Banking StandardsWritten evidence from the federation of small business

Response to question 16:

The Government is considering whether to allow ring-fenced banks to offer simple derivatives to their customers. Should they be allowed to? If so, what safeguards would be necessary?

1. The Federation of Small Businesses represents 200,000 small and medium sized enterprises (SME’s) in the UK.

2. The FSB is concerned that the principle set out in the Independent Commission on Banking report, that ring-fenced banks would only take retail deposits, provide payment services and supply credit to households and businesses is being threatened.

3. We strongly believe that the ICB report made good judgements on why these products should not be in the ring-fence.

(i)Namely, the connection between the ring-fence and the financial markets should be minimal, while accepting some limited transfer.

(ii)It is important that wellbeing of the financial markets, or not, should not impact on the core activities which small businesses need to operate.

(iii)We also raise concerns about cost subsidy from mass products such as SME loans on complex derivatives products.

4. We agree with the ICB that simplicity increases the chances of well managed and run banks, with both senior bank managers and regulators understanding the nature of clients and products.

5. The FSB believes that customers need to know about products and as such, believe that “simple” does not exist in the derivative arena. As the interest rates swap issue has highlighted (which were mis-sold as simple products to over 40,000 small firms) product owners need to know more than just how the product behaves on the upside. Downside risks, which are less of a sale tool for the banks are often not discussed with or understood by small firms.

6. An important note to consider is that many small businesses behave and therefore purchase in a similar manner as consumers. This requires thought from the banks and from the Government, and the simplicity of products the Treasury has worked on with Carol Sergeant shows how clear and simple pricing of products can improve the financial market place.

7. There have been counter arguments that small businesses would want complex derivative products from the same bank manager which looks after the firm’s loans or overdrafts. However, and as the banks and the regulators know, this does not occur as the majority of branch staff are not regulated to advice or sell these products. If a derivative product is currently sold to a small business, it would need an FSA regulated member of staff (and in most cases these individuals do not work in branches] to both advise and sell.

8. We can also envisage that if a small business wanted a derivative product, normal sales protocol would apply and the ring-fence would advertise the details of the non ring-fence part of the bank where this product could be purchased from.

9. Likewise, it is not only the major five banks which sell these products. Many other specialist groups sell products such as foreign exchange hedging products and this may lead to a more competitive market place. However, we once more urge that the Government look into how these products could be dramatically simplified for small businesses in the same way as the Carol Sergeant review of savings products for consumers.

12 November 2012

Prepared 2nd January 2013