SME Finance Contents

3Misconduct and regulation in SME banking

Past misconduct in SME banking

An overview

51.Conduct in the SME banking sector has long been subject to scrutiny, including by the Treasury Committee.73 There have been a number of high-profile cases of poor treatment of SME customers, most notably the mis-sale of hedging products, the treatment of SME customers at RBS’s Global Restructuring Group (GRG), and the fraudulent activity conducted at HBOS Reading. Throughout this inquiry, the Committee has sought to examine the characteristics of the SME banking market that allowed these pockets of misconduct to exist, and to consider the changes that may be necessary to prevent such behaviour in future. The Committee has also conducted further scrutiny of events at RBS GRG, and the regulatory response.

RBS Global Restructuring Group (GRG)

Background

52.GRG was a business support unit at RBS that operated between 2008 and 2014. Concerns surrounding the treatment of small businesses referred to GRG received significant public attention following the publication of Lawrence Tomlinson’s 2013 report, entitled “Banks’ Lending Practices: Treatment of Businesses in Distress”. Mr Tomlinson, then the Entrepreneur in Residence at the Department for Business, Innovation and Skills, alleged that RBS was “unnecessarily engineering” businesses into default, and that GRG existed to “make profit for the bank through the destruction of viable businesses”, primarily through “fees, increased margins and devalued assets”.7475 Since the publication of the Tomlinson report, a number of investigations have been carried out to examine the accuracy of the allegations contained therein, and in 2015 the Treasury Committee of the time analysed events at GRG as part of its inquiry into “Conduct and competition in SME lending”.76 More recently, the Committee has sought to bring further transparency to events at GRG, including by taking evidence from RBS in January 2018 and publishing a range of relevant documents.77

53.On 17 January 2018, the Committee published correspondence between the Chair and Ross McEwan, Chief Executive of RBS, which included an internal RBS memorandum entitled “Just Hit Budget!” written in 2009.78 The memorandum—distributed to a subset of GRG staff—contains guidance for staff on generating income via dishonest means. The “tactics”, “tips” and “ways to generate income” in the memo include:

Basket cases: Time consuming but remunerative.

[…]

Be specific: avoid round number fees - £5,300 sounds as if you have thought about it, £5K sounds like you haven’t.

Rope: Sometimes you need to let customers hang themselves. You have then gained their trust and they know what’s coming when they fail to deliver.

[…]

Monthly fees: minimum £500. Ideally on average we need c10 per cent premium on our debt […] They normally cannot afford this and you can then leverage an upside.79

54.When challenged by the Committee on the contents of the memo, Sir Howard Davies, Chairman of RBS, said:

I am acutely embarrassed by those documents. […] They are the stuff of which nightmares are made, as far as a chairman or a chief executive is concerned. […] We can do nothing but abase ourselves as far as that is concerned. It is absolutely awful.80

Tony Boorman, Managing Director at Promontory Financial Group, a consultancy appointed by the FCA to investigate the actions of GRG, described the memo as “reprehensible and inappropriate for production by any person with “manager” in their name in any sensible financial institution”. He added that, in the course of Promontory’s investigation, “other comments … that were similar in tone and spirit” to those contained within the “Just Hit Budget!” memo were seen within GRG files, and that the existence of these documents “spoke to something around the culture of the bank at that time”.81

55.Ross McEwan told the Committee that “the culture, structure and way RBS operates has changed fundamentally” since events at GRG.82 In an interview in October 2018, he stated that “I think it will take five—maybe even 10—years to rebuild trust to where we’d want it to be”.83 Supplementary evidence provided by RBS to the Committee following the evidence session in January 2018 noted the number of staff working at RBS Restructuring—the bank’s new restructuring unit—that previously worked in GRG:

There are currently 182 employees in Restructuring of whom 136 worked in GRG.

32 of the current employees are at senior manager grade or above. 30 of the 32 were formerly in GRG.84

56.The treatment of vast numbers of SME customers placed in RBS’s Global Restructuring Group was nothing short of scandalous. The actions of GRG staff heaped untold misery on hard working business owners, recklessly destroying livelihoods in pursuit of profit. The “Just Hit Budget!” memo typified the toxic and unscrupulous culture entrenched within the organisation; a culture that has been rightly highlighted as a key driver of events at GRG.

