Lawrence Tomlinson: Yes, absolutely.
Q46 Mark Garnier: Therefore it was completely disincentivised to support the businesses. It was incentivised to asset strip them.
Lawrence Tomlinson: Yes, absolutely.
Q47 Chair: Is that what you meant when you said that there was systematic and institutional engineering of financial distress?
Lawrence Tomlinson: Yes. I think if you have a long-dated loan in one of the sectors that they were particularly out of—structured real estate, leveraged finance, long-dated project finance were sectors that they were out of—then you were unfortunate. Your business was moved into GRG by whatever fashion and you were given a perhaps doubling of the bank’s interest rate margin and lots and lots of fees and a reduction in your cash flow, so your business becomes strangled. I find this talk about zombie businesses really frustrating and the fact that the banks are being so kind to them. I liken a lot of these zombie businesses to more like vampire businesses. They are kept in GRG in some instances and as soon as they get any available cash that they could use to invest and grow, it is just taken down. We have seen people’s charges being exactly the amount of profit that they made.
Q48 Chair: Another point that you have made is the need to separate out investment and commercial banking. Do you see this GRG type activity as emanating from the fact that the investment banking side has been so close to the commercial side and has brought investment banking approaches to commercial decisions?
Lawrence Tomlinson: I think there are perverse incentives that go against growth that we would like to see within GRG. It is in the bank’s interests on occasion for a business to fail.
Q49 John Mann: Are you saying, therefore, that they have an institutionalised culture and policy damaging British industry at the moment?
Lawrence Tomlinson: Yes. Wherever I go now, people come to me and tell me their tale of woe. Outside of this one day a week, I run a group of companies employing 2,000 people across a diverse range of businesses, so I have a lot of suppliers. Since I have been involved with the Entrepreneur in Residence job people have come to me and said, “I am in GRG. This is happening to me”. Those are probably some of the strongest examples of people that I have known personally for a long time and known their businesses, and I have been shocked that they are in there. One business springs to mind that is turning over £20 million, has been in business about 30 years—I have to be careful what I say—and is making £1 million profit, engineering, exporting. He has been put in GRG and he has laid people off because they have taken his overdraft off him. It is absolutely infuriating.
Q50 John Mann: We are not talking about the small number that have complained to BIS. We are talking about, in your view, a much wider range of companies across the country.
Lawrence Tomlinson: Yes. As I say, what concerns me about it is it is not just one region or one office. It could be in Bath, it could be in Bradford. I have been over to Belfast and it is the same thing. I was on the radio in—
Q51 John Mann: I just want to be quite clear what you are saying. In essence what you are saying is that RBS is maximising its profits by misusing its power in the market at the expense of perfectly viable, decent British companies across the country and across all sectors.
Lawrence Tomlinson: I am not saying it is using its power in the market in particular. What I am saying is that it is using its restructuring department to do exactly what you said.
Q52 John Mann: But people could not move to other banks.
Lawrence Tomlinson: That is right. One of the sad things is that once you are in GRG other banks don’t want to know you because you are in distress, so it is very difficult once you have been moved into GRG to get out of that. When you are going into GRG, you are walked there by a trusted relationship partner. You have the 300-year history of the bank, pillar of society and all the sort of thing that our forefathers believed in, honest banking, the trust that we have in that bank. The relationship manager you may have had for a number of years walks you to GRG and tells you that this is the restructuring department and they are going to look after you and they are going to help you. I think RBS is also unique in the fact that when the relationship manager hands you over to GRG, that is the end of it. He is not allowed to contact you as a business and you are not allowed to contact him. If you take Barclays for example, when you go into their business support unit you keep contact with your relationship manager who you have known for many years and if you have any issues you can speak to your relationship manager, and he is expecting you to come back, you know, a genuine turnaround.
Q53 John Mann: Are you alleging any impropriety or any misconduct issues?
Lawrence Tomlinson: Within the individual cases, there is no redress for the individual businesses. Have the bank on individual cases done anything wrong? It is difficult to find anything. Is what is going on morally wrong? Is it morally wrong to take someone into an area of the bank knowing that it is not really a turnaround division? I am being told by whistle-blowers from GRG that they are not happy with what they have been having to do.
