§ Mr. French
To ask the Chancellor of the Exchequer how many representations he has now received about the treatment of small businesses by the banks; and if he will make a statement.
§ Mr. Norman Lamont
I have now completed my discussions with the chairmen of the major clearing banks and considered the information which they have provided on their interest rates and charges to small businesses.
Over recent months the Government have received complaints from small businesses about the way in which banks were handling their business, in particular suggestions that the banks were not passing on to their customers the full cut in base rates seen since October 180W 1990. A strong banking system is of considerable importance to the economy, but the way in which small businesses are financed, and the terms on which they deal with the banks, are equally important. Small firms have provided much of the dynamism and renewed entrepreneurial spirit which have done so much to improve the United Kingdom economy over the past decade. The success of small firms is essential to the success of the economy. Suggestions that they are getting a bad deal from the banks therefore required serious and urgent investigation.
I, therefore, saw the president of the British Bankers Association on 5 June and the chairmen of National Westminster, Lloyds, Barclays and the Midland over the following week. I expressed the Government's concern about the complaints we had received and asked the chairmen to co-operate in the joint exercise by the Bank of England and Treasury officials to establish the facts.
The banks have now supplied the information requested and this has been analysed and considered by the Bank of England and the Treasury. A summary is being placed in the House Library. The deputy governor and I subsequently met the major clearing banks again to discuss the position.
I have also received a large number of letters from small businesses, as has the Prime Minister, the Bank of England, the Department of Trade and Industry and the Department of Employment. Well over 1,000 letters of complaint have been received and analysed. The Department of Trade and Industry regional directors have held discussions with banks and businesses and the Department of Employment has had continuing discussions with banks and small businesses over recent months.
The information we received suggests that the bulk of small firms' overdrafts and loans were base rate related. The great majority—some 95 per cent.—of small business borrowers saw at least 3 per cent. of the 3½ per cent. cut in base rates made between October of last year and the date on which the information was supplied. In about 70 per cent. of cases, the full 3½ per cent. was passed through to borrowers. From the point of view of monetary policy, there is no reason to doubt that the reductions in interest rates are feeding through and will have their effect.
About 25 per cent. of borrowers, however, experienced an increase in their margins of about ½ per cent. and a small minority—some 5 per cent.—saw their margins widen by more than that. In general, this is either because they had to negotiate new facilities; because they were moved on to a new basis of setting rates as part of a central initiative; because they had gone over their authorised borrowing limits and faced the high "penal" rates—30 per cent. APR or more—common to all banks on the excess amounts; or because the banks judged that an increase was necessary on credit risk grounds. To the extent that this reflects the current stage in the business cycle, that should be reversed as the recovery takes hold.
Any increase in costs to a business man is unwelcome. From the correspondence we have received, it is also clear that in a number of cases increases in margins have been notified to customers at short notice and sometimes retrospectively. Moreover, it is also clear that banks have been imposing higher charges and more frequently for services than before. Some banks have increased their revenue significantly from the provision of other services, particularly management, arrangements and renewal fees. 181W The increases reported by individual banks range from 16 per cent. to 55 per cent. over the last six to 12 months, albeit from a low base. In some cases, new or significantly increased charges have been made without prior notice. Such practices are clearly inconsistent with the head office policies which the chairman described to me.
I have sent the chairmen an analysis of the complaints we have received about their bank so they can follow them up. I have asked each of the chairmen to give me a report on how these complaints have been dealt with. I have also spoken to the chairmen generally about the main sources of complaint. I have put it to them that they should each consider drawing up a code of conduct for their small business customers and that at the least customers have a right to expect that the terms and conditions iof their accounts should be fair and reasonable, taking account of the customer's individual circumstances; they should have been notified to the customer in advance in writing in clear and simple terms; they should be given a full written statement of the standard tariffs of charges applicable to their account; they will be specifially warned in advance if charges which are not covered by the standard tariff are likely to be made, such as fees for management time; they should be given a clear explanation of the basis on which interest is to be charged, whether it is base rate related and what the margin over base rate will be; the terms and conditions of the account other than the interest rate, should not be altered without adequate prior notice in writing perhaps of one month, offering an opportunity to discuss with branch staff; finally, customers should be given a clear explanation of how complaints may be made about decisions taken at local branch.
The chairmen have assured me that these points are generally reflected in their existing policy, but they will instruct their branch managers to ensure that they are followed in all cases. They will each consider what further code of best practice each of them should promulgate within their banks, and they have undertaken to report to me what action they have taken. I will take stock with them in six months' time of their progress in implementing these codes of good practice.
Some of the complaints we have received are serious and reflect an unprecedented degree of public concern about the conduct and attitude of the banks. The bank chairmen are well seized of the Government's concern about this issue and have undertaken to make sure that their managers are fully aware of the need to handle small business customers with due care and sensitivity. The Government will continue to monitor the situation and I have made it clear to the chairmen that we would view with serious concern any evidence of high-handed or unprofessional behaviour.
It is also, however, important that small businesses communicate fully with their banks, and both the Department of Trade and Industry and the Department of Employment will continue to assist in fostering such a dialogue.
Finally, although the information we received showed no evidence of collusion, I am passing it to the Director General of Fair Trading in case there is anything in it which he considers merits investigation.