57.It is widely acknowledged that an organisation’s culture is strongly guided by the “tone from the top”; the standards of ethics and integrity demonstrated by those in senior positions. The overwhelming majority of those responsible for cultivating GRG’s patently unprincipled culture remain employed in RBS’s new restructuring division. This threatens to seriously undermine RBS’s claim that the bank’s culture has changed fundamentally in recent years, and raises concerns that the bank has merely undertaken a rebranding exercise.

The regulatory response

58.In response to the Tomlinson Report, the FCA used its power to appoint a “skilled person” under section 166 of the Financial Services and Markets Act 2000 to commission an independent review of the treatment of SMEs referred to GRG between 1 January 2008 and 31 December 2013.85 The FCA’s review process comprised two phases:

Phase One: To consider RBS’s treatment of a sample of SME customers referred to GRG to assess the validity of the allegations of inappropriate treatment, and to consider whether any poor practices identified were widespread and systematic.
Phase Two: If poor practices were found to be widespread and systematic, to identify the root cause of these issues, including whether inappropriate treatment was known about, authorised or sanctioned by management within RBS, and to make recommendations to address any shortcomings identified.86

59.The FCA published a summary of the findings of the phase one report—conducted by Promontory Financial Group—on 8 November 2016.87 The Promontory report was leaked to the BBC in August 2017,88 prompting the Chair of the Committee to write to Andrew Bailey, CEO of the FCA, saying:

It is now three and a half years since the FCA commissioned the skilled persons review of GRG, and nearly a year since it received the final report. If the FCA had published an early and full account of the findings, including data on the scale of mistreatment and inappropriate action, the BBC would have had nothing of interest to report from the leaked document.

The skilled persons report is now in the hands of an unknown number of third parties. The FCA has no control over the timing or content of further public disclosures from the report. The balance has tipped firmly in favour of full publication, and I urge you to secure the approval of RBS to do so, without delay.89

60.The FCA declined, arguing that the public interest would not be best served by publication.90 Instead, it published an interim summary of Promontory’s report in October 2017.91 In the interest of transparency, the Committee requested that the FCA provide the Promontory report and other relevant documents to the Committee’s Specialist Advisers, Andrew Green QC and Fraser Campbell. The advisers were asked to report to the Committee on whether the FCA’s interim summary contained a fair and balanced account of the findings of the Promontory report.92 They concluded that the FCA’s interim summary met that condition, but recommended a number of drafting changes which were accepted by the FCA and reflected in its final summary of the Promontory report, published on 28 November 2017.93

61.In evidence to the Committee on 30 January 2018, RBS confirmed that it would not object to the FCA publishing the Promontory report.94 The Chair therefore wrote to the FCA on 7 February 2018 requesting that the final, unredacted report be published by Friday 16 February or, if that proved impossible, the report be sent to the Committee Clerk by the same date.95 In his response on 9 February 2018, Andrew Bailey set out the legal constraints that made publication by that date “highly unlikely”.96 Owing to these constraints, the report was sent to the Clerk on 16 February, and published by the Committee on 20 February. Commenting on the publication, the Chair said:

The Committee has not taken the decision to publish lightly. Normally, reports prepared under section 166 are confidential, but there is overwhelming public interest in bringing transparency to what happened at GRG, given the earlier leak of the report, and in ensuring that everyone can see, and know that they are seeing, an authentic and verified copy of Promontory’s original report.97

62.Phase two of the FCA’s investigation did not take place in the manner originally envisaged. Instead of commissioning Promontory to carry out the work, the FCA itself began a “focussed investigation”. On 31 July 2018, the FCA published an update on this work, which stated:

… we do not consider that prohibition proceedings brought in relation to any member of GRG senior management, in role during the relevant period, would have reasonable prospects of success.