Q54 John Mann: But you do not have a choice going into it.
Lawrence Tomlinson: That is right.
John Mann: And you have stated that if there is an independent business report you are not necessarily afforded the opportunity to read that report.
Lawrence Tomlinson: You may get to read part of it but you don’t get to read all of it, even though you have paid for it. The IBR thing does happen in a number of banks. That is not unique to RBS, but it seems quite bizarre that they have access to your bank account, charge you as much as they feel is necessary for the report but you don’t get to see what the report says.
Q55 John Mann: Is this not anti-competitive practice?
Lawrence Tomlinson: I don’t know.
Q56 John Mann: Can you investigate that?
Lawrence Tomlinson: I am not sure. It is not my area of expertise. I don’t know.
Q57 John Mann: Has anyone suggested that in the ministerial meetings that you have had?
Lawrence Tomlinson: No, not that I have come across.
Q58 John Mann: It seems to me that your solutions—I don’t necessarily disagree with them—are macro solutions, break up the banks and so on. Where are the precise micro solutions that you are suggesting?
Lawrence Tomlinson: I don’t have any micro solutions in the report but, as Sir Andrew Large also suggests, the structural flaws within GRG should immediately be fixed, so one would wonder why West Register was buying properties and operating properties of its customers. People have come to me and said, “Exactly what you have described happened to me but I didn’t know that West Register was RBS. I didn’t know two years ago that RBS bought my business or my properties”. They didn’t know.
Q59 John Mann: One final question. You are dealing with one section of their business, but isn’t this a wider problem? Aren’t there businesses that are not going into GRG where they are being told, “No, we are not going to extend your overdraft. What we are going to do is we are going to force a more expensive solution on you, factoring for example, and that is what you have to have. Even though you are a growing business with a full order book and guaranteed orders, because of the nature of the business that you are in you are going to need a bigger overdraft facility. We are not prepared to give you that. We are going for a more lucrative method that doesn’t suit you as a business”? Isn’t that happening routinely? It certainly happened to my business with RBS. I get lots of complaints of that before we get to this stage. Isn’t this a major anti-competitive and cultural problem within this bank?
Lawrence Tomlinson: My comment on that would be that across the sector since about 2008 we have seen overdrafts reduced by about a third and I don’t believe businesses have walked in and said, “Could I have my overdraft reduced, please?” I have not come across any of those. It seems to be happening on a macro level. The banks struggle, as you know, because it is 100% offset against Tier 1 capital with an overdraft and they are not keen on people having them. I refer you to that case that takes it to the extreme. They can put you into GRG and take your overdraft away. That is what I see happening and that is what I am reporting. What is really concerning me more than anything is, yes, there is a lack of competition that gives them that opportunity to do it, but in RBS I am seeing this being a kind of system and lots and lots of businesses.
Q60 Mr Ruffley: Mr Tomlinson, the behaviour that you have set out—and I think you have drawn attention to a very troubling area of banking practice—seems to be sharp practice but you have been conspicuous in not alleging illegality, either civil or criminal misdoings. I am presuming that some of these businesses, some of which you know, have their own legal advisers, they have their company solicitors. Have there been any occasions where those company solicitors have been involved with the treatment of the company by GRG and got involved to contest the legality of, for instance, fiddled valuations? Has there been any litigation that businesses have taken?
Lawrence Tomlinson: They tend to fail because, first of all, the top law firms are conflicted out. Anyone who has a contract with RBS is not allowed to come up against RBS, and that is most of the decent law firms in the country.
Q61 Mr Ruffley: There are lots of law firms who would not be acting for a big bank.
Lawrence Tomlinson: There are, not as many as you think that are willing to go up against a bank because the bank generally will be their biggest paymasters, but I take your point that there are some. The point I make is whereabouts is the illegality? Is it around the deception that you think you are going into GRG to be restructured and you are taken down this route and that is what you are told as a business but in fact there was never any intention to restructure you? There is nothing you can do about that anyway. That has to be looked at en masse. Generally it is futile to go up against banks that have such massive resources.
