The unequal battle between banks and small companies

In October, Ross McEwan, the Royal Bank of Scotland boss, took an unorthodox approach to getting in front of the latest round of bad publicity concerning the bank’s treatment of small businesses.

Shortly before the publication of a summary of a highly critical regulatory review of the bank’s restructuring unit, Mr McEwan expressed irritation at people “constantly badmouthing” RBS and challenged those unsatisfied with how the
state-controlled lender had handled their complaints to “sue us”.

Chance would be a fine thing, representatives of small and medium-sized companies might say to that. The minority who have deep enough pockets and sufficient resilience to even contemplate taking a lender to court often discover that the law provides scant moral justice for those who feel mistreated.

A judgment in 2014 in a battle between Crestsign, a small family property company, and RBS starkly illustrates the scale of the legal hurdles that businesses face.

RBS was found to have provided “negligent advice” to the company and Ian Parker, its owner, over an interest rate hedging product. The bank’s salesman suggested that interest rates would rise and the product therefore would provide protection, despite the bank’s own internal forecasts saying the reverse. When interest rates fell, Crestsign, like tens of thousands of other companies around the country, was left nursing disastrous losses. The bank, Tim Kerr, QC, the judge in the case, concluded, “did not show themselves worthy of the trust Mr Parker placed in them”.

Game, set and match for Crestsign, you might think. In fact, the company lost the case because, as the judge put it, “the common law provides . . . no remedy because the banks successfully disclaimed responsibility for the advice they gave . . . which was negligent but not actionable”.

In such cases, lenders tend to argue — almost always successfully — that they do not act as an adviser. Even when there are records of emails, meetings and phone calls that look and sound like advice, it doesn’t count as such. In other words, it might walk like a duck and quack like a duck, but the small print says it isn’t one because the customer invariably will have signed a contract that states the bank did not provide advice.

These so-called “exclusion clauses” typically mean that financiers are under no duty to outline the risks of what they sell, nor to take care not to misstate the facts. Neither are they obliged to disclose crucial information.

Imagine a car salesman or woman promising that a vehicle is in superb working order. When its knackered engine blows up ten minutes off the forecourt, your complaints fall on deaf ears as the vendor points to small print that says no advice had been proffered.

Judges have acknowledged the risk of unfairness in this, even if they tend to conclude that their hands are tied when it comes to providing redress.

Discussing such contractual terms in a row between two banks, RZB, of Austria, and RBS in 2010, Judge Christopher Clarke highlighted the danger that organisations could “insert into a myriad of contracts a clause to the effect that the basis upon which the parties are contracting is that no representations have been made, are intended to be relied on or have been relied on, as a means of evading liability”.

Speaking on condition of anonymity, a small business owner who is in the midst of litigation against a high street bank said: “The bank can provide as much or as little information as they like. On my reading of the law, as things stand it seems they don’t even have to be accurate or honest. All they have to do is get a customer to sign up to a contract which absolves them of any responsibility for the sales process. This is no way to run an economy.

“As a customer, we have to be open and transparent when entering into business with a bank. What we are asking for is a level playing field, equality of information, equality of obligations, equality of duties.”

The judge in the Crestsign case said pointedly at the time: “While the result may seem harsh to some, it is not the role of the common law and this court to act as a regulator.”

An appeal in the Crestsign case was due to be heard in April last year. Legal experts said that a win for the company could have opened the floodgates for businesses to sue banks. RBS settled the case two months before it was due to be heard.

The All-Party Parliamentary Group on Fair Business Banking has launched an inquiry into access to justice for small businesses. It warns that financial firms “generally ensure that only the weaker or poorly argued cases ever make it to court by settling on confidential terms with those with the stronger terms. In this way, financial firms can effectively control which, if any, precedents are set”.

However, change could be on the cards. Property Alliance Group (PAG), a mid-sized, Manchester-based property developer, claimed in a court case last year that RBS had mis-sold interest rate swap products and wrongly moved it into its Global Restructuring Group turnaround unit. In a “judgment that will be warmly welcomed by the banks”, as BLP, a law firm, put it, Mrs Justice Asplin found wholly in favour of RBS and dismissed all of PAG’s claims.

