Saving Small Businesses: MP Group Pushes for Commercial Banking Reform

June 26, 2019

3 min read

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What's going on here?

The All-Party Parliamentary Group (APPG, an independent organisation made up of MPs) has intervened in a Supreme Court case to help small businesses against financial institutions by closing a legal loophole which banks have used to exploit distressed companies.

What does this mean?

The APPG has a mission to push for change, by rebalancing the rights of small or growing businesses against major financial institutions. One of the APPG’s major political focal points is centred around reforming the current insolvency system. As highlighted by the liquidity crisis after the 2008 Financial Crisis, banks including Clydesdale, Lloyds and RBS have allegedly driven thousands of troubled businesses to the ground. They did this by deliberately making poor financial decisions on their client’s behalf whilst charging very high fees. This tactic drives the clients into insolvency, where the bank can then strip the client’s assets.

The bank RBS, in particular, has been singled out for criticism. Although the Financial Conduct Authority found overwhelming evidence that the bank has systematically mistreated customers this way, the regulator has limited recourse for action. This is because the commercial lending sector in the UK is wholly unregulated. Further, with the rule of reflective loss barring victims from personally suing their bank, the FCA’s findings leaves victims defenceless.

Contrasted with the recent foreign exchange rate manipulation scandal with the same key banks (see our article on that here), it is disappointing to see a wide margin of difference in the FCA’s treatment of similarly unregulated financial behaviour. On this, the Federation for Small Business has said “there’s nothing in the current legislative framework to stop another [similar] scenario. As long as commercial lending remains unregulated, small firms will be vulnerable”.

What's the big picture effect?

The APPG have been granted the power to intervene into the Supreme Court case of Marex Financial Ltd v Carlos Sevillegja Garcia. This gives the group the opportunity to make an impact on the rule against reflective loss for SMEs – an area where the courts have been historically strict on granting exceptions.

At present, the rule against reflective loss acts as a barrier for small firms to sue their banks. This rule bars individuals pursuing legal action for losses suffered by a company, as only the company is the rightful claimant. Traditionally, it bars shareholders from pursuing a claim against the company for devalued shares or dividend pay-outs, since the shareholder’s loss merely ‘reflects’ the company’s losses. For distressed SMEs however, it acts as an exclusionary rule which prevents business owners from pursuing their own claims personally, through no fault of their own. This is because, once insolvent, the only actor with the power to sue is the Insolvency Practitioner. The Insolvency Practitioner, having been appointed by the bank, is often reluctant to pursue claims against the bank.

The APPG’s intervention into Marex Financial Ltd v Carlos Sevillegia Garcia will open up an avenue into compensating thousands of businesses that have been denied recourse to justice when their business has lost due to the misconduct of their bank. Ned Beale (a Partner at law firm Trower & Hamlins) adds that creating this exception to the rule against reflective loss “will make self-help through litigation a more realistic option.” Although the cost of legal action will still be high, the APPG plans on launching a financial services tribunal to intervene in cases of grave miscarriage of justice. If successful, this change could yield more opportunities for SMEs to take their claim against their banks and arrive at a just resolution.

Report written by Roslyn L

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