Q62 Mr Ruffley: The answer to the question is that there are some lawyers who have been advising these victimised companies but it has not got anywhere. It has never gone to trial; proceedings have never been issued?
Lawrence Tomlinson: The ones that I am looking at generally have not had any luck at all. There is a lack of redress.
Q63 Mr Ruffley: You have rightly talked about redress. What I want to get on to next is the appeal process within RBS group when a company first gets into difficulty with lending facilities being withdrawn or refused and then further down the road being pushed into GRG. Could you describe to us what avenues of appeal there are in the RBS group for SMEs who have decisions go against them?
Lawrence Tomlinson: When the business is in GRG—
Mr Ruffley: Just before that, because presumably it will not go straight into GRG. There will be presumably a preliminary—
Lawrence Tomlinson: I don’t think you get any choice. For example, I was speaking to a lady last week in Belfast and she was saying that her business went and she was introduced to someone, and this happens quite a lot. They are introduced to a new person and then, “This is your new bank manager. I am not involved with your business any more. I am in GRG”. Everyone is a little bit shell-shocked, “What is it all about? What am I doing in here?” and it seems to go on from there. People try to work with the bank, generally. The businesses trust the bank and try to work with the bank, not knowing what their end solution is going to be and they trust them all the way down the line. Usually by the time they realise what is happening it is too late and they are left with absolutely nothing and are unable to have any redress at all.
Q64 Mr Ruffley: There is no appeal against being put in GRG?
Lawrence Tomlinson: I guess you could write to the bank and appeal against it. I have not seen any success in anyone doing that. I don’t know what their actual appeal process would be.
Q65 Mr Ruffley: Maybe I could put it another way. Of the many cases you refer to in your report, to your knowledge did any of those businesses go through an appeal procedure with anyone in RBS group?
Lawrence Tomlinson: I have businesses that are asking to be taken out of GRG and are not being taken out but not being given a reason why. That is as near as it gets.
Q66 Mr Ruffley: That would rather suggest that there is not a formal appeal they can go through, a mechanism where they can challenge a decision by one of the RBS executives to say, “I want someone else to take a look at this, a second opinion”.
Lawrence Tomlinson: It is perhaps an area I should have looked at in more detail, but I didn’t come across that and I didn’t come across people making appeals to be taken out or not to be put in or making appeals against the bank. They tended to write to the bank. They would write to the bank and say, “This isn’t fair, your valuations are wrong. I have had another valuation done off my own bat.” “We don’t recognise your valuation. You are in GRG. These are your new fees. These are your new interest rate margins.”
Q67 Mr Ruffley: If there was a mechanism, your sources did not tell you about it?
Lawrence Tomlinson: If there is a mechanism it is certainly failing because I have not come across it in the cases that I have dealt with, but I should have maybe looked at it.
Q68 Mr Ruffley: That is helpful. The retail lending is covered by FSMA as amended. Is commercial lending something that you think the FCA should be specifically regulating, should be tasked with regulating?
Lawrence Tomlinson: Yes, I do. We have talked about the sophistication of the borrowers and about 4.9 million businesses in the UK. A lot of these businesses are perhaps husband and wife teams that are starting up in business, borrowing money, and then the business grows and they are relying on members of their family in the initial stages and trusting the bank. They are very little different from if they took a mortgage—in fact, a lot of the time their house is collateral—or if they took any other kind of loan, and I think they should be afforded the same protection.
Q69 Mr Ruffley: Is the Secretary of State to BIS in favour of the FCA taking responsibility for the regulation of SME commercial lending?
Lawrence Tomlinson: I am afraid I don’t know. You would have to ask him.
Q70 Mr Ruffley: Is that something you will be arguing for as this policy is dissected and the reviews take place?
Lawrence Tomlinson: I have done my dossier of evidence that has then led to the published report. We are going to be working now with the FCA. I am struggling to do all that sort of thing but perhaps someone in this Committee or someone else can run with that if they feel that that is the appropriate measure. It certainly seems to make a lot of sense because these are unsophisticated people in a very big legal world.
