SMEF0036

Written evidence submitted by Mark Bishop

Executive summary

●        Testimony of Mark Bishop, former BBRS SME Liaison Panel member, willing to give in-person evidence to the Committee

●        Argues that the BBRS was created by the banks to give the impression of a redress scheme rather than an effective means of delivering justice to a material number of complainants, intended to fend off calls for tribunals while minimising banks’ payouts for past misconduct

●        Opposes the extension of Financial Ombudsman Service as solus route to compensation for SME mistreated by banks, on the grounds that:

○        The FOS is too close to FCA, which is not trusted by SMEs

○        It’s a ‘black box’ arbitration scheme, with asymmetric disclosure and challenge and no penalty for non-disclosure or perjury

○        It is designed to deal with large numbers of functionally similar, low-value claims - the opposite of typical SME banking claims

●        Notwithstanding the above, foresees a possible role for an ‘evolved FOS’, which might operate as a form of in-person mediation, prior to cases going to tribunals

●        Believes that any perceived drawbacks of tribunals (Limitation Act, contractual view of disputes) can be addressed through legislation, provided genuine SME stakeholders are consulted and involved throughout, and banking ones marginalised

●        Supports bringing SME banking within the regulatory perimeter

A. Introduction

1. I have been a financial services campaigner since 2012, advocating for improved rights, regulations and regulation in the sector, to benefit both consumer and SME stakeholders. Prior to this, my career has encompassed journalism, entrepreneurship, consulting and corporate finance. I hold an MBA from Cranfield University School of Management, where I am also a Visiting Fellow, and am the author of a book about private equity;

2. I served on the SME Liaison Panel[1] of the British Banking Resolution Service (‘BBRS’) from the announcement of its inception on 18 August 2021 to the announcement of its closure on 20 March 2023, donating my (derisory[2]) fee to campaign group Transparency Task Force, for which I volunteer, to avoid any allegations of being in the pay of the scheme or its member banks;

3. This paper deals with the Call for Evidence’s question about the BBRS (‘How effective has the Business Banking Resolution Service been, and what lessons can be learnt from it?’), where I have extensive first-hand knowledge of the scheme’s operation, governance and outcomes; it also addresses questions relating to the appropriateness of the Financial Ombudsman Service to the resolution of SME banking disputes and whether SME lending should be brought within the regulatory perimeter, all of which are fields in which I have professional expertise. I have left other topics to respondents better qualified to address them than me;

4. If asked to do so, I would be honoured to give in-person testimony to the Committee, based on my written evidence. I have prior experience of providing in-person evidence to a Bill Committee[3] and serve on the Secretariat of an APPG[4], so am accustomed to working with Parliamentarians, and am hopefully regarded as a credible witness. I can produce a list of Parliamentarians that I believe would be happy to vouch for my integrity, technical competence and balanced mindset if asked - my views are evidence-based and not extreme;

5. The BBRS required SME Liaison Panel members to sign an onerous confidentiality agreement, and threatened one Panel member who left, publicly criticising the scheme. I consider myself no longer bound by the NDA because I believe the BBRS breached its agreement with Panel members by improperly and illegitimately closing down the Panel; in the unlikely event that I am wrong in law on that point, it is my understanding that evidence (both written and verbal) to a Parliamentary Committee is covered by Parliamentary privilege. It is therefore my intention to present to you my understanding of the truth, without redaction or omission

B. Background

6. The Treasury Committee’s previous inquiry into SME finance concluded that bank lending to SMEs should be brought within the regulatory perimeter, that FSMA should be amended to allow the FCA to introduce industry-wide redress schemes for SMEs and advocated the creation of tribunals to adjudicate disputes between SMEs and banks. I believe that the Committee reached the correct positions on all three points, based on the evidence available at the time, and that subsequent events further vindicate these policies;

7. Unfortunately, the Treasury rejected the Committee’s three central recommendations, arguing that regulating commercial lending could impose costs without clear benefits, claiming that the Financial Ombudsman could provide ad hoc redress, implying that the issue of Interest Rate Hedging Product (‘IRHP’) redress would be resolved by an independent review and arguing that alternatives to tribunals would be more effective than such a scheme. It backed ‘the banking industry’s commitment to establish a voluntary ombudsman scheme to address unresolved historic complaints from SMEs which have not already been addressed by an independent review process’ (despite evidence that previous review schemes funded and operated by the banks were neither independent nor effective) and welcomed the fact that ‘the Financial Conduct Authority’s (FCA) plans to expand the number of SMEs who are eligible to take a complaint to the Financial Ombudsman Service (FOS)’ (despite evidence that the FOS struggles to deal with SME banking disputes, due in part to their complexity but also because inequality of resources enables banks to prepare better defences than SME owners can produce complaints, the absence of enforceable disclosure and perjury rules, combined with asymmetries such as the fact that banks can see and comment on complainants’ evidence whereas complainants lack a corresponding right, means that complainants struggle to secure the evidence that might prove their complaints);

