SME lending arbitration in need of overhaul

The Business Banking Resolution Service (BBRS), set up three years ago to resolve disputes between SMEs and high street banks, is to close after three years having failed to attract the expected number of cases and facing allegations that it has not met its remit to improve the lending environment for smaller businesses.

The BBRS will close to new registrations at midnight on 13th December. The body was established in 2021, since when it has overseen £2 million of financial redress to just over 130 cases, at an operational cost of over £40 million, which the last Parliament’s Treasury select committee branded “questionable value for money”.

Countering claims it had not done enough to help SMEs, the BBRS, which is wholly funded by its seven participating banks (Barclays Bank, Danske Bank, HSBC UK, Lloyds Banking Group, NatWest Group, Santander UK, Virgin Money), said it had left “no stone unturned to encourage eligible SMEs to register their complaint”.

SMEs seeking to use the service needed to have a turnover of more than £6.5 million, as below that level a SME has recourse to the Financial Ombudsman Service (FOS), and less than £10 million at the time of the complaint. The issue had to relate to one of the seven participating banks and must have taken place on or after 1st April 2019.

As well as financial compensation, BBRS said it had achieved non-monetary resolutions such as changes in loan terms, adjustments to debt recovery arrangements or interest rates, and adjustments to or cancellations of personal guarantees.

Lack of demand

The BBRS pointed to research from Bayes Business School investigating the low caseload which concluded that there were only 1,600 possible cases in scope for the BBRS.

The decision to close the scheme follows a report by the Financial Conduct Authority (FCA), which argued that the low number of complaints referred under the BBRS criteria was indicative of a lack of a need for larger SMEs to access alternative dispute resolution.

However, external commentators have challenged this analysis. In an interview with the Times, Mark Bishop, a former member of an advisory panel to the service, claimed that: “The BBRS was an expensively engineered Potemkin scheme designed to reassure politicians that the banks were taking seriously the need to compensate SMEs for egregious mistreatment. The reality is that it was designed to minimise compensation.”

This May’s Treasury select committee report on SME Finance described the BBRS as “ineffective and perceived as lacking in independence”, and “not fit for purpose in providing alternative dispute resolution to the 55,000 SMEs who fall outside of the FOS’ thresholds”. It endorsed the decision to wind up the current scheme and called for a consultation on an alternative approach.

At the same time, there has also been criticism of the Lending Standards Body (LSB) which regulates the banking industry more generally, after it was found to have held only one formal investigation into breaches of its rules since it was set up in 2009.

The LSB’s aim is to provide “rigorous, independent oversight,” and to “drive fair customer outcomes” from financial services, but Andy Agathangelou, of the Transparency Task Force consumer group, has claimed the LSB “gives the appearance of consumer protection, but in fact it seems to behave more like a trade body that looks after the interests of members.”

The Treasury committee report identified “needlessly” stringent financial regulations as significant obstacles to the growth and innovation of SMEs.

The topic of how SME lending can be regulated effectively was on the agenda at AFC’s summer conference. You can see analysis from Martin McTague Federation of Small Businesses chair, and Simon Evans, chair of the Consumer Redress Association, along with comments from the AFC expert panellists, here.