There is nothing to stop high street banks letting their business branch managers make local lending decisions, the Financial Services Authority has said.
The clarification of the rules by the City regulator has prompted business groups to question why none of the main business banks are planning to do so as part of their efforts to attract more small business customers ahead of a government commissioned review that is likely to call for more competition.
Last year Santander told The Telegraph it would like to differentiate its business banking service from rivals like Royal Bank of Scotland, HSBC and Barclays by giving more lending discretion to branch managers.
But Steve Pateman, head of corporate, said the FSA found it “unsatisfactory” if he let the “guy down in Barnstaple make the [lending] decision”.
“What the FSA is interested in is consistency of decision making and consistency of approach. It’s quite hard to deliver that level of consistency across 1,000 relationship managers. They are human beings,” he has said.
Business groups say the ability to have a meaningful relationship with a local bank manager is valued highly by small business owners, a sentiment recently picked up by the Treasury Select Committee. It highlighted how “the availability and cost of credit” was only half the picture for small and medium enterprises (SMEs). “Good customer service for SMEs can be as, or even more, important to SMEs. Competition and the ability to switch, is the most important spur to better service,” it said in a recent report.
“SMEs need access to a branch network and staff who understand their circumstances ... [yet] survey evidence consistently shows customers are dissatisfied by service quality and the lack of real choice on offer in the marketplace. In a genuinely competitive market we would expect firms which provide superior service, choice or prices to gain significant market share from rival firms, but we see little evidence that this is happening.”
The Independent Banking Commission will address these issues when it makes its recommendations in September on promoting “stability and competition in banking”.
In the meantime, the main high street banks have reported increases in lending to small businesses against a backdrop of weak demand. Yet the Chancellor last week said many businesses did not feel this positive trend on the ground. “Every small and medium-sized company that I have visited in recent weeks has had some problem with their bank – either they have found it difficult to renew their overdraft or they demanded additional collateral, often someone’s house,” he said.
The problem, says, Derek French from the Campaign for Community Banking Services, is the lack of competition between the big four banks, which control around 85pc of the small and medium sized lending market.
“Unlike the personal sector, they are doing nothing to stimulate demand in the business sector. There are no special marketing efforts at all to stimulate demand,” he said.
A small number of business banks are competing on branch service as well as credit availability and price. Swedish bank Handelsbanken is expanding rapidly, opening its 100th UK branch in Ilkley last month.
Simon Lodge, head of the bank’s southern region, said FSA officials had visited the bank last year to learn more about its lending practices, which see managers given the discretion to approve anything between 75pc and 90pc of lending locally.
Mr Lodge said: “The FSA are fully aware of our model and our credit structure and how we do things. They are fully aware that this operates across the globe and we have been doing it for a long time. And we have had no feedback whatsoever that they are uncomfortable with it.”
Handelsbanken operates through regional banks – it has three in the UK – with each one supporting between 25 to 80 branches.
Yorkshire Bank and Clydesdale have placed a credit manager in each of its 73 business centres, able to make decisions locally.
Of the five main small business banks, only Lloyds still gives its business managers any discretion. This is limited to £500,000 for secured and £250,000 for unsecured loans.
So what is stopping them doing more local lending? One reason is cost. Operating fully staffed branches is expensive. The likes of HSBC and Barclays also say they saw a significant improvement in their loss to loan ratios after they withdrew lending discretion from their branches. The computer can say ‘no’ for good reason, they argue.
A third factor is the scale of upheaval following the banking crisis, with the focus on cutting costs, branch sales and the realisation that staff no longer have the skills for traditional banking. As Mr French says: “I just don’t think they have the staff to do it [local lending]. You just can’t undo what they have done over two decades overnight.”
All the banks are retraining staff, with thousands of managers being sent back to school to learn about traditional banking skills.
Chris Sullivan, chief executive of corporate banking at RBS, told The Telegraph recently it would take a year for staffing at business branches to return to a satisfactory level.
“The turnover rate [of staff] was every 12 months and you cannot have a relationship on that basis,” he said. “By next year we will be where we want to be.”
But businesses are losing patience, the Forum of Private Business says. Phil McCabe, a senior policy adviser, said: “We need a move away from the over-centralised tick-box attitude to lending we have now where the only contact with a bank representative is over the phone to a person many miles away who doesn’t know you or your business.
“We need branch managers with the ability – and authority – to make lending decisions.”
Derek French from the CCBS said branch closures – running at 170 last year and already 109 this year – was also hindering competition. “As banks came into towns where they were not before the local branch manager had some discretion and they would pick up some good business and some not so good business but at least you knew they were building a presence in the town. We don’t have that now,” he said.
Scandinavian model: How does Handelsbanken do it?
“We can demonstrate that what we do has worked over many years and that gives us a lot of strength,” say Simon Lodge, head of Handelsbanken’s southern UK bank.
“It doesn’t matter if we have 100 or 1,000 branches, the risk does not increase because it is a scaleable model. If you get the right people, give them the right training and guidance and have the right culture the risk does not increase just because you have more branches.”
He added: “It is a very difficult model to put in place. To do it from scratch you can do it but to convert an existing business you would need to have a completely different culture. The UK banks to my mind are typically more top down.
“For me, the logic of having a customer in Taunton having their credit approved in the north of England or a country overseas does not stretch to me. How can I know better in London than someone in Taunton knows about it? I don’t know the customer, I don’t know the street, the properties or the market. If you put the power in people who understand and are experienced in the local market place it has got to be a lot more powerful. Our model on that basis works very well.”
Handelsbanken does not reveal how many customers it has but Mr Lodge said a large branch would cater for between 400 to 500 businesses, suggesting it has around 40,000 business customers across the UK. It is about a tenth the size of HSBC but is rated the second strongest in the world. Its model is a “church spire principle” - effectively that 90pc of customers are based within four miles of the town.
It takes new branches two years to break even and in that time the branch has discretion over about 75pc of its lending decisions. This rises to 90pc as the branch proves itself.
Mr Lodge said that 98pc of loan applications are approved at branch or HQ level. That said, Handelsbanken is only looking for certain types of customer and virtually all its lending is on a secured basis. “We have no computer model, no scorecard. We assess each case on its merits,” he said.
“There are winners and losers in every sector. We look at construction companies and engineers; areas where the UK banks say ‘no’.”
The bank is expanding when others are contracting because it is not “mopping up from being too aggressive in the good times”, he added.