8. Attempts to amend the Financial Services and Markets Bill (now Act) 2023 in the Lords to bring SME lending within the regulatory perimeter were rebuffed by Government, which has still been unable to evidence (perhaps by comparing costs and outcomes for loans of less than £25,000 to unincorporated businesses, which are regulated, with the rest, which are not). The Ombudsman continues to struggle to adjudicate SME banking disputes, with many of them resulting in no decision, on the basis that the FOS believes the issues raised are too complex for it to determine. Its definition of an SME remains hugely more restrictive than that adopted by Government (the FCA recently called for input on changing the eligibility criteria), and the cap on awards remains woefully inadequate. John Swift KC’s independent review into IRHP redress portrayed the FCA as complacent and perhaps captured, criticising the 2012-3 compensation scheme as unduly narrow, finding no basis for its unduly restrictive eligibility criteria, demonstrating that the Treasury (up to and including Ministerial level) and banks lobbied for leniency, but stepping just short of reaching the conclusion, obvious on the inference, that this lay behind the scheme’s limitations; the FCA decided against launching a new redress scheme to remedy this historic injustice, resulting in a judicial review, which is still on foot, by the All Party Parliamentary Group on Fair Business Banking. In short, no progress has been made on any other front, so any material improvement in the rights and outcomes for SMEs in the past five years hangs on the success or otherwise of the BBRS;

9. The BBRS and banks will insist that the scheme was co-created by the banks and SME stakeholders, and that the latter voted unanimously to approve the scheme’s creation in its current form. I was not a member of the Implementation Steering Group established to create the scheme, so was not a party to that decision. At the time and subsequently, many SME stakeholders have criticised ISG members for approving what was clearly a defective scheme, principally with regard to its eligibility criteria and governance arrangements. On balance, I would not have consented to its creation, but would make the following points in mitigation for those who did:

●        It was the only game in town: Government had already publicly ruled out tribunals, forcing SME stakeholders to negotiate from a position of weakness;

●        The minutes - and, far more so, a confidential audio recording of the proceedings that has been passed to me - indicate that sign-off was conditional on three things: that SME stakeholders would control or very strongly influence the remit and operation of a post-implementation review, and that if it demonstrated that the eligibility criteria were too narrow, they would be changed; that provisions to allow cases to be considered that fell outside the eligibility criteria on a concessionary basis would be exercised liberally; and that the caps[5] on awards were merely contractual and would in practice be disregarded. Unfortunately, all three turned out to be untrue and the significance of this point must not be underestimated - it means the SME representatives were deceived into accepting the arrangement;

●        They received legal advice, but it was provided by a firm paid by (and that therefore arguably owed a contractual duty of care to) the participating banks; the advice appears not to have alerted SME stakeholders to certain shortcomings to the governance documentation, not least the existence of the Bank Appointed Member[6] (‘BAM’) and the significance of its reserved powers;

●        In practice, the powers afforded to the BAM exceeded even those set out in the Articles of Association[7];

●        They were dealing with a Chief Executive and Chief Ombudsman, both of whom I believe they trusted, whose assurances they relied on and may well have been genuine; they left the organisation[8] two and 15 months respectively after it went live;

●        They were told the BBRS would be controlled by an independent board (in fact, all appointments were made by the participating banks)

C. How effective has the BBRS been?

10. Prior to launch, UK Finance estimated that some 60,000 firms would be eligible for the historical scheme alone. In fact, 514 applied. Of the 325 cases assessed by the end of January 2023, 135 (41.5 percent) were deemed ineligible, suggesting that in total, the historical scheme may in time deal with around 300 eligible historical complaints[9] - around 0.5 percent of the claims universe identified by UK Finance. Of the 325 historical complaints handled, 15 received a financial award, a success rate of below five percent of applications, and just 0.025 percent of the universe of potential claimants;

11. The BBRS commissioned research from academics at Bayes business school, which it has used to brief Parliamentarians, which I understand estimates a much smaller claimant universe (14,000) and expected participation rate (1400). Unfortunately the report has not been published, nor has it been shared with SME Liaison Panel members, so I am forced to speculate about how it might have arrived at lower numbers than UK Finance did. It is conceivable that the work took as its start point the restrictive eligibility criteria and attempted to build from those a model of expected participation levels. If so, it is concerning that it has been used by the BBRS to claim that the BBRS has done a better job at reaching claimants than might otherwise be thought and even to argue that bank misconduct toward SMEs is a smaller problem than had hitherto been claimed. UK Finance is a lobbying organisation funded by the banks; it is not in the economic interests of its leadership to overstate the extent of disputes between SMEs and banks (rather, the reverse); I therefore continue to believe that its 60,000 estimate is on the cautious side of accurate, until presented with compelling evidence to the contrary;

12. The BBRS’ historical scheme closed to new applications on 14 February 2023; the contemporary one is funded until the end of 2023. While no official announcement has yet been made that the entire scheme will close to new applications at that time - further funding is possible - it seems unlikely, given that when the BBRS announced the closure of the SME Liaison Panel, it let slip that this event had been due to take place at the end of this year. According to the Panel’s Terms of Reference (Paragraph 3.2f), the only circumstances under which it can be dissolved are the winding-up of the Scheme or mutual agreement between the BBRS Board and the Panel Chair. Since the BBRS could not predict the timing of any agreement to close the Panel, its statement implies an intention to wind up the Scheme in December 2023[10];

