Bankers warned to stop 'unfair' charges

Published on Monday 27 July 2009 22:03

THE government last night raised the spectre of referring Britain's major banks to the Office of Fair Trading, amid accusations they are withholding credit and forcing high interest rates on business customers.

The threat came at a meeting convened by Chancellor Alistair Darling, who hauled executives from the main lenders into the Treasury yesterday.

They were warned regulators such as the OFT could be brought in to examine their lending practices. "I want to make sure we have a competitive banking system in this country," Mr Darling said.

City minister Lord Myners is to grill banking bosses one by one about their lending practices, starting this week.

In what were described as "robust" exchanges, banking bosses insisted their lending had actually gone up in recent months. The British Bankers' Association said total lending to small companies rose 391 million in June, up from May's 153m increase.

But the government said it was "extremely concerned" that small businesses were still being left short of credit, forcing many to go to the wall.

Business Secretary Lord Mandelson, who was also involved in the talks, said that lending was "still too weak" and that ministers would be "robustly" challenging bankers.

The Chancellor made clear he expected banks to play their part in the recovery and not hold up crucial credit to ailing firms.

He warned that the government intended to scrutinise banks until lending practices had normalised. "Each and every bank needs to know that there is someone who is looking over their shoulder," he said.

The UK's interest rate is at a record low of 0.5 per cent, and Mr Darling said businesses should be offered the lowest possible rates.

Speaking after the meeting, he said: "The banks will say that, because interest rates have come down, people are paying less now. I think that the advantage of low interest rates has to be passed on. Of course, there are arrangement fees that need to be paid, and so on, but I am concerned to make sure that banks do not charge any more than is absolutely necessary."

He went on: "I want to make sure that we do have a competitive market. In the last year or so, a number of institutions that used to lend have simply gone."

Mr Darling presented evidence to banking chiefs, including the bosses of Royal Bank of Scotland, Lloyds Banking Group, Barclays and HSBC, of how profit margins had swelled while many firms had collapsed.

Sources said he confronted the banks over the fact that:

&#149 Since June 2008, the difference between the best and worst two-year fixed-rate mortgages has increased by 450 per cent.

&#149 A higher proportion of firms are now paying margins on new lending greater than six percentage points over the base rate.

&#149 Almost a third of small and medium enterprises (SMEs) now pay more than nine percentage points above the interest rate that banks charge each other for loans. It was only two points in 2007.

A source close to the Chancellor said: "Medium-sized businesses, in particular, appear to be having difficulty accessing loans."

The source added that the warning about further action was aimed at banks that had no government stakeholding, as well as the part-nationalised lenders.

At yesterday's Treasury meeting, alongside the Chancellor and Lord Myners was Treasury minister Baroness Vadera, herself a former banker.

Those in attendance for the banks included RBS chief executive Stephen Hester, Lloyds' boss Eric Daniels, HSBC's managing director of UK banking, Paul Thurston, Barclays chief executive John Varley and Standard Chartered chief executive Peter Sands.

Also there was the Financial Services Authority's chief executive, Hector Sants.

The tough message from ministers was officially taken on board by banks, but some industry sources questioned whether the Treasury should force the rules on to banks that have not been bailed out by the government.

Banks such as Barclays and HSBC have so far managed to sidestep the need for government cash, unlike Lloyds and RBS.

One banking source said: "You can tell we are in an election year. It is as though bankers are being put on the naughty step."

Another source close to the talks said the banks had felt the meeting was constructive.

Contrary to the uncompromising message coming from the government, the source added that there had been "no hectoring or lecturing".

Banking bosses had argued, however, that their profit margins had actually gone down.

Demand for lending from SMEs was also down, they said.

Angela Knight, the chief executive of the British Bankers' Association, insisted lenders were "meeting their part of the bargain".

She said: "There will be businesses out there which haven't got a lot of business left.