We did not find evidence of dishonesty or lack of integrity. The absence of regulatory rules against which the performance of senior management within GRG could be measured, in the context of the environment at the time and in all the circumstances, means we do not think a successful competence and capability case could be brought.98

63.Responding to the FCA’s announcement that no disciplinary action would be taken, the Chair of the Committee noted that those affected by GRG will find the decision “deeply disappointing and bewildering”.99 The FCA will publish a fuller account of its findings with respect to GRG in due course.

64.The fact that commercial lending is largely unregulated, and thus the absence of regulatory rules against which to assess GRG’s treatment of SMEs means that the FCA lacks the power to take disciplinary action, such as imposing fines on RBS or individuals. While the FCA has the power to ban individuals from the financial services industry if it considers them not to be fit and proper, it concluded that it would not be able to bring a successful case against any of GRG’s senior management. The Senior Managers and Certification Regime—which came into force in 2016 and is discussed in more detail later in this chapter—was not in place during the period covered by the FCA’s GRG investigation. This regime introduced stricter conduct standards and greater levels of personal accountability, and also allows the FCA to fine senior managers in relation to unregulated activity, where appropriate. However, these rules cannot be applied retrospectively to GRG.

The regulation of SME lending

The regulatory perimeter

65.Not all financial services are regulated, and those that are not are often described as “outside the regulatory perimeter”. At the Committee’s request, Andrew Bailey wrote to the Committee on the FCA’s powers and the regulatory perimeter in January 2018. The letter gave an overview of the FCA’s regulatory framework, as well as the regulatory position with respect to lending to SMEs:

Certain types of financial services activity require a licence or “permission” before that can be carried on.

[…]

The activities are described at a high-level in the Financial Services and Markets Act 2000 (FSMA) […] We usually refer to such activities simply as “regulated activity” or as being within the “FCA’s perimeter”.

Much of the regulatory framework set out in FSMA, and most of the FCA’s powers, are targeted at regulating the conduct of this activity.

[…]

In contrast to mortgage lending and consumer credit activity, commercial lending is not a regulated activity. In other words, a person lending money commercially does not need to be authorised by the FCA (unless the lending constitutes “consumer credit”). So some lenders are therefore completely outside the scope of FCA regulation. Banks, on the other hand, are regulated by the FCA (because they are deposit-takers), but the FCA’s interest is primarily in the extent [to] which the banks’ activity outside “the perimeter” is relevant to the banks’ standing as a deposit taker.

[…]

Engaging in the sort of restructuring activity conducted by GRG is not of itself regulated activity. Our detailed conduct rules on the design and governance of products and services do not apply.100

66.Further detail on the regulatory protection afforded to SMEs is given in the FCA’s discussion paper “Our approach to SMEs as users of financial services” published in November 2015:

Although many financial services provided to SMEs are within this regulatory perimeter, lending to SMEs for business purposes is mostly outside the regulatory perimeter. For example, unsecured lending to an SME borrower for the purposes of their business will only be regulated if the SME is unincorporated and the amount being borrowed is £25,000 or less …101

67.The fact that commercial lending is outside the regulatory perimeter effectively means that there are no detailed FCA rules governing how that activity should be carried out. It also means that the majority of the FCA’s Principles for Business do not apply. These principles are a general statement of the fundamental obligations of firms under the regulatory system. The table below lists the principles, and indicates those that apply to unregulated activities, such as lending to SMEs.

Table 2: FCA Principles for Business

Principle	Description	Applicable to unregulated activity?
1 - Integrity	A firm must conduct its business with integrity.	No
2 - Skill, care and diligence	A firm must conduct its business with due skill, care and diligence.	No
3 - Management and control	A firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems.	Yes
4 - Financial prudence	A firm must maintain adequate financial resources.	Yes
5 - Market conduct	A firm must observe proper standards of market conduct.	No
6 - Customers’ interests	A firm must pay due regard to the interests of its customers and treat them fairly.	No
7 - Communications with clients	A firm must pay due regard to the information needs of its clients, and communicate information to them in a way which is clear, fair and not misleading.	No
8 - Conflicts of interest	A firm must manage conflicts of interest fairly, both between itself and its customers and between a customer and another client.	No
9 - Customers: relationships of trust	A firm must take reasonable care to ensure the suitability of its advice and discretionary decisions for any customer who is entitled to rely upon its judgment.	No
10 - Clients- assets	A firm must arrange adequate protection for clients’ assets when it is responsible for them.	No
11 - Relations with regulators	A firm must deal with its regulators in an open and cooperative way, and must disclose to the appropriate regulator appropriately anything relating to the firm of which that regulator would reasonably expect notice.	Yes