13. The BBRS claims (page 5) that by the end of 2022, ‘More than £1 million of financial awards have been made to customers as a result of using the BBRS.’ This should be placed in the context of the Scheme’s operating costs, which had by that time totalled £42.2 million[11]. 2023 is likely to bring significant redundancy costs, given the closure of the historical scheme and likely closure of the contemporary one. In total, costs across the Scheme’s lifetime are unlikely to be less than £50 million. Given that new case registrations under the contemporary scheme and decisions on existing ones have slowed to a trickle, I believe it is likely that the value of awards to SMEs is unlikely to be more than one thirtieth of the total cost of running the Scheme. The only basis on which this ratio of outputs to inputs can possibly make any sense is if the banks’ real intention in setting up the BBRS was to minimise payouts to SMEs, not facilitate them;

14. While it is clear that the BBRS has been a spectacular failure from SMEs’ perspective, judged by both the number of cases eligible and handled and by the value of awards made, I believe it is important also to consider whether the Scheme has proven effective for the participating banks. I believe it has - spectacularly so. By spending barely more than £50 million between them, they have so far been able to defeat calls (not least by the Treasury Committee) for tribunals to remediate SMEs’ claims of mistreatment by banks and for bank lending to SMEs to be regulated, and have succeeded in creating the credible illusion of an independent and effective dispute resolution service, even tasking the BBRS team with briefing Parliamentarians and APPGs to this effect. By these criteria, the BBRS has been as successful for banks as it has been a failure for SMEs;

15. Perhaps best of all, from the banks’ point of view, by delaying the introduction of tribunals by more than half a decade, they have succeeded in ‘running down the clock,’ causing a great many SME disputes with banks to become time-barred under the Limitation Act, protecting them from claims but further frustrating access to justice. And as well as the financial implications of time-barring, we should remember that some claimants have simply died while waiting for justice, and many more have suffered years of avoidable poverty and distress;

16. The reason I focus on the divergence in outcomes for SMEs and banks is because I believe it is essential that whatever happens next has the enthusiastic support of SME stakeholders, and that opposition from the banks, their lobbying organisations, the Treasury and FCA (both of which may be prone to influence and even capture by the banks) should not be allowed to derail measures intended to deliver justice for SMEs and their owners mistreated by banks and rebuild much-needed confidence among small business owners in borrowing from banks again, as happened previously. Thanks to the Financial Services and Markets Act (Chapter 3), financial regulators now have a competitiveness and growth objective. This will not be met while the directors of and shareholders in small and medium-sized enterprises eschew borrowing because they have a rational and well-founded fear of being mistreated by banks and being unable to secure justice under such circumstances. The economy will miss out on the jobs and innovation that might have resulted, honest banks will forfeit profitable lending opportunities and the Treasury will be deprived of the tax receipts that would have been created by the missing activity. This deadweight loss is too high a price to pay for protecting a few bad actors within the banking industry from the consequences of their behaviour and shielding bank shareholders from the costs of remediating past misconduct. It is time to clear the decks, to ‘fess up and pay up, and to make regulation fit for purpose; and this means policy must be driven by SMEs, with banks’ concerns sidelined - instead of the other way round, which is what has happened to date, and how the BBRS came into being

17. Prior to the Scheme’s inception, the then Chancellor of the Exchequer wrote, ‘If it transpires that the Scheme is not bringing resolution to a meaningful number of complaints, and as such is not going to achieve its objective of bringing closure to past events, then I would expect there to be further discussions about the scope of and eligibility for the backward-looking scheme.’ The SME Liaison Panel made extensive, constructive efforts to engage with the BBRS and, through the Bank Liaison Panel chair[12], the participating banks, to initiate such discussions; we were rebuffed, as is confirmed by the resignation statement of our Chair, Antony Townsend

D. What lessons can be learnt from the BBRS?

18. For the reasons set out in paragraph 17, above, it is vital that the core recommendations of the Committee’s 2018 report are now implemented. In particular, we need:
1. Bank lending[13] to SMEs to be brought within the regulatory perimeter;
2. The FCA to be able to introduce industry-wide redress schemes[14] for SMEs; and;
3. Tribunals to hear cases brought by SMEs against banks, with genuine SME representatives at the heart of the process of drafting the legislation, setting eligibility criteria and terms of reference and scoping operating processes. The initiative must be wholly independent, from inception to ongoing operation, from the respondents (the banks) and those widely viewed as their proxies (the FCA, Bank of England, PRA, FOS and HMT);

19. For the reason set out in paragraph 15, above, any legislation introducing tribunals for the resolution of SME banking claims should contain provisions to ensure that the Limitation Act cannot be used to time-bar historical claims. I would suggest that all claims relating to ‘FSMA-era’ disputes (those arising from acts or omissions taking place in the Financial Services and Markets Act 2000) be novated, for the purposes of the Limitation Act, to the date on which any legislation giving effect to SME banking tribunals receives Royal Assent. Prospective appellants would therefore have six years from that date to bring claims, during which respondents would be unable to use the time-bar argument to set aside proceedings. This is an unusual course of action, and while I accept that Parliament may be reluctant to set a precedent under which liabilities are created retrospectively, this would not be the case here, since those costs were incurred by the firms’ misconduct at the time and merely temporarily evaded because of the huge inequalities in resources and information between the counterparties and the perpetrators’ ruthlessness in attempting to cheat justice through the creation of defective in-house redress schemes then an equally flawed industry one, the BBRS;