Q71 Mr Ruffley: Do you think the Financial Ombudsman Service should be extended to cover SMEs? You would have to have a fairly tight definition of SMEs, I suppose, but do you think the FOS could be reformed to cover these cases?
Lawrence Tomlinson: We would have to look at the whole area of redress and the balance of fairness. As your colleague John was saying, the competition is not there. It is a completely dominant position that the banks have, particularly the size that RBS is and the number of SMEs it has, so there needs to be some rebalance of the overall fairness in the relationship. It should not perhaps be, “There is your loan agreement; sign it or don’t”. The whole relationship needs rebalancing.
Q72 Mr Ruffley: You have talked about the FCA, which is helpful. That might be a fruitful avenue to make sure cases like this don’t happen again. But on the Financial Ombudsman Service, is that also something you think should be looked at with a view to amending the false jurisdiction?
Lawrence Tomlinson: I can’t remember what the limit is. Is it a £150,000 claim or something? Just about every claim that I have had has been in excess of that, so it rules out just about everyone I have come across.
Q73 Mr Ruffley: So you think we should look at the FOS?
Lawrence Tomlinson: Yes, we should look at the Financial Ombudsman, but I think at the overall thing and how effective it is.
Q74 Mr Mudie: When you are at work in BIS, how many staff have they allocated to you?
Lawrence Tomlinson: None, apart from I have a secretary who helps with appointments. I have no one specifically allocated to me. I have a team of people who I can ask and a point of contact.
Q75 Mr Mudie: To an earlier questioner you gave a whole list of areas that you are looking at. Do you not think that you are being treated badly in terms of—well, you laugh but you are covering very serious items and if you are important enough to take into a Department, they are not treating you very well if they don’t link you into resources.
Lawrence Tomlinson: One of the highlights of this job has been working in BIS. Coming from the private sector, I thought I would find all the civil servants with their feet on the table waiting for their gold-plated pensions. I found a wonderful team of people there, working very hard for the benefit of growth in the UK. They have supported me as well as they could, and perhaps I should have asked for a researcher rather than getting my own. That may have helped.
Q76 Mr Mudie: The Department must have policy people. You have raised policy issues galore and all the fields you are covering have policy issues that can only be dealt with with resources, with policy people getting the information, feeding it, thinking about it, arguing with you about it. Is your report about GRG or is it about the way that small businesses—and not the 25 million or 20 million—are being treated so badly but they don’t have any muscle when they are dealing with a bank to be able to fight back? What is the report about? What is the priority?
Lawrence Tomlinson: There are the two elements, which are around competition and how we could quite easily bring competition into the marketplace.
Q77 Mr Mudie: No. When Mr Ruffley was speaking to you about systemic and this and that, it was inexorably drawn to GRG, but if somebody had been advising the Department, that is a very valuable piece of work that is quite rightly able to be handed over to the regulators and to the Department to deal with. That should be off your table whenever you have enough in your dossier. But the real important stuff in here is not even that your heading is wrong, Treatment of Businesses in distress. The businesses I am finding the banks treating so badly are not in distress. They are put in distress by the behaviour of the bank. Is that what you find?
Lawrence Tomlinson: That is exactly the behaviour I am referring to, Mr Mudie.
Q78 Mr Mudie: Your report heading has Banks’ Lending Practices: Treatment of Businesses in distress. Mr Garnier has raised that you have to watch, they are not all as good business as you think. They will tell you a tale. But all around this table we find businesses that are doing well—not doing well, surviving, paying, up to date, and so on, and the bank decides, for reasons of their own, to pull them in and change their terms or call the money in. Is that not what we are finding?
Lawrence Tomlinson: I didn’t find that kind of behaviour across the piece. What stood out to me was RBS and GRG in the vast majority of cases were completely disproportionate to anything that came through. Also the structural failings in GRG lead to this opportunity in a much more extreme way than any other banks. That is what I am highlighting.
Q79 Mr Mudie: So this is about GRG, which is very sad, then, because there are 19 pages and 18 of them are not about GRG, quite rightly not about GRG, but you are saying it is about GRG.
Lawrence Tomlinson: All the cases in this report are about GRG.