Source: FCA Principles for Business, FCA Handbook

68.In its report on events at GRG, Promontory described the regulatory protections for SMEs as “limited”, adding that “the FCA should work with the government and other relevant parties to extend the protections available to SME customers”.102

Awareness of the lack of regulatory protection

69.When borrowing money, many SMEs do not appreciate the limited nature of the regulatory protections afforded to them. For many, there is an assumption that regulatory protection exists. Ian Smith, Chief Financial Officer at CYBG, told the Committee:

Anecdotally, what we hear when we talk to [SME] customers is that they have a perception that there is some kind of protection available. It is only when it is tested, when they are disappointed, that they find out that it is not.103

This view was shared by other witnesses. The SME Alliance noted in its written submission that “most SME owners don’t realise they have no protection until it’s too late”,104 and Suren Thiru told the Committee that “there is not a great awareness” amongst SMEs of the lack of regulation.105

Past consideration of SME lending regulation

70.Decisions on what is regulated are for Parliament and Government. The original decision to place SME lending largely outside the regulatory perimeter was made primarily on the basis that SMEs are more sophisticated than individual consumers (and therefore warrant less regulatory protection), and that regulation may lead to a reduction in the supply of credit to SMEs. In evidence to the Committee, Andrew Bailey recalled the debates that took place when the regulatory perimeter was initially established in FSMA 2000:

You have to go right back to the 1997 and 1998 debates on the FSMA legislation for this. There was a view at that time that SMEs should be kept outside the regulatory net to encourage innovation, and that they could fend for themselves; I am paraphrasing. Sadly, I think, experience has shown that that is not justified.106

Howard Davies, who was Chairman of the Financial Services Authority (the predecessor to the FCA) when FSMA 2000 entered into force, also discussed these deliberations in evidence to the Committee:

I was chairman of the FSA when the Financial Services and Markets Act was put in place in 2000. Consideration was given to this at the time. At the time, the judgment made by the Government was that to paint small business banking with a regulatory paintbrush might make provision of services more costly, might make the whole market seize up, because the regulatory controls around know your customer, treating customers fairly and all that would impede the small business market. A decision was made at that time, which still remains the case, that small business lending should not be part of the regulated activity.107

71.The Committee has seen no evidence that the question of whether SME lending should be within the regulatory perimeter was subject to detailed public debate at that time, however. The Government’s February 1999 consultation on regulated activities does not seek views on the regulation of SME lending.108

Should SMEs be expected to “fend for themselves”?

72.The Committee received a number of submissions suggesting that it is wrong to badge all SMEs as financially sophisticated and for lending to SMEs to be largely unregulated on that basis. The Serious Fraud Office told the Committee:

Some financial activity is not designated as regulated activity on the basis that the parties are financially sophisticated and do not require additional protection. This can lead to vulnerable people being exposed to risk. For example, financial lending to Small and Medium Enterprises (SMEs) is not regulated. However, many owners of SMEs are far from being sophisticated or experienced investors and this leaves them exposed to potentially dishonest high risk or otherwise inappropriate lending practices and products, without the protection afforded by regulation. They may have their own businesses, but their personal expertise may be in a completely different field, from hairdressing to farming. The SFO has seen cases where business owners have been induced into entering into highly risky financial transactions, without the protection offered by the activity being regulated.109

73.The FCA, too, recognises that many SMEs are no more financially sophisticated than everyday consumers, yet may often be required to engage with financial products that are complex. Its 2015 Discussion Paper entitled “Our approach to SMEs as users of financial services” notes:

Across regulated industries, SMEs have traditionally been treated as having greater self-sufficiency and bargaining power than individual consumers. So they have often been seen by regulators as requiring less assistance than these, even though their needs, behaviour and expertise are often similar. Our own work has shown that SMEs can experience poor outcomes in a wider range of situations. They can be exposed to risk at the point of purchase due to product complexity, limited choice or poorly managed expectations. When things go wrong, some struggle to navigate the complaints and claims processes or to obtain redress.110