20. It is clear from the recent Westminster Hall debate about the BBRS that the current Economic Secretary to the Treasury and his Labour shadow - both of whom may be subject to extensive and presumably very persuasive lobbying by banks and Treasury officials - are already lining up the Financial Ombudsman Service, perhaps with modestly wider eligibility criteria, as their preferred successor route to the BBRS. For the record, SME stakeholders have no objection to an expanded FOS being one option by which disputes may be resolved, but I doubt you will find even one reasonably informed representative of that constituency who believes that the Ombudsman can satisfactorily be the only such route, other than full-scale litigation, nor one who prefers it to tribunals. I set out more fully in section E, below, why the Ombudsman is not a satisfactory route to the determination of SME banking disputes;

21. I am concerned that even if Government appears to concede in principle the need for tribunals, it could try to set the rules in a way that minimises banks’ exposure, and hence the utility of tribunals to SMEs. The BBRS’ replacement Chief Executive and Chief Ombudsman both have Cabinet Office links, as do the authors of the two Post-Implementation Reviews (‘PIRs’), which leads me to suspect there may have been some undeclared involvement of that part of Government in the Scheme, which may be echoed in the set-up of any SME banking tribunals;

22. The most effective way to prevent tribunals from delivering material redress for SMEs or causing reputational harm to banks is to set unrealistically narrow eligibility criteria, as happened with the BBRS. Building on that experience, I set out below what I believe the criteria should be, with my reasoning:
1. All SMEs incorporated in the UK should be eligible, and the definition of SME should be the one used by the Government. Self-evidently, using any lesser definition would exclude firms that the Government itself believes are SMEs;
2. There should be no minimum criteria for turnover, staffing or balance sheet size; and if such tests are introduced, they should apply to the date of the allegedly harmful act or omission, and not to the day the firm submits a complaint. The BBRS sought to do the latter, which necessarily meant judging a company’s eligibility against those minima when the firm was at best much diminished in scale and, in many (perhaps most) cases, insolvent; therefore, the consequence of bank misconduct was that firms became ineligible for redress, a particularly unpleasant and unjust Catch-22 situation;
3. For the avoidance of doubt, balance sheet size means net asset value (assets minus liabilities). The BBRS succeeded in excluding many firms as too large by arguing that the size of a balance sheet is the total of its assets, with no deduction for liabilities - illiterate in accounting terms, but a nasty ruse, successfully used to exclude many complainants;
4. Complainants should not be excluded for being eligible for, or participating in, past redress schemes (including the BBRS), or for complaining to the Financial Ombudsman Service. These rules, which were imposed by the BBRS, probably excluded more complaints than any others. As the Treasury Committee concluded in 2018, past redress schemes operated by the banks themselves were defective for the obvious reason that they were run by the perpetrators of past misconduct, who had an obvious incentive to minimise reputational harm and financial payouts. The FCA’s IRHP redress scheme, heavily criticised by the Committee in 2018, has now been discredited by John Swift KC (see paragraph 8 of my testimony), and the FCA’s subsequent decision not to impose a new scheme to deliver justice for those excluded from its original casts further shade on the integrity of the regulator. I address the shortcomings of the Ombudsman more fully in section E of this testimony, but for now I will make the point that many of the complainants excluded by the BBRS for having previously gone to the FOS received case determinations that can be summed up thus: ‘Your case is too complex; we’ve been unable to reach a view.’ In other words, receiving a determination from the FOS that leaves a case undetermined was sufficient for a complainant to be ineligible for the BBRS;
5. Either the (former) directors and shareholders of a firm should be able to bring a claim or claims should be eligible if brought by or on behalf of a firm that has been wound up[15], without the approval of any Insolvency Practitioners appointed prior to liquidation. The BBRS required firms to bring claims (their former directors or shareholders were ineligible); where firms had been wound up, any IPs formerly appointed had to give their consent to any BBRS claims proceeding. Not one agreed to do so. Not one. Sally Berlin (whom I would charitably describe as alarmingly naive about these matters, given the nature of the post to which she had been appointed) approached various professional bodies to establish whether this could be changed. As I told her at the time, this initiative was doomed: banks take charges over the equity of firms they lend to, which gives them the right to choose which IPs are appointed should things go wrong; each bank maintains a panel of preferred firms from which such appointments are made; no panel member is likely to jeopardise the flow of instructions that results from panel membership by authorising a claim to proceed against the bank that instructs them;

