Business Banking Resolution Service

Margaret Ferrier Excerpts

Tuesday 11th July 2023 Westminster Hall

[Mr William Wragg (Hazel Grove) (Con)]

I beg to move,

That this House has considered the Business Banking Resolution Service.

It is an extraordinary pleasure to serve under your chairmanship, Mr Pritchard, and to welcome the Minister, shadow Ministers—the hon. Member for Hampstead and Kilburn (Tulip Siddiq) and the right hon. Member for Dundee East (Stewart Hosie)—and an extremely able Parliamentary Private Secretary, the hon. Member for Totnes (Anthony Mangnall), who will no doubt pass notes diligently.

I hope to outline how and why the Business Banking Resolution Service has failed to restore trust between small and medium-sized enterprises and their lenders, or to resolve a meaningful number of complaints. I also hope to outline alternative proposals that might achieve those goals. According to “Scale up to level up”, a 2021 report by the all-party parliamentary group on fair business banking, 73% of small businesses would rather grow more slowly than borrow. That is a worrying trend that needs to be reversed.

Empowering businesses to borrow with confidence can only be good news for our economy. A healthy SME lending market depends on trust and confidence that things will be put right if they go wrong. As has been stated in this place many times, most transactions between businesses and their financial service providers, including the majority of commercial lending, are neither regulated nor covered by consumer protection laws. The power imbalance between SMEs and banks and other large financial firms leaves small businesses vulnerable to poor treatment. It is, therefore, vital that SMEs have access to independent and effective dispute resolution services when they are in dispute with their lenders. The Treasury Committee’s 2018 “SME Finance” report was clear on that:

“We must introduce a system for dispute resolution and redress that gives the UK’s SMEs the confidence to engage with financial services providers, safe in the knowledge that they are not vulnerable to exploitation and mistreatment.”

[Margaret Ferrier (Rutherglen and Hamilton West) (Ind)]

I congratulate the hon. Member on securing this debate. Support for the BBRS is limited; many have stated that a new alternative resolution scheme should be created. Does the hon. Member agree that any new scheme should seek not to burden the tribunal system, by requiring parties first to seek agreement through mediation services?

[Mr Wragg]

The hon. Lady makes a valid, important and sensible point. I will touch on a suggestion towards the end of my remarks.

In the course of its inquiry, the Treasury Committee considered the long-standing and very large gap in provision of a financial dispute resolution service for SMEs, between those eligible to refer a complaint to the Financial Ombudsman Service and those with access to enough money, appropriate legal representation, and sufficient courage and time to be able to sue their bank. A similar shortfall was identified in the APPG’s “Fair Business Banking for All” report.

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[Mr Wragg]

I am afraid that the hon. Gentleman highlights one of many cases across our constituencies. I perfectly well understand his constituent’s sense of injustice. Hopefully this debate will at least give us an idea of the way forward.

The BBRS followed from the Walker review, commissioned by UK Finance, which identified a gap in dispute resolution and recommended that a voluntary scheme be established. It recommended action to deal with legacy disputes and contemporary complaints by providing speedy resolution for larger SMEs’ ongoing financial complaints. A proposal to set up a financial services tribunal was made at the time by my hon. Friend the Member for Thirsk and Malton (Kevin Hollinrake) and the Treasury Committee in its 2018 report. The Treasury Committee report noted strong cross-party support for the proposal. For a number of reasons, including a lack of parliamentary time and the significant costs involved, the Walker review did not support the creation of a tribunal.

The BBRS was also established to ensure the excesses of the financial crisis were not repeated, and that record keeping and data flows about SMEs can be used to monitor bank behaviour and culture, and can provide an early warning system for customer mistreatment. That was a key purpose of the Walker review, beyond providing a new mechanism for dispute resolution.

A 2019 letter to Stephen Jones, the then CEO of UK Finance, the then Chancellor of the Exchequer, Philip Hammond, made Her Majesty’s Government’s position on the nascent scheme abundantly clear. It stated:

“If it transpires that the scheme is not bringing resolution to a meaningful number of complaints…then I would expect there to be further discussions around the scope of and eligibility for the backward-looking scheme.”

That gets to the nub of the issue.

