Categories
Banks, Lenders & Investors Finance Rescue, Restructuring & Recovery

The FCA dilemma over consumer credit

Since April 2014, when it took over regulation of consumer credit, the UK’s Financial Conduct Authority (FCA) has been investigating financial products that it argues pose high risks in the context of its consumer protection remit.
High street payday lender storeBy 2015 it had already imposed a cap on interest rates and fees on short term loans, known as payday lending, and this will be reviewed in the second half of 2017.
However, the ongoing investigation has also been looking at retail bank loans, arranged overdrafts, credit cards and home-collected credit, catalogue credit, some rent-to-own, pawn-broking, guarantor and logbook loans.
This has encompassed not only charges and interest rates but also competition issues in co-operation with the Competition and Markets Authority (CMA).
Whether there will be further regulation on lending businesses remains to be seen.

The potential effects on business

The FCA is concerned about the affordability of credit and about borrowers’ ability to repay in the context of high interest charges.
In March this year it proposed new rules to help credit card customers in persistent debt, defined as those who have paid more in interest and charges than they have repaid of their borrowing over an 18-month period. Proposals include options for repaying the balance more quickly, for example by reducing, waiving or cancelling any interest or charges.
Jonathan Davidson, Director of Supervision – retail and authorisations at the FCA, said in a speech in March: “the use of consumer credit in the UK has become so ubiquitous that 60% of adults now have credit cards and 40% are defined as overdraft users…… borrowing in the UK is simply more common, and more socially acceptable, than in many other large economies.” He added that “use of debt to meet unexpected emergencies is also widespread.”
In his view this was a risk that had to be managed. He argued that in some cases firms were making profits even when customers defaulted on loans and said that fair treatment of customers should be a core part of lenders’ business philosophy.
We would argue that some lenders are lending with the intention of triggering a default and incorporating terms that make a default highly beneficial to the lender.
Despite any moral or ethical issues the FCA is dealing with, its remit is consumer protection in what is essentially a free market consumer-driven economy in which businesses and their success depend on the sale of their goods and services in a highly competitive environment.
This applies particularly, but not only, for those businesses, many of them SMEs, that cater to the retail market.
Often, their sales success will depend upon the consumers’ ability to access credit to make purchases, for example for larger items such as household white goods and vehicles.
Arguably, limiting the supply of credit to consumers would make it more difficult for these businesses to survive.
So, is there a fundamental conflict at the heart of the FCA’s existence between ensuring fair charging for consumer credit and the needs of businesses operating in an economy that relies on credit being available?

Categories
Banks, Lenders & Investors Finance General

Essentials of Equity Crowdfunding

Equity crowdfunding is particularly useful for start-ups and SMEs seeking to grow, particularly because it is so difficult to raise small amounts as share capital due to the extensive due diligence required by investors who don’t already know you.
Even when investors are interested, the share of the equity and control they may require can be an issue for the founders when the business is not yet profitable.
Investors in equity crowdfunding receive shares in the business and with them the prospect of receiving dividends as well as being able to vote and to hopefully sell their shares at a profit in the longer term.
The business must provide a detailed business plan with a lot of information about the key people as well as other supporting information before it will be accepted by a crowdfunding platform.
An example of a successful equity crowdfunding was E-Car Club that raised £100,000 for 20% equity from 63 investors. The online fundraising was organised by crowdcube.com with most investors subscribing small amounts although the largest was £15,000. E-Car Club is a pay per use scheme whereby club members have access to an electric car for a defined amount of time without having the expense of car ownership.
Research by the British Business Bank in 2014, however, found that the growth of crowdfunding had posed challenges to Angel investment networks because some angel investors were choosing to invest through crowdfunding instead.
The risks in equity crowdfunding include a relatively high failure rate for start-ups and the potentially lengthy wait for a return on the investment.
Equity crowdfunding platforms are regulated by the Financial Conduct Authority (FCA).

Categories
Banks, Lenders & Investors Cash Flow & Forecasting Finance General

An overview of crowdfunding

Funding for businesses and in particular those wanting to invest in development and growth has become extremely difficult to find. Banks have become risk averse and need evermore capital-liquidity provisions which has combined to make it uneconomic to lend to SMEs and those who can’t provide asset backed security.
This has led to the popularity of raising money using online via crowdfunding platforms.
Crowdfunding can be defined as the act of raising money via a website from a relatively large number of small investors.
This is a fairly new form of financing and the last two years has seen some clarity emerging as to the different types and what each involves.
In our next few blogs we will be looking at each type of crowdfunding. This first article is a short overview.
There are three main types of crowdfunding. They are Equity, Debt (aka peer to business or market place lending) and Donation (aka Reward) crowdfunding.
In the first, individuals provide capital for shares in the business looking for funding and expect to receive dividends and/or a profit from a future sale of the shares. They are typically used by start-ups, early stage & growth businesses.
In the second type, Debt crowdfunding, businesses are looking to borrow money as repayment loans, convertible loans or loans with warrant. Lenders are typically repaid at regular intervals with interest on terms that are often more competitive than can be achieved from a bank.
Donation crowdfunding is generally used to raise non-returnable money for a worthy cause, so there is a social component and the “reward” is generally in the form of recognition for investors’ contribution rather than any financial return.
There has been some concern that small investors in such schemes may be inexperienced in investment and its risks and this has led to the introduction of regulation via the Financial Conduct Authority (FCA) in an effort to protect them.
Since April 2015 any organisation offering Equity or Debt crowdfunding facilities must apply to the FCA for permission to operate and must supply supporting evidence including a detailed business plan, evidence of capital reserves, a website showing information that details not only the benefits but also the risks involved.
The FCA is responsible for regulating loan-based and investment-based crowdfunding such that only regulated firms should be used to raise finance. The main restriction relates to the marketing promotion to investors in Equity and requires each investor to acknowledge they are either a high net worth or sophisticated investor or to confirm that they will invest less than 10% of their assets in crowdfunding. This means that firms raising Equity should take advice before doing any self promotion of Equity crowdfunding.
The FCA does not regulate Donation crowdfunding.
For other sources of business finance you can download a free Finance Guide from our website using this link.

