Business Support Units (BSU) are loathed by businesses who have ever had to encounter them, and perhaps found out, that they don’t exactly do what’s written on the tin – support them. The Tomlinson Report in 2013 exposed, what many small businesses already knew; their bank’s idea of supporting them, when the business encountered financial difficulties, was to sink them further into debt through extra fees and/or through increased loan interest rates, and unfortunately, for many, it ended in insolvency.

Royal Bank of Scotland

In 2016, the Financial Conduct Authority (FCA) carried out an Independent Review, after the Tomlinson Report identified significant problems with how the Royal Bank of Scotland (RBS) treated its small medium enterprise (SME) customers, once it entered its BSU, called Global Restructuring Group (GRG). The FCA report was published in November 2016, and whilst not upholding all of the allegations against RBS, it did find there were significant failings by RBS. This led to RBS launching a complaints process to deal with the complaints made by customers placed in GRG. Since, the FCA has carried out a further detailed review, although, it has refused to publish the report in full. However, three years on, finally, Ross McEwen, the chief executive of RBS has accepted that GRG’s definition of turning customers around, included putting them into insolvency[1].

The problem with GRG, was compounded because of the West Register, some customers felt that their property portfolio was being purposefully undervalued, so that it could be brought by the West Register. The West Register was set up in the early 1990’s to manage property assets from failed RBS customers. Clearly, a conflict of interest becomes apparent. You have an RBS subsidiary purchasing distressed property potentially at undervalue from RBS, and then it sells the same property at a profit. The perception is that the transaction is not at arm’s length. These problems were brought to light many years before any action was taken.

Whilst the Report focuses on RBS, it would be only fair to point out, that RBS is not the only financial institution that has been charging hefty fees through its BSU.

This may only be the start of the process, the FCA could investigate and direct other banks to follow suit; require them to review their BSU practices, and require them to carry out a skilled person (section 166) review. It would perhaps be prudent for banks, to carry out internal reviews, if they haven’t already done so.

Why do the banks have Business Support Units

To support a customer who is not performing as expected, it is in the interests of both the customer and the bank that the business performs well. The intentions of a relationship manager may start out well, but often, if they are not able to assist the business to recover to expected profitability margins, and the management information is not satisfactory, it very often has to refer the customer to BSU. This can result in the relationship manger passing on the business relationship to an entirely different department.

Some businesses go through a cash flow issue for a short period, and require financial support for a finite period of time, after which they can go from strength to strength. It is inevitable that some businesses would fail irrespective of whether they were placed in BSU. However, should a bank be allowed to argue that it was right for a financially struggling business to be charged ‘BSU management fees’[2]? the customer is over a barrel, it cannot move banks easily once it is considered higher risk, or put another way, have had their credit rating downgraded. The Customer cannot chose to say if you charge me these fees I will move to a different bank. The customer is often required to have a valuation (at their own cost) carried out, which could result in a reduced loan to value ratio. Which again, would give a bank cause for concern if the business was struggling and the economic climate was also having a negative impact. This could lead to an increase in the bank’s interest rate, most banks will have a clause in the initial loan contract to do this. The bank may decide they no longer want to bank a customer who is high risk and drive it out through fees and interest increases.

How fair is it to impose an increased interest rate, or management fees?

Banks have to dedicate extra time, or even the resources of an entire department to business customers who fail to perform as expected. As they are dedicating more resources to this customer, to try to help it out of its difficulties, this will cost money. Should the banks not be entitled to make a profit? After all they are taking the risk and must protect themselves against bad debt, and earn a profit for shareholders. The bank has to carry out a risk cost analysis, and proceed on that basis.

GRG appears to be in a category of its own, as it was taking advantage of its troubled SME’s. However, issues arise within many business banking relationships, when a bank claims it is helping and supporting you, when in all reality, it isn’t. An additional burden on cashflow is not helpful. What can aggravate matters further is the unfairness in treating different customers, in a different way, based on the pot of gold they have to offer, or how loud they scream foul play. This is where the FCA does help, as they take, not treating your customers fairly, very seriously, and banks can be fined where they are found to have done this, and suffer reputational damage as a result.

The problem arises because not all customers are equal before its bank; how is a tech start-up company or one with no assets or money, who has been fortunate enough to obtain a loan for its business, going to pay for BSU fees? Other than through its bank overdraft, or a personal guarantee. It is unlikely this business would be an attractive candidate for BSU.

A property developer, with many assets on the other hand, may be an incredibly attractive customer to BSU, especially in a falling property market for a number of reasons. However, when they suffer from cash flow because rental income has reduced, how helpful is an increased interest payment, or an additional £500 a month coming out of the account, which can only stand to exasperate matters.

Could the answer be for banks to have a better system in place; they could front load their fees instead early on in the banking relationship, there could be insurance premium you pay during the good times, and if you end up in the BSU, then the insurance policy kicks in, and all your fees for BSU are paid. For example, similar to income protection for landlords who have defaulting tenants.

Change is needed

Tomlinson points out, lack of competition in the industry is an issue, as RBS and Lloyds have the largest slice of the pie. Metro Bank is a relative new comer to the UK retail banking industry. They are attempting to be more customer friendly and offer outside of the box services with their extensive opening hours, ability to print of debit cards while you wait, and overall are attempting to be more Customer focused; you will always speak to a customer service agent, even if the queue is a little longer. How it deals with SME’s is yet to be tested. The RBS, GRG issue stands apart from what most other banks do, but there is always room for reflection, see if things could be done better.

As fintech grows, this may challenge the status quo further and allow for more competition in the market place, more transparency and customer centric business banking. Fintech may become a real alternative for SME’s. This can only be healthy competition, and no doubt high street banking will have to improve.

The FCA have launched a consultation[3], to see if SME’s can have recourse to the Financial Services Ombudsman (FOS). This would be a business with fewer than 50 employees, annual turnover below £6.5 million and an annual balance sheet below £5 million. Access to FOS would no doubt be welcomed by SME’s, who cannot afford to pay for lawyers; therefore they fail to litigate and obtain due process through the courts, and due to a lack of regulation have little recourse to the FCA or the FOS.

Two select committees have just announced that there will be inquiries around SME finance, one will look into the mistreatment of SME’s, see whether there is enough protection when they borrow[4], and the second will look into lessons to be learned from RBS’ GRG restructuring, and sources of funding more generally available for SME’s[5].

Many SME’s who were being ‘assisted’ by BSU’s, ended up in administration, perhaps it is the Insolvency Firms who would be best placed to take charge, in making claims for these businesses, if there are claims to be made for mistreatment.  But for, the additional burden placed on these SME’s, through BSU’s, they may have been able to find a way to survive. The RBS case has highlighted that there is a need for more transparent, fair banking for SME’s. More competition and recourse to the FOS can only help.