Q80 Mr Mudie: If you take GRG out of it, I am in contact with Lloyds at the moment with a constituent who has had all their terms changed. Last year they just demanded £100,000 from him, which he had to find and give. This year they don’t want him. They have a valuation on his assets, he has provided two creditable valuations that are £100,000 more, and they are sticking by theirs. He has no place to go; there is no appeal. Isn’t that the big story out of this? GRG is something that should not have been happening, but the lack of appeal procedures, the lack of the regulator looking at how the banks are behaving to really small businesses, is equally as important a matter that is coming out of your report, isn’t it?
Lawrence Tomlinson: I am referring all of the cases that have come to me to the FCA. What I am highlighting here are the structural flaws in RBS GRG and how disproportionate it has been, relative to any other bank, and also the way that their actions are completely disproportionate in putting people into their restructuring department.
Q81 Mr Mudie: I am saddened, though, because how many cases have you referred to in your dossier? How many cases of bad behaviour in RBS relating to GRG?
Lawrence Tomlinson: The vast majority of them.
Mr Mudie: How many?
Lawrence Tomlinson: In the initial findings, 20 out of 23.
Q82 Mr Mudie: Don’t you have a suspicion that in the normal course of business the fact that most politicians around this table can give you chapter and verse of a constituent or constituents who have come to us where their business is being damaged by the behaviour of banks, where they have no recourse, is just as big a problem?
Lawrence Tomlinson: I think it is a big problem but I am identifying a problem here that follows a pattern and is unique to RBS, which is what I think it is. It is unique to RBS and GRG that it has its own property company—
Q83 Mr Mudie: So why didn’t you name your report RBS Lending Practices Relating to GRG instead of Bank Lending Practices: Treatment of Businesses in distress?
Lawrence Tomlinson: I don’t know. I think it probably started off exactly being what you are suggesting, but the vast body of evidence and the way the report went highlighted that the vast majority of things were GRG.
Chair: We are definitely going to have a vote at 4.00pm and we have three colleagues who want to come in.
Q84 Stewart Hosie: The FCA have announced a section 166 review of allegations contained within your report. Do you welcome that investigation?
Lawrence Tomlinson: Yes, I do.
Q85 Stewart Hosie: Where do you think they should start looking and at what? Be as specific as you can.
Lawrence Tomlinson: I think they need to look at the training and manuals for GRG people. They need to look at the minutes of what GRG was decided to do at meetings that were held to brief people in GRG, and at some point speak to people within GRG about what their function really was, were they turnaround, and at what point did they become a non-turnaround division and a debt collector. That is key, and the transparencies around what people were told when they were put in. I would be asking all the businesses, “Were you told you were going into a turnaround division and what really happened” and then looking at the fees that were loaded on. I would be looking at how the fees were calculated.
On File on 4 for the first time we had someone representing the banks talk about GRG and saying that West Register is not a profit centre. It quite clearly is an investment portfolio. One area I would like to look at is that we own 82% of this bank. Wouldn’t it be worthwhile having the whole of West Register valued at a trading valuation rather the fire-sale valuation that it is put at? What is the true valuation of those trading businesses in West Register? What do we own as a country? What is the truth behind the numbers?
Q86 Stewart Hosie: All of that is extremely interesting but it does not necessarily point to the systematic abuse that your report describes.
Lawrence Tomlinson: What I am suggesting around the training is how were people trained and what was their function. What were they told to do? Were they a debt collection agency or were they a turnaround division? That area is around the deception of the business and what they felt was going to happen to them when they went in, because everybody I speak says, “I was told I was going to a turnaround division and I ended up here”. If we come back to the facts of the matter that it looks like 6% of the businesses return to a performing portfolio, then it is a pretty dire situation.
Q87 Stewart Hosie: For a turnaround division it would not be a particularly clever outcome if it was only 6%, that is true. You have said you have sent your cases to the FCA.
Lawrence Tomlinson: They are in the process of going.
Q88 Stewart Hosie: Can I just be clear, is that the 20 cases from the report is it the 100 or so of the 200 you identified as problematic or is it the bulk of the many more, the 1,000 or so, that have contacted you since?