23. The other way to prevent tribunals from transferring material sums in redress from banks to SMEs by tribunals is to place a (low) cap on the value of awards, as happened with the BBRS. In the latter’s case, maximum awards were £350,000 for historical claims and £600,000 for contemporary ones. Given the required size of firms[16], the payment caps were so derisory that it is likely that a sizable proportion of the small absolute number of eligible complainants decided that it was not worth their while to claim, not least because doing so might jeopardise their right to greater redress under a better, successor scheme. It is vital that this does not happen again. I see no reason for a statutory upper threshold on awards: tribunals should have full discretion to award redress equal to their assessment of loss. In practice, the upper size of such claims will be constrained by the definition of a small- or medium-sized enterprise. Creating an arbitrary ceiling risks disenfranchising some firms that qualify as SMEs

E. How well does the Financial Ombudsman Service (FOS) work for small business complaints?

24. SME stakeholders generally do not have confidence in the suitability of the FOS to determine disputes between them and banks. Even if the Committee is unconvinced by some of their concerns, the fact that the stakeholder group expected to use the FOS clearly does not want to do so should surely carry significant weight;

25. There are many reasons why SME stakeholders have concerns about using the FOS. I am grateful to the Committee for including in the Call for Evidence a question about this, and another about how its role might change. Doing so means you are likely to receive a number of responses from individual SME stakeholders and representative organisations that set out their reservations about the FOS, and outline any suggestions for change. For this reason, I have not attempted to reproduce every opinion I have heard on the matter, and have instead concentrated on just the shortcomings I have personally witnessed or experienced, and on my views about how those might be addressed. Many of my concerns apply also to the operation of the FOS in relation to consumer complaints, and not just SME ones. I hope that at some future date the Committee might launch a separate, holistic inquiry into the issue of how consumers can pursue redress when mistreated by the financial services industry, as it is an area in which the evidence shows, and I believe, change is urgently needed;

26. As with the BBRS, there are problems with eligibility. The size thresholds are more onerous than the Government’s accepted definition of SMEs, the scheme is not retrospective, and the firm must be extant (and, in practice, in the hands of the directors and shareholders in place when the alleged wrongdoing occurred[17]);

27. While the FOS should be commended for attempting to reduce one aspect of the inequality of arms between SMEs and banks (barrister representation is not needed, and - in theory at least - it is not necessary to engage a solicitor to submit a claim), there are nonetheless a number of asymmetries present in the system, including the following:
1. Inequality of resources is still a major factor, because in most cases the complainant cannot afford to engage a solicitor to write his/her/its complaint, whereas the bank has in-house lawyers and may additionally engage external ones to help it construct its defence. Often, banks can amortise legal costs across multiple, similar cases, whereas for the SME complainant making a single complaint, even if the firm or individual is in the fortunate position of being able to afford to use a lawyer, they are less likely than the bank to be able to justify doing so, because the ‘prize’ is the value of that one claim, whereas for the bank, it is usually the value of an entire class of related ones;
2. The complainant’s claim is disclosed in full to the respondent, both because the former is required to complain to the firm and receive a final decision before escalating to the FOS and because the FOS shares the particulars of claim with the firm; however, there are no disclosure rules obliging the firm to share with the respondent (or, indeed, the FOS) all information it holds about their banking affairs, including information that could be helpful to the customer in constructing a claim or to the FOS in finding for the customer. In a consumer complaint, a clued-up citizen can mitigate this to an extent by submitting a Data Subject Access Request to the firm, obliging the latter to release to the former all information held about him/her; however, this does not work for SME banking disputes because the banks hold that information held about a client’s incorporated business does not constitute his/her personal data, even where there is a substantial shareholding, a personal guarantee, or both. Moreover, the FOS does not disclose to the complainant the information provided to it by the respondent, so there is no opportunity for the former to scrutinise and challenge the documentation on which the bank relies in its defence and on which the FOS forms its decision. A claimant may therefore never get to see the documentary evidence used by the bank to win the case, let alone have the opportunity to challenge it, as the respondent does the claimant’s case;
3. Whistleblowers within the FOS have revealed that there is a behavioural bias among time-pressured case-handlers toward respondents, banks especially, because they fight longer and harder than individuals and SMEs if presented with an adverse decision

28. There is an in-built lack of transparency. Unlike an adversarial process such as a tribunal or civil litigation, where both parties are held to disclosure and perjury rules so all the facts are on the table, both sides are able to scrutinise and challenge the other’s case and cases precedent help shape case determination, the FOS is a ‘black box’ arbitrator that decides, sometimes seemingly irrationally or perversely, on the basis of what it decides is ‘fair and reasonable[18].’ I have seen FOS determinations that have seemed to me to be hard to justify, to put it politely, on the basis of the complainant’s case and what I’ve seen of the respondent’s defence; in my view, such verdicts would not have emerged from a process in which there is full disclosure and adversarial challenge;

29. There is no effective external appeal mechanism for complainants. A case-handler’s decision can be appealed within the FOS, to an Ombudsman, but beyond that, the only option available is judicial review. This is prohibitively expensive for most SMEs and expensive for the FOS, but small change for banks. As a result, SMEs are in the main denied an appeal route, but there is one for banks - and the FOS may be inclined to yield to banks in contentious cases, to avoid the cost of JR. The FOS has an Independent Assessor, who is permitted to criticise the Ombudsman, but not to overturn decisions;