The Financial Services Consumer Panel expressed a similar view in its written submission, noting that:

Consumer protection regulation in general assumes that a consumer, merely because he or she is engaged in business, is more financially sophisticated and thus does not need the same levels of protection as an individual. Whilst this may be reasonable at the larger end of the SME spectrum, the small business consumer is often simply an individual consumer wearing a business hat, and needs the same protection as an individual.111

74.Given the varying levels of financial sophistication within the SME community, Promontory argued in its report on events at GRG that “policies and practices for the SME sector need to be based at least in part on an appreciation of differing customer capabilities, if the SME customer is to be treated fairly”.112

75.The consumer-like nature of many SMEs is also demonstrated by the fact that, for many, the business’s finances are closely linked to the personal finances of the owner. On this subject, the Promontory report stated that “The fate of the business and the personal finances and working lives of their owners are often so closely intertwined”.113 The interconnection between business and personal finances arises for a number of reasons. The Promontory report highlights the corporate structure of many small businesses—specifically the lack of independent shareholders and the prevalence of owner managers—as an important contributor.114 In its written submission, ICAS also notes the “prevalence of personal guarantees required by banks” when lending to SMEs.115 In addition, in some cases a business loan may be secured against the business owner’s home.

76.Given this interconnectedness, the implications of mistreatment can spread beyond the business itself, potentially leading to lost livelihoods, lost homes, and bankruptcy, much like in the consumer banking sphere. Indeed, in the case of GRG, there are a number of examples of SMEs being mistreated, and the owners of those businesses suffering significant personal hardship as a result. During the Commons debate on “RBS Global Restructuring Group and SMEs” on 18 January 2018, a number of Members described the way in which SME banking misconduct had affected their constituents. Mr William Wragg MP said:

Just one such example of malpractice was the forced liquidation in 1998 of Pickup and Bradbury Ltd, a company formerly owned by a constituent of mine, Mr Eric Topping. […] It was a business customer of RBS and, like many other businesses, used an overdraft to manage its cash flow. In 1998, the overdraft was £345,000—not an unreasonable amount for a business of that scale—and the company had been happily trading and growing under that arrangement for several years. Then, in February 1998, RBS wrote to Mr Topping saying that it wanted to reduce the overdraft facility to £200,000 and, moreover, that the company owed the bank over £700,000—a figure that is still in dispute today.

Unable to operate under more restrictive conditions, the company was moved into RBS’s Global Restructuring Group, according to RBS, to help it to repay the money it owed. While under the administration of the GRG, the bank’s advisers consistently undervalued the company’s assets, while simultaneously overvaluing its liabilities, to support its claim the company was unviable and, in July 1998, it forced Pickup and Bradbury into receivership. The GRG engineered the fall of the company by demanding aggressive repayment plans and allowing insufficient time for company directors to appoint independent valuers to prove the worth of the company’s assets and its solvency.

[…]

This scheme was organised fraudulent asset stripping on a massive scale, leading to the forced liquidation of many businesses—companies that people had poured a lifetime of effort into and which were their livelihoods. In the case of my constituent and many others, those businesses were their nest eggs for retirement. […] Mr Topping, and hundreds of business owners like him, are just such hard-working people, yet they have had their assets stripped by RBS and now have very little to show for it.116

Bob Stewart MP described how one of his constituents saw his “life’s work … taken away from him” and his “father and step-mother … evicted from their home”, leaving the whole family facing “complete wipe out”.117 Bill Esterson MP said:

What happened at RBS GRG was nothing short of a scandal and a disaster for the victims. Businesses were ruined, families were torn apart and people took their own lives.118

The Government’s position on the regulation of SME lending

77.The Economic Secretary told the Committee that “We … have to be future-orientated and make sure that we have regulation and a regime in place that puts people’s minds at rest going forward”.119 The Minister was asked whether he thought there was a case for bolstering the regulation of SME lending; in response, he noted the Treasury’s desire to consider the outcome of four external pieces of work before forming a view on the issue.120 Those external pieces of work are described in the table below.