Lawrence Tomlinson: It will be the bulk of the 1,000 that will go to the FCA, depending if the people want their cases to go. We will forward on anyone who contacts us or let them contact the FCA direct.
Q89 Stewart Hosie: Did the FCA ask you to forward or have you done this of your own volition?
Lawrence Tomlinson: We have not forwarded them yet. I have only had an initial meeting with the FCA about a month ago or something like that. I have another meeting with them next week, because they have only just appointed the person who is going to do the investigation.
Q90 Stewart Hosie: I presume at that meeting is when you will take the opportunity to make sure the FCA, from your point of view, adequately identify the cases that cause the most concern?
Lawrence Tomlinson: Yes. I will identify the cases that cause the most concern and then try to identify, “Here are 100 that are the same”. I got to the position where I could sit with a business and I could tell them what happened next. It was like that. If I had put a lot of the cases down on a piece of tracing paper and put them up to the light, they would have looked like one line. They were almost identical in the way they had been treated. That is a key element.
Q91 Stewart Hosie: That is helpful. Just one final question on the FCA. Do you know of any individuals who have taken their case to the FCA before coming to see you, people who have already approached the FCA with their complaint about RBS and the restructure?
Lawrence Tomlinson: I honestly don’t know.
Q92 Stewart Hosie: So you would not know if there had been any success rate from individual businesses going to the FCA on their own already?
Lawrence Tomlinson: I don’t know of any that I am dealing with.
Q93 Stewart Hosie: One final question. What do you expect the FCA will find in the section 166 review?
Lawrence Tomlinson: I think they will be shocked by the treatment of the businesses. I think they will be shocked, as I was, by the lives that have been ruined—not just the businesses that have been ruined, people’s lives—and the complete waste of an opportunity to grow businesses rather than destroy them. What I think they will also find is that the cases are all so incredibly similar that there is a pattern to it.
Q94 Mr Newmark: I have recently met with representatives from the Campaign for the Reform of Asset-Based Finance Industry. I met with a Mr Stephen Hunt, who wrote a very good pamphlet entitled Asset based lenders versus unsecured lenders. The main focus seemed to be around abuse in factoring or invoice discounting. It seemed to be a lot of abuse, and two names that were particularly highlighted during my meetings were GRG and a company called Bibby. What insights have you picked up with respect to abuse in invoice discounting, the base of power that one has over the other, and whether you think more needs to be done with respect to having them more formally regulated so that anybody who is the factoring, invoice-discounting business should have tighter regulations?
Lawrence Tomlinson: As overdrafts have been withdrawn it has been the only place to go. I think I may have had a meeting with the same man and a team. He spoke a lot of sense and seemed to have a lot of cases, but I don’t believe he provided me with the cases that I asked for. I may be mistaken.
Q95 Mr Newmark: Forget the individual. I think many MPs will have coming into their surgeries particularly people who have small businesses where this sort of base takes place. Just to give an example, if you receive a commission of, let’s say, £40,000 for a particular deal and you can pull the rug from under that business three months later and make £400,000, that tends to happen. I don’t want to tar all institutions with that brush, but certainly it seemed to be going on, again from anecdotal evidence from my meetings with GRG in particular and also Bibby. There seemed to be almost an incentive to salesmen to pull the rug from under these businesses. I would be interested in your comment on that.
Lawrence Tomlinson: I came across it and it was anecdotal evidence that I had. I did ask for examples of it but I don’t believe that they were forthcoming to any kind of degree.
Mr Newmark: But you accept the principle that it has been going on?
Lawrence Tomlinson: Yes. The thing is you put somebody into a contract for five years, you sell them this thing, and then you create a default and you end up charging the commission for the next three years even though they have only been in it for six months.
Q96 Mr Newmark: It is the sort of practice you saw on the photocopying industry in early days, almost, where people would have these contracts. They are not saying it happens now, but when that industry started off there was a lot of abuse. I want to understand that you recognise there is abuse in the industry, that particular segment, and that there does need to be tighter regulation when it comes to that form of lending because of the abuse that seems to be taking place.
