GADFLY: SME funding is perfect chance for financial technology disruptors to enter the frame
The government should take the advice the regulator gives in its report and add small-business lending to the list of banking activities overseen by the FCA
"There can’t be all this smoke without some fire," legislator Andrew Tyrie complained at a 2014 hearing into whether Royal Bank of Scotland mistreated 5,900 business customers. For incendiary material, how about a leaked internal memo suggesting clients should be given enough rope to "hang themselves?"Parliamentarians have given the Financial Conduct Authority (FCA) until Friday to publish a report the regulator commissioned into the scandal at the taxpayer-rescued lender. The FCA is dragging its feet. Helpfully, a website has done the job for it.
In summary, the country’s then biggest lender to small businesses squeezed small-and medium-sized enterprises that got into trouble for profit, rather than helping them recover. The study found inappropriate treatment in an astonishing 86% of the cases it examined. In one in seven examples, RBS’s actions "could reasonably be described in several cases as contributing to a journey" that tipped some clients into liquidation, according to the report.
So far, so bad for a bank that was bailed out by taxpayers. But in the next downturn, would so-called nontraditional lenders do any better in supporting troubled borrowers with a willingness to throw good money after bad to fund rehabilitation? I’m not convinced equity crowd-funders or peer-to-peer lenders would be any more lenient than — or even as understanding as — the big four when the crunch comes.
The problem, as the FCA report notes, was that RBS’s customers had nowhere else to turn to. A 2015 government study found that 85% of business bank accounts and almost 90% of business loans came from just four providers — RBS, Lloyds Banking Group, HSBC Holdings and Barclays. Less than 4 % of companies switched between different providers.
SME funding thus looks like a perfect opportunity for financial technology disruptors to enter the frame.
Consultancy firm Deloitte argues that a change in rules that came into force in 2018 would bolster competition among SME lenders. British banks are now obliged to share the data they hold on companies with any third party authorised by an account holder. That should give nonbank lenders more confidence to lend to small companies, according to the accounting firm.
The problem is, the two things a small business in trouble needs are time and money — both of which are in short supply when you’re struggling to make payroll in a deteriorating economic environment and your lenders want their pound of flesh.
RBS shunted 5,900 customers away from their relationship managers and into the hands of the GRG gang, who were disinclined to either extend more credit or give companies time to recover. Peer-to-peer platforms are arguably even more distant from their borrowers, and would be reluctant to lend more to a company in trouble.
SMEs, defined as those employing fewer than 250 people, comprise more than 99% of British businesses. In the post-Brexit world, their contribution to the economy will become more vital than ever. They should be wary of fintech firms proffering loans.
The government should take the advice the regulator gives in its report and add small-business lending to the list of banking activities overseen by the FCA. RBS should be forced to compensate those business owners who suffered at the hands of its GRG unit. And the FCA should publish its report.
• This column does not necessarily reflect the opinion of Bloomberg and its owners.
• Gilbert is a Bloomberg Gadfly columnist covering asset management.