30. As identified by whistleblowers and featured in Channel 4’s 2018 programme, Dispatches Undercover: Who’s Policing Your Bank?, the FOS is under huge pressure from the volume of cases it receives. This, combined with poor training and, perhaps, suboptimal recruiting, limits the capacity of case-handlers to consider the detail of the cases before them. Inevitably, SME disputes are among the most complex cases, and these tend to be the disputes in which the respondents have the deepest pockets, and the most to lose from adverse decisions - and, thus, the best-prepared defences. Set against this backdrop, SME stakeholders suspect that they cannot be confident of receiving a fair outcome[19];

31. A contributory factor is that the FOS is permitted to reach a ‘no-decision decision’, meaning one in which the FOS says, in effect, ‘this case is too complex for us to reach a decision.’ There is anecdotal evidence to suggest that this outcome is more commonplace in SME banking disputes than in consumer ones, perhaps because of their complexity or because the FOS and its employees are reluctant to pick a fight with the banks and also don’t want to find against complainants where there is significant evidence of bank wrongdoing, knowing that such decisions could be brought to the attention of politicians and the media to cast doubt on the impartiality of the service. There are also suspicions that such decisions tend to be reached more slowly than some others, and after lengthy complaint procedures within the banks. While it cannot be proven that there is an element of ‘running down the clock’ in such cases, trying to delay complaints so civil litigation becomes time-barred, there are suspicions within the SME community that this may have been the motivation in some cases, at least. Whether this is reality or just perception, the optics matter as far as having trust and confidence in a redress mechanism are concerned;

32. As with the BBRS, the ceiling on awards is very low, given the size of businesses eligible for the service, let alone those defined by the Government as SMEs. Mistreatment by a bank can easily destroy a business; it can also render the directors unemployed, bankrupt them, cause them and their families homelessness, family break-up and acute emotional distress. Any fit-for-purpose scheme should be empowered to issue awards covering the entirety of the value of the forfeit business, as well as consequential losses, opportunity costs and awards for distress and inconvenience;

33. The FOS is not independent of the FCA. The FCA:
1. Appoints, and if necessary, removes the FOS’ directors (who in turn appoint the CEO/Chief Ombudsman);
2. Sets its budget;
3. Sets the rules under which it operates;
4. Shares and receives information through a confidential gateway

34. This is a clearly a great cause for concern among SME stakeholders because the FCA is itself widely perceived by them to be, at best, a complacent regulator and, at worst, one captured by the industry - and, especially, the banks. This concern is particularly acute in relation to allegations that the FCA has acted with a lack of integrity in relation to banks’ mistreatment of SMEs. To give just a few examples, the FCA:
1. Published misleading (in my view, wilfully so[20]) summaries of the Section 166 report into RBS’[21] mistreatment of SMEs in its Global Restructuring Group, falsely portraying examples of misconduct as ‘isolated’ when the Final Report - which the FCA was forced into publishing[22] because it had already been leaked by someone shocked at how it had previously misrepresented the document’s findings - showed that it was actually ‘widespread and systemic’. It is hard to avoid the conclusion that the FCA lied in an attempt to protect RBS, not intending to publish the entire report and hence confident it could get away with doing so;
2. Failed to use its statutory powers to secure redress for thousands of firms harmed or destroyed by ‘misselling[23]’ of Interest Rate Hedging Products (‘IRHPs’) by banks. While John Swift KC could not prove that this decision arose as a result of lobbying by banks and the Treasury, he was unable to detect any alternative rationale. There are allegations from credible whistleblowers within the FCA that the Complex Events Team modelled the likely remediation costs for the banks of IRHP misselling at £10bn and were given a target of £2bn that the banks were willing to pay, and told to reduce the scope accordingly[24];
3. Even when presented with Swift’s report, declined to launch a further redress scheme for those wrongfully excluded a decade ago;
4. Allowed (perhaps encouraged) the FOS to appoint an Executive Director of the FCA, Nausicaa Delfas, as its Interim CEO and Chief Ombudsman, despite the fact that she formerly headed up the regulator’s Complex Events Team, whose role was heavily criticised in John Swift KC’s IRHP review and Raj Parker’s report into a consumer investment scam, The Connaught Income Fund Series 1. The reports imply concerns over Delfas’ competence and integrity; and even if you believe these are misplaced, there were very obvious conflicts of interest. Thankfully, I was able to head off any attempt to make the appointment permanent, though I am concerned that her slidekick Simone Ferreira, seconded at the same time, remains in the influential post of Chief-of-Staff almost two years later;
5. Has, to date, taken no regulatory action against the perpetrators of the HBoS Reading fraud, nor of the bank executives who subsequently sought to cover up the crimes, and deny the victims redress. Instead, it has allowed the bank to hire its own ‘independent’ investigator (whose work has been dragging on for years, with no end in sight), pay her and her team, set their terms of reference - and decide whether, and if so what, to publish, if and when the work eventually concludes. Overall, the perception is that the FCA protects bankers from SMEs, not the other way round;
6. Recently, allegedly sent misleading briefings to MPs to try to deflect attention from NatWest Group plc in respect of alleged fraud perpetrated against SMEs at its Ulster Bank subsidiary;
7. More widely, one of the lowest ratings ever recorded on Trustpilot, with reviews alleging that the organisation is variously complacent, incompetent, dishonest and unaccountable