"I don't think the Chancellor wants us to lend savers' money to businesses that are in such a difficulty."

Asked why lending rates for businesses were so much higher than the Bank of England's 0.5 per cent base rate, Ms Knight said: "Because the cost of money has gone up.

"One of the things that has happened is that the actual price of money is much, much higher than that of the base rate.

"I think there's a much broader picture that the Chancellor needs to look at."

Shadow chief Treasury secretary Philip Hammond claimed the talks had produced a "fudge", because banks were being urged to hold higher capital reserves, while also making more credit available.

"Those two things are not obviously compatible, and when people get mixed messages, they are able to interpret them in the way that suits them best," he told the BBC.

"What the government needs to do is send a very clear and unambiguous message to the banks."

Stewart Hosie, the SNP's Treasury spokesman, said every MP must have fielded complaints from small companies struggling because they could not access credit.

He said: "Alistair Darling has had months to sort this problem out, and this time must follow through or lose what remaining confidence he has left with the business community."

The Bank of England's quarterly Asset Purchase Facility report, released yesterday, showed that large companies, at least, could find it easier to raise finance through corporate bonds in the second quarter of this year.

The central bank pointed out that liquidity and price transparency were improving.

A separate report by the banks said smaller firms were also able to borrow more in June, when lending to small businesses rose by 391m.

Mr Darling, however, argued there were still inconsistencies, and he is to meet bank executives again in September.

Insolvency Service figures show some 5,000 British companies went into liquidation in the first three months of 2009, many of which had been refused vital credit from crisis-stricken banks keen to cut their liabilities.

Mr Darling's fears over accessibility of credit was confirmed by a study conducted by Deloitte, which showed that 30 per cent of firms said banks were reducing their credit facilities.

Banking relationships had also broken down because lenders were refusing to extend credit facilities at critical times.

BISCHOFF POST

SIR Win Bischoff is to become the next chairman of Lloyds Banking Group. The appointment comes after current chairman Sir Victor Blank announced his retirement earlier this year.

Sir Win, who will take up the position in September, is a former chairman of Citigroup. He said he was "honoured and pleased" to accept the post.

"Short-term, we face many challenges, but in the longer term the group is well-positioned to deliver significant benefits to its customers, shareholders, employees and the public," he said.

The Financial Services Authority also approved the move. Lloyds said it had conducted a "comprehensive search process" to fill the role.

'It was only 400 – I didn't expect this hassle'

TRICIA Fox, founder of marketing company Volpa, was stunned when she found it hard to get a company credit card with a mere 400 limit for an employee.

With her firm in a strong financial position – turnover was double last year's – she assumed it would be relatively easy to get a card for one of her events managers. But instead of being approved on the spot, her request was referred to a special decision-making team at her bank.

"I found it confounding that they had to refer that level of borrowing to a special lending unit. Five years ago they were throwing money at businesses. They have obviously reigned in so much. I thought it ludicrous."

Ms Fox, who is based in Auchterarder, Perthshire, has scrapped her business's overdraft facility because, aware that some firms were having them suddenly stopped, she did not want to be exposed to risk.

However, she realises she is in a fortunate position not to need an overdraft. She knows of other small businesses in a far more difficult position.

"I'm very aware of one company – a friend of mine – and they went under because they couldn't get the funding that they needed," she said.

"Those that are struggling and generally need the support aren't getting it. Another company I know had their bank pull the plug on them just after Christmas and now they have to operate from their own personal account. Small businesses are having to cope with that extra pressure when they don't need it."

She added: "The banks have got the fright on. They are scared to make decisions."

Edinburgh businessman Aldo Marcantonio is in a dispute with his bank after they increased the interest rate on his loan out of the blue. He believed he had a 15-year deal paying 1.5 per cent above the base rate on a 600,000 loan. However, without warning, they told him this was rising to 3.66 per cent.

"Apparently, the small print said they could do this," he said. "I'm totally fuming."