[Margaret Ferrier]

Despite forecasts that more than 60,000 legacy cases would be eligible for review, take-up and financial payouts have been minimal. Does the hon. Gentleman agree that further action must be taken to support businesses in bringing forward legacy claims, and that there should be a six-year time window?

[Mr Wragg]

As ever in these debates, the quality of interventions is superb. The hon. Lady pre-empts exactly what I was going to say. If she will forgive me, I will come on to that in a moment, but her point is perfectly valid.

It may not surprise anyone following the story closely to learn that the BBRS has failed to resolve a meaningful number of complaints. By the former Chancellor’s standards, I think it is fair to say that the BBRS has been an abject failure and has certainly not given UK SMEs confidence to engage with financial service providers.

As just mentioned by the hon. Member for Rutherglen and Hamilton West (Margaret Ferrier), it was estimated by the then chief executive of UK Finance that more than 60,000 historical complaints would be eligible for review. However, by May of this year, the BBRS had made direct adjudications on just 28 cases resulting in financial awards. In that same time, it has been involved—whatever “involved” means—in the award of 56 financial settlements between banks and claimants. That includes cases where the dispute has resulted in a settlement following, but not necessarily because of, the involvement of BBRS. Even being generous, the BBRS has been involved in a maximum of just 84 financial awards in nearly two years out of an estimated potential of 60,000. Plainly, the quantity of resolved cases is very disappointing, to say the least.

Naturally, that raises questions about value for money. The BBRS cost more than £40 million to set up. By May of this year, according to its own data:

“Substantially more than £1 million of financial awards have been made to SMEs as a result of BBRS intervention so far”.

In other words, a maximum of between £1 million and £2 million has been paid out since the launch of the BBRS. Bear in mind that it cost £40 million to set up. Would it not have been easier to simply divide that £40 million and dish it out randomly? The BBRS has proved to be very poor value for money.

The primary issue behind these abysmal figures is the design of the scheme itself. Heavily restrictive eligibility criteria have locked out and timed out almost all credible claims from businesses, and there is no indication of any willingness from the BBRS or the banks to address this. The chair of the BBRS SME liaison panel—an advisory body set up to give SMEs a voice within the service—resigned in March this year, stating:

“The very low numbers of cases resolved by the BBRS and the banks suggest an inflexible system, and I do not detect the necessary willingness and imagination within the existing system to resolve this.”

Another fitting quote from an unnamed source close to the scheme was reported in The Times in May 2022. They eloquently put it as follows:

“Saying BBRS needs an overhaul is like saying that a tank that’s been blown up could do with a service. It’s completely defective.”

The specific concerns about eligibility are fourfold. First, the current point of valuation of turnover is the date at which the complaint was first made by the SME to its bank. This allows the bank to artificially distress companies’ assets to below £1 million, and therefore out of the scope of the BBRS, before the complaint is made to the bank. Instead, the point of valuation of turnover should be made at the point at which the bank’s alleged act or omission initially occurs.

Secondly, complaints eligible for the Financial Ombudsman Service are not eligible for the BBRS. However, the FOS has a wider purpose than strictly to resolve disputes. There may be a peripheral element of a historical SME claim that either qualifies it for consideration by the FOS or has been the recipient of such consideration. In this case, the applicant would be precluded from the BBRS, although it may meet the other criteria.

Thirdly, eligibility regarding size of business thresholds is too strict. Property developers, landlords and others cannot meet the current BBRS eligibility minimum business size criteria, even if they set out to do so. Fourthly, on balance sheet limits, currently businesses are assessed on gross business assets rather than net business assets. This is restricting and illogical, because it is not representative of the true size of the business, as it includes the costs that are due to be deducted from the balance sheet in the short term.

As I have already alluded to, the chair of the advisory SME panel resigned earlier this year after proposals put forward to reform the eligibility criteria were consistently rejected or ignored. This prompted the BBRS to unilaterally dissolve the panel. As I said at the time, this was a rather shocking and cynical move. The BBRS established an advisory panel to feed SME concerns about the service back to the BBRS. The concerns raised were ignored, and the proposals were rejected out of hand. When it appeared that the panel might be publicly critical, the panel was shut down. For those now unrepresented SMEs, that must have felt like a complete stitch-up.