35. Even if you reject as ‘guilt by association’ some of the fears held about the FOS by SME stakeholders, I hope you will accept one, namely my paragraph 33(d). It is not disputed that information supplied by the FCA can result in the FOS deferring decisions on complaints submitted pending the outcome of regulatory investigations; I hope the Committee will accept that there are also reasonable stakeholder concerns that the FCA might, on occasion, pass incorrect or incomplete information to the FOS, resulting in it reaching unjust determinations. Likewise, FCA-driven complaint deferral can sometimes delay FOS determinations for multiple years, which may have the effect (whether or not it is the intention) of civil claims becoming time-barred, while unjust determinations tend to disfavour consumers, not the industry, for the reasons already set out;

36. In conclusion, in its current incarnation, the FOS is an imperfect, ‘black box’ adjudicator, designed to deliver approximate justice at low cost in low-value, straightforward disputes between consumers and financial services providers. It struggles with complex cases, its eligibility and awards criteria are ill-suited to many SME banking disputes, and its processes, skill levels, case volumes and links to the FCA all undermine SME confidence in it. For these reasons, it is ill-suited to the determination of SME banking disputes;

37. SME stakeholders are clear that tribunals are the best vehicle for resolving banking disputes; they have been kept waiting a long time and have shown perseverance and good faith in working with the industry’s and Treasury’s preferred solution, the BBRS - despite their own, well-founded reservations, which have now been vindicated. Their views should not be ignored a second time round; the FOS is no substitute for tribunals, even with significant modifications

38. I believe that the BBRS is now comprehensively discredited, not least by this article, published by Thomson Reuters, that refers to serious allegations made by a whistleblower, the use of a reputation management company to track MPs’ and campaigners’ views about the Scheme, the deployment of SLAPPs to deter the media from publishing criticisms, and governance flaws. It is crucial that the Committee ‘sees past’ the BBRS and recognises that it was a creation of the banks, with the support of the Treasury, FCA and perhaps, the Cabinet Office. The banks and Treasury are now backing an expanded FOS, and the FCA has already consulted on the proposition. As things stand, this is the next injustice to be foisted upon SMEs. I urge the Committee to be appropriately sceptical about the motivations of those parties and instead intervene to ensure that those wronged in the past get their way this time

F. Is the FOS’s existing role in SME finance appropriate? If not, how should it change?

39. Turning the FOS into an alternative dispute resolution service even partially capable of handling complex cases, including SME banking disputes, and rebuilding confidence in the organisation, would require profound changes to its legal status, governance and operations that I suspect are unlikely to happen without a standalone inquiry by the Treasury Committee, a series of consultations by the Treasury, or both. I believe there is a compelling case for such work to be undertaken; until then, I will make the following observations:
1. Any role for the FOS in handling SME banking disputes should be additional to tribunals, not a substitute for them;
2. If SME banking tribunals are introduced, use of the FOS should be optional from the complainant’s perspective, meaning that having first complained to the FOS should be neither a precondition for making a tribunal claim nor an alternative to it (you will be aware that the BBRS - absurdly, in my view - excludes prospective claimants who have gone to the FOS);
3. Eligibility criteria should match those for tribunals, and there should be a corresponding carve-out for historical cases that would otherwise be time-barred (FOS eligibility rules currently mirror the Limitation Act);
4. I believe the FOS could usefully evolve into something more akin to a sophisticated form of mediation (perhaps obligatory) preceding tribunal hearings, meaning that claimant and respondent meet before an independent mediator, all facts are laid on the table and tested, then the mediator attempts to negotiate a satisfactory resolution. This would be a major evolution from its current role, which I have characterised as ‘black box’ arbitration. Most claimants want to get to the truth, and to be heard, as well as to secure financial redress; many respondents, banks especially, want to avoid reputational harm and regulatory action as much as or more than they want to avoid the financial costs of remediating past wrongdoing. I believe that mediation of the kind I have outlined would result in many cases being resolved at low cost, without adding material workload to the tribunal system[25], and without the risk of reputational harm, regulatory consequences or the establishment of precedents that could arise from open-forum hearings, whether in tribunals or the courts;
5. Attractions to this approach include:
1. Requiring complaints to go to an upgraded Ombudsman prior to Tribunal would provide an opportunity for some to be settled at an early stage, reducing the workload on the Tribunal system;
2. It is possible that a significant number of cases would be resolved at this stage, because the threat of a Tribunal (with the risk of setting a precedent, and of publicity) might result in banks settling at initial complaint or Ombudsman stage, without the need for the Tribunal to get involved - in effect, the existence of the right of SMEs to escalate complaints to the Tribunal service would help keep the banks, and Ombudsman, honest
6. There are potential downsides to this approach for SMEs:
1. They might be tempted to settle on unattractive terms at Ombudsman stage because they would be unaware of any ‘smoking gun’ evidence that might emerge at the Tribunal stage - this can be resolved by requiring full disclosure when cases go to the Ombudsman;
2. Cases can be held up at the Ombudsman, sometimes for years, either because of caseload or because of an ongoing FCA investigation. This could be resolved by introducing a role that novates a case for Limitation Act purposes to the date on which the Ombudsman reaches a final decision, by giving SMEs the right to escalate to the Tribunal service after a reasonable period of time has elapsed without a decision, or both

