One of the clearest messages we have received following the financial crisis is that the relationship between banks and businesses has deteriorated.
We do recognise that effort is needed from both sides on this relationship and that sometimes the onus is more clearly on the customer to initiate improvement.
However there are some helpful steps the banks and/or government could take, which we suggested in September last year in response to the government access to finance green paper:
1. Restore direct bank-business communications via the Small Business Finance Forum;2. Greater transparency and publication by banks of the factors behind certain lending policies and conditions e.g. personal guarantees;3. Greater transparency from banks on ancillary costs (lawyers fees, due diligence on accounts etc) associated with lending;4. Increasing the frequency/volume of publishing results on which institutions are generating complaints to the Financial Services Ombudsman (FSO);5. Government obligation for banks to publicly pledge to adhere to the Lending Code coupled with reporting performance against this code.
Quickly following the green paper, the major UK banks (Barclays, HSBC, Lloyds, Santander, Standard Chartered, RBS) under their ‘Business Finance Taskforce' announced a series of commitments.
Delivering on these commitments has gone some way to addressing our recommendations. The banks have established a Business Finance Roundtable.
And at the end of last week the banks launched a new Lending Code for micro-businesses and lending principles for larger SMEs. Today they have further announced a monitoring and appeals process for the processes banks will use for declined loan requests and wrapped everything under the tag of a campaign for Better Business Finance.
These steps will help to improve the customer service experienced by businesses.
But better customer service also means greater transparency on when and why conditions are attached to loans, transparency on additional costs around loans, and on covenants borrowers can expect to face.
Both the banks and the government must be vigilant in ensuring that the announced steps really do improve relationships with customers.
If there isn't genuine improvement, the banks and the government need to be ready to take further steps. One option to consider would be including transparency on terms and conditions in the Code and principles.
For example, banks could pledge greater transparency on when certain conditions are likely to be attached to loans or what sort of covenants borrowers can expect to face given broad borrower characteristics.
EEF has also previously recommended genuinely independent monitoring of adherence to the Code and principles. This would give businesses more confidence that they would lift service standards – and probably increase the visibility of them as well.
The action taken so far is good but we must keep watching to make sure it makes a difference to firms.