Lawrence Tomlinson: I think we have both ended up in exactly the same place. It is an area that I have had a number of complaints in. Yesterday I had somebody text me, a man who used to be—sorry, I can’t say who he was. He had had a big issue similar to what you are explaining, which I think was a bona fide case.
It is an area where, again because of the lack of competition and the withdrawal of overdrafts—and as I said previously since 2008 for some reason the level of overdrafts in the UK has gone down by a third. I don’t believe, just as I don’t think anyone around here believes, that businesses walked in and said, “Can I pay down my overdraft, please?” So you are then pushed into invoice financing.
Q97 Mr Newmark: You are maybe not understanding my question. Whether they have been pushed into invoice financing or have ended up there out of their own volition, there seems to be a problem, in a highly unregulated industry, where incentives seem to be placed to put businesses under much more financial duress than needs be. Therefore I am saying to you, no matter how they have ended up in that particular sector of the lending industry, as someone who sits here and deals with lots of medium-sized business, and someone who instinctively is not one who calls for loads and loads of regulation, what I have always called for is better regulation. It seems that there is a hole in this particular area of lending that unfortunately certain cowboy behaviour of very bona fide institutions—I certainly would not want to disparage GRG or even Bibby, but there seems to be a practice within that organisation of trying to go for the bigger fee than trying to work out the businesses somehow.
Lawrence Tomlinson: It is very swap-esque, isn’t it? You do not bother selling a loan, you are not bothered about the margin you make on the loan, you can make £400,000 on the commission and crack on. That is the sort of thing that was identified to me, and the collapsing of the products is where they make the fee.
Mr Newmark: I am looking for solutions.
Lawrence Tomlinson: I agree with you.
Q98 Mr Newmark: You do think it needs to be more regulated. Is that what you are saying?
Lawrence Tomlinson: I think asset-based lending is a good opportunity of funding for businesses that are wanting to grow quickly, but it has to be done in a way where the business has confidence. It is going to end up being like RBS where the sector becomes tainted by bad practice and people will not use it. It is important that we have belief in asset-based lending, and to do that, if it needs more regulation—
Q99 Mr Newmark: Factoring has been the lifeblood of businesses for well over a century. Given it plays such an important role and given that certainly I have identified abuse, I think you have heard about it and I suspect there are other Members of Parliament, whether in this Committee or in the House, who have come across this sort of abuse, do you believe—at least as I have increasingly come to the conclusion—that there needs to be much better, tighter regulation when it comes to those who are involved in invoice discounting and factoring? Do you subscribe to that conclusion or not?
Lawrence Tomlinson: All I can say is that the evidence that it have is anecdotal. I do not disagree with anything you have said.
Q100 Mr Newmark: Just say yes or no. Do you agree that there needs to be tighter regulation for those financial institutions involved in invoice discounting and factoring, yes or no?
Lawrence Tomlinson: My answer is I don’t know. I am sorry, but I can’t answer it if I don’t know. What am I supposed to say? I have only anecdotal evidence of a few people who have come to me. I have not investigated any of the claims and I would not say yes or no to something that—I have been accused in my report of having anecdotal evidence. I am hardly likely to go out on a limb on this, I am sorry.
Q101 John Thurso: I have been told we are very short of time, so I am going to cut very quickly to the chase, if I may. I chaired the Scottish panel of the Banking Commission and we spent quite a lot of time trying to nail down some of the cases. I suspect some of the ones I saw are identical to the ones you saw. We spent some considerable time in the Edinburgh office of the GRG. The problem that we had was that none of the people who spoke to us wished their name to be known because they expressed fear that there might be difficulties for them.
Lawrence Tomlinson: Is that within the office or is that the customers?
Q102 John Thurso: The examples that I had before. Therefore, it was very difficult to say, “Here is an example. Can you follow it through and prove it one way or another?” In order to solve something you have to bottom out the problem first, problem-solving 101, as it were. Have you been able to bottom out the problem in a way that it can be taken to RBS and said, “Here is the problem. Can you go through these and respond?”
Lawrence Tomlinson: In terms of the structural nature or the structural failings, I think they are there and very obvious for everyone, a judge and jury. GRG are going through the main bank and choosing who they want to have in GRG. The way that they progress down is fairly systematic, so I think that is the case.