G. Should commercial lending to SMEs be brought into the regulatory perimeter?

40. Yes. The banks, together with the FCA and Treasury, have long argued that the availability and costs of loans to SMEs would be impaired by bringing them within the regulatory perimeter; but, as stated in paragraph 8 of this paper, there is no evidence available to support the claim[26], in that it cannot be shown that loans of amounts less than £25,000 to unincorporated entities, which are regulated, are significantly less commonplace or more expensive than larger loans to incorporated entities, which are unregulated;

41. However, there is evidence that even where SME lending is regulated, standards of conduct fall far short of where they should be. This is an apposite time for me to remind the Committee that ensuring there are adequate regulations, while a start, is not in itself a guarantee of good outcomes - these are at least as dependent on assertive and effective regulation[27] and, better yet, on providing effective and affordable routes by which customers can secure compensation from firms themselves, enabling them, if necessary, to bypass a cautious, complacent or captured regulator - which is why statutory routes to redress that directly empower SMEs and consumers are so important;

42. It is my understanding that bringing SME lending within the regulatory perimeter is a necessity if the FCA is to have the power to create sector-wide redress schemes under Section 404 of the Financial Services and Markets Act 2000. Providing the regulator with that power would deprive it of an excuse for failing to act to secure justice for mistreated SMEs and would thereby significantly reduce the volume of cases brought before any SME banking tribunals

H. Should SMEs have the same level of consumer protection and deposit insurance limits as retail consumers?

43. They should have the same level of consumer protection. As stated in paragraph 40, there is no evidence base for depriving them of rights afforded to unincorporated firms and private citizens;

44. The issue of depositor protection is much wider than can satisfactorily be dealt with in this call for evidence about SME finance. The LDI crisis in the UK last year and the subsequent runs on banks that occurred principally in the US (though the latter impacted on the UK arm of Silicon Valley Bank) have shown us that prudential risk has not been eliminated from the shadow and mainstream banking sectors, as we had hoped. Moreover, they have demonstrated that, in the era of social media, contagion risk may spread faster than in 2007-8. Under fractional reserve banking, any bank will become insolvent on a cashflow basis if enough of its depositors believe this could happen, and act accordingly by demanding repayment of their deposits; raising capital ratios merely reduces the probability of this occurring and increases the time available to regulators to rescue a targeted institution. Ultimately therefore, there is only one solution that is certain to prevent such runs occurring in the future, and from causing bank collapses: to guarantee all deposits, from all classes of customer;

45. Traditionally, three arguments have been advanced against unlimited deposit guarantees. Below, I list them, and set out why I believe they are flawed:
1. Moral hazard (banks) - if a bank believes it will be bailed out, it will take more risk. Banks already believe they will be bailed out; so the risks they take are circumscribed by the standards of regulation to which they are subjected, not a hypothetical fear of being allowed to fail (which, in any case, would impact shareholders and perhaps taxpayers and depositors, not the executives who make the prudential decisions[28]);
2. Moral hazard (customers) - if consumers believe banks will be bailed out, they will flock to the ones paying the most interest, not the ones that have the strongest balance sheets. Most consumers are unable to read a bank balance sheet, let alone compare one financial institution against another for financial prudence; they are also entitled to believe that financial regulators perform their jobs to a reasonable standard, and therefore that all banks are safe. It’s a cheap shot, but I’d be remiss if I didn’t point out that the existence of financial crises indicates that regulators, too, don’t always spot these things - if they can’t, it’s clearly unreasonable to hold private citizens, or SMEs, to a higher standard[29];
3. Smaller bank failures don’t represent systemic risk - Silicon Valley Bank was deemed not to be systemically important, and was thus subject to less onerous prudential regulation in the US than larger rivals. But its client base was concentrated in one sector - digital tech. So if it had been allowed to fail, the consequences for firms, investor confidence, employment levels and tax receipts in that sector would have been enormous. Equally, there are UK banks, and building societies, that have very specific and significant geographical or sectoral concentrations, failure of which would prove catastrophic for the affected consumers or industries

46. For the reasons set out, I believe that the UK should move toward a system of unlimited depositor guarantees, for citizens, SMEs, the third sector and public bodies and corporations alike. In practice, it is near-certain that we already have de facto unlimited guarantees - the Global Financial Crisis showed that the state rescues banks, if solutions cannot be found within the industry. Making that position overt reduces (perhaps to zero) the probability of such guarantees ever being called upon, because depositors would realise that there is no circumstance under which their deposits could be lost, so there would be no risk to not participating in a bank run, therefore there would be no runs on banks. There are other measures that can be introduced to reduce any theoretical risk, and to make the introduction of unlimited guarantees politically more palatable - principally, better prudential regulation, including personal guarantees for bank bosses and perhaps prudential regulators. But this is a huge topic, better suited to a separate inquiry

47. Finally, I restate my willingness to give in-person evidence, and to be questioned on the content of this document.

September 2023