Britain’s banks insist they want to support small and medium-sized enterprises. So why have they been so slow to resolve the multi-billion pound interest-rate swaps mis-selling scandal?
Some 15 months after the Financial Services Authority set up a swaps compensation scheme, its successor, the Financial Conduct Authority (FCA), has revealed that only 10 SMEs have received redress from the banks. Just another 30,000 cases to resolve then.
Interestingly, pay-outs from those first 10 cases totalled around £50,000 each, which implies the total cost of will be around £1.5bn. That’s substantially less than the £2.5bn the banks have put aside for compensation.
However, the first cases to settle were presumably the most simple. And while we don’t have the detail, the fact that the average settlement was only £50,000 suggests the banks didn’t pay out much redress for consequential losses to the SMEs concerned. This has become the sticking point in many interest-rate swap mis-selling cases, for the banks are terrified about their liabilities for consequential losses. The regulator requires them to compensate customers not only for the direct costs of the mis-sold swap contracts but also for losses they have suffered as a result of entering into the agreement.
Some of these losses are simple to quantify and likely to be relatively modest – for example, the overdraft fees incurred by an SME because of the cost of the premiums on the contract. But the banks are praying it will be difficult for SMEs to prove that other losses really were incurred as a direct consequence of being mis-sold a swap contract – and given the scale of the redress theoretically due in some cases, you can expect them to fight tooth and claw to limit their liabilities.
Many businesses claim, for example, that they have been prevented from embarking on new ventures or investing in new projects because of the costs of maintaining their swap contracts. They want compensation for the lost sales and profits from such ventures. Other firms claim they have missed out on funding because of their exposure to interest-rate swaps, with potential lenders or investors assessing them as having much higher gearing than would have been the case had they not bought the contracts.
Many of these claims will be large and highly contentious. And while the banks have undoubtedly behaved very badly throughout this mis-selling scandal, it would not be reasonable to expect them to automatically settle all claims, however tangential the consequential losses might seem. Nevertheless, some of these claims are justifiable, even if proving the link between mis-selling and loss is difficult. There clearly will be instances where the cost of maintaining an interest-rate swap contract has been the final straw for a cash-strapped business struggling to get the funds together for investment.
By and large, the banks are insisting they won’t pay any compensation at all to a customer until the issue of its consequential losses is resolved. This means small businesses are waiting much longer than expected to get compensation for the direct losses they have incurred, even though there is often no dispute about these.
The banks’ stance is supported by the FCA, which fears the whole affair will drag on for years to come unless the banks are able to settle each case with a single payment agreed as full and final compensation.
One takes that point – on the other hand, it would be unfortunate if SMEs miss out on the full compensation package to which they should be entitled because they need quicker access to the more limited redress on the table upfront and therefore sign away their claim to consequential losses.
Tech opportunity for tomorrow’s leaders
Calling entrepreneurs in video games and related areas. IC Tomorrow, an offshoot of the Government-backed Technology Strategy Board, is launching a new competition offering £25,000 in prize money plus the chance to work with several blue-chip technology businesses.
The Digital Innovation Contest lays out challenges for entrants in five areas – from “Second-screen use in a game” to “Open street map data” – with each award being sponsored by businesses including Sony, Intel and Google. The winners then get cash funding to develop their ideas, along with practical support from the award sponsor.
“The winners get to trial their ideas with some of the key players in the global games arena,” said Matt Sansam at IC Tomorrow. “They get funding to do this and retain their intellectual property.” More details at connect.innovateuk.org.
Shawbrook rises to the challenge by lending £1bn
Slowly but surely, Britain’s new challenger banks are beginning to make inroads into the lending market. Shawbrook Bank, launched in 2011, will today announce that it has now lent more than £1bn to small and medium-sized enterprises and personal customers – and that it was profitable for the 2012 calendar year.
Shawbrook has so far made £1.13bn of loans, the bank said, including £766m to SMEs. Having broken into the black in May 2012, 16 months after opening its doors for business, the bank made a £2.6m profit for the full year.
That profitability is important because other new banks are still trading with large losses, undermining their viability as challengers over the longer term. And while Shawbrook’s figures still look modest in the context of the established banks, it is growing quickly.
Having eschewed a branch network, Shawbrook trades predominantly through a network of professional intermediaries, which has helped its geographic reach. While almost half of its lending has been to customers in London and the South-East, its book is otherwise spread evenly around the country.
Small businesswomman of the week: Melissa Burton, founder, Goody Good Stuff
We’ve just celebrated our third anniversary by wining the Nectar Small Business of the Year award, which was a tremendous honour – especially given some of the other amazing businesses in the final.
I started a business-angel service and three months into that I met a man who was working on an alternative gel to gelatine for gummy sweets.
He was thinking of the kosher market, because most gelatine has pork in it, but I thought it was an amazing idea with a much wider potential market.
Three friends and I pooled our savings to buy the intellectual property from the inventor and then we worked on developing the product, plus the branding, packaging and so on.
Our first-ever sale was actually in the US – I did the pitch using a mock-up that I’d glued together with hair-straighteners in my hotel room. The order was for 250,000 units, which enabled us to turn on the production line.
Today we have a growing business in the UK selling through most of the big supermarkets, but we also export to 28 countries around the world – being an international business was a crucial part of our strategy from the start.