One thing I would point out is that I have never come across an industry where whistleblowers are so absolutely scared to death to come and even speak to you, for fear that they are going to lose their pension, that there is some sort of contractual obligation even though they have left the bank. It is quite bizarre.
Q103 John Thurso: That was a critical recommendation, the whistle-blowing section of the Banking Commission’s report as well.
Can I come quickly to my second question, which is that in your report at the end you have under “Solutions” your three main points, A, B and C. C was the competition issue, which the Chairman asked you about at the beginning so I don’t want to go there again. I want to ask you about the other two. A was business protection and B was conflicts of interest. Business protection is effectively the equivalent of a chapter 11?
Lawrence Tomlinson: Yes, but not as clumsy. I have spoken to the insolvency people in Business, Innovation & Skills and chapter 11 does not seem to be on the agenda. But payable on demand loans, immediate repayment, I think there should be maybe a cooling-off period, 30 days before a bank can call it in, or 60 days, to give the business an opportunity to move. If the bank is going to sell the debt, there should be first option to the business and not have it sold to someone who is buying the business.
Q104 John Thurso: The protection side is something you would like to see put in place, where a business that feels it is being poorly advised can go into shelter for a period of time to reconstruct or find other alternative solutions?
Lawrence Tomlinson: Yes.
Q105 John Thurso: The second one is conflict of interest. You made the very good point that the Enterprise Act 2002 meant HMRC is no longer the first creditor and that therefore whoever is an asset holder becomes a prime creditor and there is an incentive for the person holding that security to put the bank under, whereas in the old days, when HMRC was the first creditor, there was an incentive to keep the thing going because the money would go to HMRC. You further note that there are all sorts of things in conflict, like the bank wants a business review, it is the same companies and they do a lot of work for them.
Lawrence Tomlinson: They do the admin.
Q106 John Thurso: Assuming the problem is there and it is as you say, what would you like to see done to tackle these so there is a reasonably fair playing field?
Lawrence Tomlinson: I am no expert on legislation at all. All I am is a businessman who can see these things happening and maybe come up with some kind of protection. I don’t know how you then—
Q107 John Thurso: Is that for you a critical area for us as policymakers?
Lawrence Tomlinson: I think it is political. There is nothing going to happen by leaving the banks to do it themselves and to regulate themselves. If we are wrapping up, my parting comments are that I would love to see all the parties work together to sort this out and to get some competition into the banking marketplace.
Q108 John Thurso: I still regard myself as a businessman rather than a politician. I have had the experience in the old days of going into a high-dependency ward of a bank, the old NatWest, and the business needed it. It was well looked after and we came out the other side quite happily. We are not arguing that that is a good mechanism. It seems to me that a lot of where we are today is cultural that has come from the decade of expansion, which is why I suspect you want the investment banks out. To what extent do you see the problem as cultural, and a cultural solution as helping to get us back to where we want to be?
Lawrence Tomlinson: I think the banks have become too big. Sir Andrew Large talked about fragmentation of the banks, and he could not identify who was to blame for the banks not lending. That was quite bizarre. The banks have become bigger than too big to fail. Going forward what really frightens me is that if we just privatise the banks as they are, we will end up with 2018 being 2008, because they will be bigger than too big to fail.
I think the regulators struggle to regulate because the banks are even bigger than too big to regulate. I think we need a political change in the banking landscape and all to pull together to achieve that so that businesses can grow going forward and have a stable banking platform, where they are the customer and the bank grows its business not on the back of or to the detriment of the customer, the business, it grows its business with the business.
John Thurso: That is a very good last word from you.
Chair: I think so. Your 2018 comparison with 2008 takes us back, on a somewhat sombre note, to the questions that we opened the session with. We are very grateful to you for coming to give evidence this afternoon and for having done this work for the Government. We will continue to look very carefully at it. What you have said this afternoon has been noted well beyond this room. Thank you very much indeed, Mr Tomlinson.
Oral evidence: Banks’ Lending Practices: Treatment of Businesses in Distress, HC 1037 9