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2013 Review: Banks in crisis

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27th Dec 2013
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The past 12 months have seen yet more trouble for Britain's banks. Robert Lovell looks back at the reputational wreckage.

Despite encouraging signs of recovery in the wider economy, 2013 was another damaging year for the reputation of banks, which seemed to worsen as the year went on.

The interest rate swaps scandal reared its head in January, when MP Guto Bebb blasted HMRC's attitude towards the mis-selling of interest rate hedging products as "disappointing" at the tail-end of 2012. January also saw the Financial Services Authority publish a damning review of four leading banks.

The report found 90% of swaps sold to small businesses failed to meet regulatory requirements and that a significant portion of customers should get compensation. The FSA said around 40,000 small-to-medium-sized businesses had been mis-sold swaps.

At the time this was just the latest scandal to hit UK banks after forking out £12bn to customers who were mis-sold payment protection insurance.

By March the full scale of the swaps scandal was coming into focus. Total industry provisions for swaps mis-selling stood at more than £2bn – a figure that could have been much higher had changes to the FSA review scheme not been reduced.

To add insult to injury by June Lloyds Banking Group was under the spotlight for breaching FCA guidance on the offer of mis-selling compensation.

The FCA found Lloyds had tried to substitute the original hedging product for an alternative, breaching guidelines as it exceeded the maximum break cost of 7.5% of the businesses’ borrowings, and also switched the benchmark interest rate, in its own favour, to base rates from Libor.

Following dissatisfaction with the time a number of banks were taking to issue redress, by September it had become clear that businesses were starting to receive swap redress offers.

In total 10 out of 210 offers of compensation from banks worth £500,000 were accepted by businesses, but this level was expected to “increase rapidly” over the next few months as 1,700 more offers were due to be sent out.

More salt was rubbed into the banks' wounds over the summer when the National Audit Office revealed that the Treasury had provided £141bn to help maintain financial stability in the banking sector up to March this year.

The Treasury had invested £66bn in shares in RBS and Lloyds to give the banks sufficient capital, but the NAO noted that the eventual returns for the taxpayer from the disposals of the government’s shareholdings in both banks would depend on how well their business plans are developed and delivered, as well as the performance of the UK economy. When it divested 6% of Lloyds shares in early December, the government lost £230m, the NAO reported. The official auditor added, however, that this represented good value for money.

The government’s much-touted Funding For Lending Scheme and its massive scaling back towards the end of the year added to the downward mood swing.

Back in March the warning signs were clear to see as the scheme was failing to deliver in its first five months of operation.

Bank of England figures revealed that while 39 lenders signed up to the scheme, just 13 had actually used it and reduced their stock of UK loans by £1.88bn. Out of those, 10 groups did increase lending but their efforts were offset by withdrawals by RBS, Lloyds and Santander.

With just a slight improvement over the summer, by November the Bank of England and Treasury scrapped the scheme for household lending in an attempt to guard against the risk of another housing bubble, and instead focused just on small businesses lending.

During that same month alarm bells were ringing for the Co-operative Bank as it prepared to cut hundreds of jobs and 15% of its branches as part of a rescue plan.

Questions were also being asked about the thoroughness of its auditor KPMG who oversaw due diligence before the Co-op's troubled merger with Britannia Building Society, which was largely blamed for a £1.5bn capital shortfall.

With this catalogue of banking disasters rumbling on throughout 2013, it doesn’t provide much confidence going into the New Year.

While the high street banks have foundered, AccountingWEB has been tracking the rise of alternative lenders in recent years.

According to research from Deloitte, a growing number of businesses are now using alternatives to High Street banks to finance deals.

As banks continue to be accused of being stingy with lending to businesses, debt transactions from alternative lenders such as Ares Management, Alcentra and BlueBay Asset Management more than tripled in the third quarter compared to the first quarter.

AccountingWEB members have also been very vocal about the banking sector, and its lack of support, over the past 12 months.

Just last week AccountingWEB regular Steve McQueen and others vented their frustration about the British business banking system.

“Lloyds have asked for everything but my inside leg measurement and a full credit risk profile just to consider opening an account,” he said. “Do they actually want any business?”

The relationship between accountants and bank managers had once been the bedrock of a good accounting practice, but now it seems banks have been told to avoid accountants and solicitors at all costs, according to AccountingWEB member nigelburge.

What’s been your experience of dealing with banks in 2013? Do you see the relationship between banks and businesses/accountants improving over the next 12 months?

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the sea otter
By memyself-eye
30th Dec 2013 10:02

As a shareholder in Lloyds....

A soon to be pensioner with HSBC and a (new) business customer of the Co-Op I have found them ok and annoying in equal measure but I don't borrow and keep healthy credit balances on our business and personal accounts. On a personal level First Direct (HSBC) - with whom we have banked for eons - are good. HSBC on line business banking were also good until they decided to charge me monthly fees to keep an £18k credit balance - hence the move to Co-Op  on line bank (brave decision that). The transfer went smoothly enough. Lloyds will be sold back to the private sector and as the country's largest mortgage lender, has a sound future. As I bought in at around 65p a share, I'm looking forward to both dividends and capital gain.

Banks are a bit  like the NHS - no matter how bad they are we can't live without them.

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