However, in June, PAG secured the right to take the case to the Court of Appeal. The appeal has been granted an unusually generous 35 hours, or seven days, of air time in January and some of the principles that stack the law in the favour of financiers are about to be vigorously tested. RBS says that it intends to fight, and representatives of small companies will be hoping that the bank is good for its word and that there will be no out of court settlement.

The parliamentary group warns that there are damaging consequences of the clauses that banks insert into contracts, with companies left lacking “sufficiently clear information . . . to make informed decisions. Without any requirement for transparency or for firms to act in good faith or provide a duty of care, problems can be sealed into commercial banking relationship from the outset.”

James Oldnall, a partner at Mishcon de Reya, the law firm, said that the granting of the appeal was an “extraordinary outcome”, given the resounding defeat PAG had suffered in the original judgment. He said that any ruling that called into question the contract terms that banks tend to rely on in these kind of cases would be a “great result for SMEs, who have very little bargaining power”. Conversely, an RBS win could significantly inhibit future legal claims against lenders.

Even if the PAG case proves to be a dead end for advocates of a more level playing field, there are other lines of attack. The parliamentary group is among those calling for a permanent dispute resolution tribunal to be established.

Promontory, the firm that conducted the investigation into GRG for the City regulator, believes that the unfair contract term protections that are available to consumers should be extended to small business borrowers. Banks argue that this would reduce the availability of credit and increase costs.

An RBS spokesman said: “RBS rejects the allegations made by the PAG and will continue vigorously to defend this claim.”

Justice comes at a high price

Small businesses that want to take a lender or rival to court have more than just crafty contract terms to deal with, (James Hurley writes).

The “vast majority of entrepreneur-owned private businesses” face a “huge disparity in power” if they wish to challenge their financier, according to the All-Party Parliamentary Group on Fair Business Banking. Difficulties include the prohibitive cost of court action and the “potential for losing a large percentage of any award to cover funding and/or insurance arrangements”, it has warned.

Paul and Nikki Turner have spent almost a decade battling Lloyds over a fraud at HBO

Court fees have gone up by as much as 600 per cent after an increase pushed through by the Ministry of Justice in 2015, leading to senior judges and representatives of solicitors warning that the justice system was becoming the sole preserve of the wealthy.

Companies also must demonstrate that they can cover their enormous rivals’ legal costs should they lose. Easier said than done, although “after the event (ATE)” insurance in theory provides a way of doing this. Yet that, too, is now in doubt after Keith Elliott, the owner of a car business, was told last month that he must pay £4 million into court if he is to continue a case against Lloyds and PWC. The appeal court ruling came after his insurance had been queried over concerns that should Mr Elliott’s evidence be called into question, insurers would pull the policy on the basis they may have been misled over the strength of the case.

Chris Waters, partner at Meaby & Co solicitors, said: “For those who cannot afford to engage in court battles, third-party funding and ATE is normally their only option. With court fees already having been hiked up as high as £10,000 in some claims, any ruling capable of deterring third-party funders or insurers may impact heavily on access to justice.”

Miles Pengelly, a Cornish farmer, has looked into teaming up with a group of other farmers who claimed that an agricultural lender had misled them. He said that “£10,000 in court fees just to get started was just not feasible for us, even if we team up. You’re looking at £50,000 at least just to get the ball rolling. Even £150,000 doesn’t go very far. We found access to justice is not affordable.”

Nikki Turner has spent the best part of the past decade battling Lloyds over a fraud at its sister bank HBOS. Along with her husband, Paul, last week she secured a hard-earned financial settlement. As a director of SME Alliance, Ms Turner is continuing her campaign for better access to justice for small businesses.

“We are hopeful that next year the banks themselves will join us in finding some practical alternative solutions to litigation to resolve disputes,” she said. “In particular we hope 2018 will see the idea of a tribunal system turned into a reality.”