Categories
Banks, Lenders & Investors Cash Flow & Forecasting General Insolvency Rescue, Restructuring & Recovery Turnaround

Update on Interest Rate Swaps missold to SMEs

 

The May deadline for banks to compensate thousands of small businesses for the misselling of Interest Rate Swaps (IRS) has now past and banks would seem to want everyone believe that they have resolved matters within the deadline.

But campaigners Bully Banks say that many SMEs will miss out on compensation arguing that banks have rejected most claims for consequential loss.

The compensation scheme imposed by the Financial Conduct Authority (FCA) on the banks allowed for basic redress – a refund for excessive interest paid plus 8% interest. However, affected businesses could also claim for such things as lost profit and legal expenses (consequential loss).

Bully Banks Chairman Jeremy Roe was quoted recently as saying: “I don’t know of any business that has successfully claimed for consequential loss and received reasonable compensation from their bank”.

Meanwhile the British Bankers’ Association claims that banks have met their obligations by informing businesses of the IRS compensation they may be owed by May’s end. The claims for consequential loss are being dealt with case by case but would seem to be being dragged out.

It is three years since Bully Banks first began their campaign into IRS misspelling.  That is a long time for a small business to wait for recompense. 

But for many it seems that the waiting is still not over and the outcome remains uncertain.  In the meantime many such businesses would be well advised to prepare for the worst by revising their business plans with the help of a turnaround adviser rather than wait in hope for a big payout.

Categories
Banks, Lenders & Investors General Insolvency Rescue, Restructuring & Recovery Turnaround

High Court ruling on mis-sold IRS gives businessman the right to sue RBS

 

As time goes on more and more murky behaviour by the banks in their treatment of SMEs over Interest Rate Swaps (IRS) is being revealed.

It has been two years since the lobbying group Bully Banks first highlighted IRS mis-selling (IRS are also sometimes referred to as Interest Rate Hedging Products- IRHPs).

As a result of their efforts, and the Tomlinson report into the behaviour of RBS, the Financial Conduct Authority (FCA) has been tasked with investigating the banks’ behaviour and administering a redress scheme to allow SMEs to reclaim their money.

Now a High Court ruling has given one businessman, Michael Hockin the right to sue RBS over a mis-sold IRS, even though the bank put his business into administration in a classic illustration of the behaviour highlighted by Tomlinson.

The company, London and Westcountry Estates, had had a loan that RBS converted to a 10-year IRS, adding an estimated £600,000 extra in annual repayments and an exit fee of £11 million that Mr Hockin said the family was never warned about.

One of the questions that needs to be asked is why the administrators of this once-prosperous business, Ernst & Young, did not pursue a claim against RBS over alleged mis-selling.

RBS meanwhile is quoted as saying that it had investigated Mr Hockin’s concern about mis-selling and found no evidence of wrongdoing by the bank

The case will now be heard in court. Hopefully the issue of why the administrators declined to pursue the bank will be given an airing.

Categories
Banks, Lenders & Investors General Insolvency Rescue, Restructuring & Recovery Turnaround

Is another bank mis-selling scandal brewing?

 

The full extent of the banks’ questionable behaviour following the 2008 crash has seemingly not yet played out as suggestions of yet another possible mis-selling activity surface.

Many SMEs are still awaiting compensation after being mis-sold insurance in the form of hedging products to protect them from potential interest rate rises.  Libor rate rigging is still under investigation and the recently-published Tomlinson report has prompted Business Secretary Vince Cable to refer RBS’ approach to dealing with companies in financial difficulty for investigation by the Financial Conduct Authority and the Prudential Regulation Authority.

Mr Cable is plainly going to be an even busier man following recent revelations in the Sunday Mail, the FT and the Times, that banks may also have been taking advantage of the Government’s five year-old Enterprise Finance Guarantee (EFG) scheme whereby they may have sought to repair their balance sheets at their SME clients’ expense.

Reportedly some SMEs have had their overdrafts cancelled by their banks who have then offered loans under the EFG scheme. The benefit for banks is that EFG loans do not require the same level of reserve capital as overdrafts but it is not clear whether this was the reason behind the withdrawal of overdrafts.

It seems that many banks have not fully explained the terms of an EFG loan.  Loans under the EFG scheme are intended for businesses that do not have sufficient assets or track record for a conventional loan where the scheme guarantees the bank 75% of any loans should the borrower’s business fail.

Unfortunately, many SMEs appear to have been given the idea that should they fail they would only be liable for repayment of 25% of the outstanding debt.  In fact they are liable for the full amount and the banks get the 75% from the Government ONLY after they have exhausted the recovery terms of the EFG loan which require security over the business assets and personal guarantees from director/shareholders. As such the government only pays out under the scheme after the company is formally declared insolvent and the guarantors are made bankrupt.