Table 3: External initiatives referenced by the Minister

Initiative	Description
The FCA’s consultation on SME access to the Financial Ombudsman Service.	A consultation on proposed new rules to allow more SMEs to refer disputes to the Financial Ombudsman Service
Richard Lloyd’s independent review of the Financial Ombudsman Service.	A review of the Financial Ombudsman Service, prompted by concerns that some of its staff were not behaving appropriately and fulfilling the organisation’s legal duty as they should.
Simon Walker CBE’s UK SME Complaints and Resolution Review, commissioned by UK Finance.	A review of the scale and complexity of banking complaints from SMEs, focusing on disputes between financial services providers and SMEs that remain unresolved through the normal customer complaint procedure and may be unsuitable for court processes.
The Fair Business Banking for All report produced by the All Party Parliamentary Group on Fair Business Banking.	Research examining the best way of establishing an independent resolution mechanism for complex financial disputes.

Source: FCA, FOS, UK Finance, APPG for Fair Business Banking

These pieces of work are primarily concerned with redress and dispute resolution for SMEs; an important issue considered in the next chapter of this report, but one that is distinct from the regulation of SME lending. The outputs from the majority of these initiatives do not contain, or are not expected to contain, a detailed analysis of the case for bringing SME lending within the regulatory perimeter.

Voluntary codes and the Senior Managers and Certification Regime

78.The Senior Managers and Certification Regime (SMCR) seeks to make individuals working in the financial services industry more accountable for their conduct and competence. This is achieved by requiring firms to allocate certain responsibilities to specific individuals and to certify that certain employees are “fit and proper”. The regime also requires all non-ancillary staff within firms to adhere to a number of high-level conduct rules. The fifth of these conduct rules states that “You must observe proper standards of market conduct”.121 In a recent Policy Statement, the FCA noted that:

All of the Individual Conduct Rules apply to both regulated and unregulated activities that individuals working for these authorised firms undertake in the course of their employment. For regulated activities, regulatory rules and requirements are the key determinant of proper standards of market conduct. For unregulated activities, firms and individuals must use their judgement to determine what ‘proper standards of market conduct’ are. FCA Guidance explains that market codes are one place (but not the only place) they may look to make such a determination.122

79.This means that, under the SMCR, the FCA can take enforcement action against relevant individuals who fail to observe proper standards of market conduct in relation to unregulated activities. The FCA has introduced a process for “recognising” certain industry codes to give staff comfort that by complying with the code(s), they will be meeting their obligations under conduct rule five (“You must observe proper standards of market conduct”). The FCA argues that this “gives an incentive to follow recognised codes and to improve their standards of conduct in relevant unregulated markets”.123 It also notes, however, that it does “not intend to directly supervise compliance with market codes” and that it will “not take action based solely on a breach of provisions in market codes”.124

80.Andrew Bailey told the Committee that using the SMCR and industry codes of conduct is “a way to get to the same place [as extending the regulatory perimeter]”, but also noted that “if [it] … does not work we really are back to extended perimeter”.125 Mr Bailey has been critical of industry codes in the past, however. He told the Committee in October 2017:

The history of industry standards and codes is not brilliant, frankly. They tend to get put together in great waves of enthusiasm, then sit on shelves. Things go wrong and they are pulled down …126

81.The FCA also sought the views of industry on a proposal to apply its fifth Principle for Business—that a firm must observe proper standards of market conduct—to unregulated activities.127 Doing so would allow the FCA to take enforcement action against firms for breaches of the Principle, which would be distinct from its ability to take action against individuals for failing to observe proper standards of market conduct under the SMCR. Feedback from industry suggested that applying the principle to unregulated activities would, amongst other things, increase costs for firms. In light of this feedback, the FCA decided against pursuing the proposal further.128 This leaves what the FCA itself describes as a “possible anomaly”, whereby all the staff within an authorised firm are required to observe proper standards of market conduct in unregulated activities, but the firm itself is not.129

Conclusions and Recommendations

82.The length of time taken by the FCA to investigate events at RBS’s Global Restructuring Group has left those who saw their livelihoods destroyed understandably incensed. The Committee shares their concerns.