The BBRS is indeed winding down—though I question whether it ever got into swing. The historical complaints process closed in February, and the contemporary complaints process will continue only until the end of this year. The reason that I am here—I surmise that colleagues are here for the same reason—is to put it to parliamentarians that the process has been a failure. We simply cannot make the same mistakes again. As I hope I have illustrated, the BBRS has been a waste of time and money and has certainly not resolved a meaningful number of disputes. If anything, many SMEs’ experiences with the BBRS have served only to further erode their trust in the financial services sector.

As has been suggested in the past, a financial services tribunal, with a statutory footing, could be the solution. I commend the idea to my hon. Friend the Minister. Such a body would be modelled on employment tribunals and be a genuinely independent organisation with legal teeth. The creation of a tribunal would have a dramatic effect on the power imbalance inherent in disputes between businesses and large financial institutions, echoing the transformation in employer-employee relationships brought about by the introduction of employment tribunals. That must be accompanied by an amendment to section 138D of the Financial Services and Markets Act 2000, to enhance the legal rights of SMEs. Those changes will be significant in ensuring that SMEs have access to justice. Indeed, as the Treasury Select Committee stated in 2018:

“Taken together, these changes will ensure that the UK’s small businesses will no longer be denied justice, as so many have been in the past.”

Ultimately, the BBRS has failed to achieve its aim of providing meaningful redress in a fair and independent way. As an alternative, the proposal for a financial services tribunal, endorsed by the Treasury Committee and by the all-party group on fair business banking, which I have the pleasure of co-chairing, must be seriously considered. We owe it to the brilliant SMEs in each of our constituencies to create a lending environment in which they can thrive and drive our national economy forwards.

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[Stewart Hosie]

They ought to be in people’s thinking. The figure of 60,000 is commonly used. Of course, the eligibility criteria include that they must not be eligible for the FOS scheme, as was very properly referred to by the hon. Member for Hazel Grove. However, let us assume that it is a big number, in the tens of thousands, and let us hope that, at the very least, businesses do not fall through the cracks between this service and the FOS. It would be a different problem entirely if people were not eligible for any kind of access to at least one of the redress systems.

The hon. Member for Hazelgrove laid out a bit of the background. I want to go through some of that again briefly, given that it is quite important in terms of what the Government may choose to do next. The BBRS was set up in 2018 to help SMEs resolve disputes with their banks free of charge. Many high street banks, including Lloyds, NatWest and HSBC, took part in the scheme, and it has been operating—although I use that word loosely—since 2021. It was created after a spate of banking scandals involving the mistreatment of thousands of companies, including, as we know, the Royal Bank of Scotland’s GRG, and similar operations at other banks in the aftermath of the 2009-10 financial crash.

The eligibility criteria, which have been mentioned, are that the dispute must have occurred after 1 April 2019, and that the SME must have an annual turnover of up to £10 million per annum and a balance sheet of up to £7.5 million, and must not be eligible to take the complaint to the Financial Ombudsman Service. Many stakeholders have noted that the scheme has not been successful in helping SMEs to resolve their disputes, despite costing—as we have heard—tens of millions of pounds to set up, which was paid for by the industry. One of the main issues with the scheme is the narrow eligibility criteria for SMEs to use the service. The recent figure was only 35, but even 50 or 60 would still represent a tiny fraction of the number that could be resolved.

[Margaret Ferrier]

When the Business Banking Resolution Service was introduced, it was marketed as an accessible service. However, data shows that, by March last year, only 776 businesses had registered with the BBRS. Does the right hon. Member agree that this suggests that either the Business Banking Resolution Service was difficult to use or, alternatively, the service was not publicised effectively?

[Stewart Hosie]

It could be a combination of both, although it is instructive that Andy Agathangelou, the founder of the Transparency Task Force, called the BBRS an “abysmal failure” that is not “fit for purpose”, so I certainly think that the opaqueness and lack of advertising might be significant factors in how few businesses have sought to use it and what happened to those that did. He also said that some small businesses are “convinced” that the BBRS is

“a mechanism through which banks have found justification for not making payments”.

Even if that is not true, if the perception among the SME community is that the service, which was put in place to resolve their disputes, is being used for contrary purposes, that alone would be a huge problem for the BBRS.