83.The FCA is not taking enforcement action against the perpetrators of the misconduct at GRG, but this must not be interpreted as a “not guilty” verdict. SME customers were treated appallingly, and because of shortcomings in regulation this mistreatment is likely to go unpunished. The Committee views this inaction as a damning indictment of the regulatory regime and a sad reflection of its inadequacies. GRG exemplifies a regulatory framework that is failing the UK’s small businesses.

84.The FCA itself concedes that the failures at GRG might ordinarily have triggered disciplinary action had they occurred in a regulated business. That we have a regime in place that allows this sort of behaviour to take place with impunity is simply unacceptable. The victims of misconduct—who have seen those that destroyed their businesses go unpunished—rightly expect change.

85.Experience has shown that the justification for leaving commercial lending outside the regulatory perimeter is feeble, and it is unclear whether this issue was subject to sufficient public debate when the regulatory perimeter was first established. Many small business owners are no more financially sophisticated than everyday consumers, yet they will often be required to engage with relatively complex financial products. They may also lack the resources to purchase the appropriate advice or expertise externally. To deprive them of regulatory protection because of an assumed universal sophistication is wrong, and this unfairness is compounded by the fact that most SMEs are unaware of the regulatory position. In addition, the interconnection between personal finances and business finances can mean that the potential for personal catastrophe due to SME banking misconduct is significant. The Treasury and the FCA should introduce a regulatory regime that protects SMEs. The scope of the regime must be based on an appreciation of the varying levels of financial sophistication within the SME community. This will require analysis of the financial sophistication of the UK’s SMEs that goes beyond blunt metrics covering headcount and turnover.

86.The Committee recognises that bringing commercial lending within the regulatory perimeter will not be a ‘silver bullet’. But doing so would afford the FCA a significant amount of discretion as to how to design and implement a regulatory regime. This regime would need to be proportionate—taking account of the potential impact on the supply of credit to SMEs—and targeted at those SMEs that show the greatest need for additional protection.

87.The FCA’s plans to drive up conduct standards in the SME lending market by using industry codes of conduct will not provide SMEs with the protection they need. The idea is untested and, as Andrew Bailey acknowledges, industry codes do not have a track record of success. Firms cannot be compelled to sign up to voluntary codes of conduct, and the FCA’s initiative may lead to these codes being watered down if they are drafted in the knowledge that they may be enforced against in future.

88.Mr Bailey told the Committee that if the initiative does not work, the regulatory perimeter will need to be reconsidered. The Committee considers it unwise to take a ‘wait and see’ approach; the authorities should get on the front foot by taking action that they know will provide adequate protection to SMEs. It is clear that extending the regulatory perimeter is now necessary. Waiting for another high-profile misconduct scandal before pursuing it would be irresponsible. This episode has raised wider questions about the perimeter of regulation, which the Committee continues to consider.

73 See, for example, Treasury Committee, Eleventh Report of Session 2014–15, Conduct and competition in SME lending, HC 204

74 Lawrence Tomlinson, Banks’ Lending Practices: Treatment of Businesses in Distress (25 November 2013), p 2

76 Treasury Committee, Eleventh Report of Session 2014–15, Conduct and competition in SME lending, HC 204

77 Treasury Committee, RBS’s Global Restructuring Group and its treatment of SMEs

78 “Treasury Committee publishes documents relating to RBS’ Global Restructuring Group”, Treasury Committee press release, 17 January 2018

79 Letter from Chief Executive of RBS to Chair of the Treasury Committee (9 January 2018)

80 Oral evidence taken on 30 January 2018, HC (2017–19) 737, Q157

81 Oral evidence taken on 30 January 2018, HC (2017–19) 737, Q59

82 Letter from Chief Executive of RBS to Chair of the Treasury Committee (9 January 2018)

83 “RBS boss: rebuilding trust will take another ten years”, BBC News, 10 October 2018

84 RBS, RBS Supplementary Evidence Addendum (27 February 2018)

85 Financial Conduct Authority, Final Requirement Notice, Skilled Persons Report (20 May 2014)