Report to the Officers and Members of the All Party Parliamentary Group against Financial Exploitation.  

IN SUPPORT OF "TWIN-PEAK" REGULATION (1)

Twin-Peak Regulation and Heritage plc (in Liquidation)

1. In an article on Corporate Insolvency", and the current OFT investigation, in the December 2009 version of "Private Eye" the writer stated:  "Alas, it is all rather late. Reform has long been needed but was always ducked in the name of "light touch" regulation. In 1999, for example, the owner of a company called Heritage plc managed to get the matter debated in the Commons through his MP, Rudi Vis. He was fobbed off with reassurances that banks and bean counters had "codes of practice". Ten years on, these ambiguous codes have proved toothless and self-regulation of the insolvency business has in practice meant no regulation".

2. Being the former "owner" of Heritage plc, I am uniquely placed to agree with the writer.

3. There have been virtually no improvements in regulation through the last decade of "plenty". As a result thousands of businesses and individuals are going to suffer appallingly as we begin a potential decade of "famine".

4. Any regulation introduced of the banks has failed: the country will be paying for this failure for the foreseeable future.

5. Similarly regulation of the accountancy professions by the ICAEW has failed. The list of its failures is endless. Despite being instructed not to do so, (based again on Heritage) I am advised the ICAEW continues to use the "no prima-facie case" decision to "fob off" its regularity responsibilities. The ICAEW investigation into Deloittes after MG/Rover is another example of this peculiar decision.

6. During this decade lawyers have recognised their regularity responsibilities, and ceased "self-regulation". In my experience the ICAEW is still primarily a "star chamber" for the larger firms. I hope the OFT investigation recognises this.

7. Lack of proper regulation led to huge risk taking by the banks. These huge risks resulted in huge bonus driven "paper" as opposed to "real" profits. The risk takers could only "win" as allegedly they were "too big to fail". The taxpayer has been left with the cost of that massive failure. The taxpayer (as a consumer) is now virtually un-protected by regulation of the banks aided by the accountants, as they seek to re-build the Banks balance sheets. Then they can start taking massive risks again. Proper or "Twin-peak" regulation may at least stop this stupidity from repeating itself.   

8. A real hidden cost of this lack or regulation is the number of Companies (read tax-paying employers) that have been needlessly sacrificed. From Heritage, through Fabb Industries the list is vast, and allegedly includes Woolworths as one of the latest to be sacrificed, rather than saved.

9. All MP"s have examples within their constituencies. We start this decade with a vast bill for our financial lack of regulation to be met by our children and grandchildren.

10. Currently with Heritage plc the ICO is advising me how I can get full disclosure from the FSA of their investigations into Lloyds Banking Group following my and Dr R Vis MP"s requests. In an e-mail dated 11^th February 2010 the FSA finally admitted they had documents not previously revealed under the FOIA. They still refuse to provide those documents to me, quoting s14 of the FOIA and claiming my repeated requests, and presumably those requests quoted by the FSA of my MP, Dr R Vis MP, and the request of the vice-Chair of this APPG, Alan Keen MP, were "repeated" "obsessive" and "vexatious".

11.   I have requested the FSA to review their non-disclosure decision, so that the decision can then be referred back to the ICO. It is now agreed by all parties that the FSA has further documents that we have all been asking for under the FOIA for several years.

12. Lloyds Banking Group has applied to make me bankrupt a second time. I have evidenced allegations that Lloyds Bank over-recovered Heritage plc"s debt and over-recovered my Guarantee. This evidence had previously been concealed from me, and various insolvency professionals. The matter is due in Court again shortly. I have applied to the Court for the FSA documents referred to in 10 (above). That Application will be heard in March 2010.

13. The Heritage saga demands proper regulation by the FSA, or some transparent and independent body, on behalf of the consumer. With "Twin Peak" independent regulation it could not have happened. Heritage plc, a rapidly growing SME, would have continued to make a contribution to the UK economy. Instead millions of pounds of time costs have been spent revealing the alleged perjury of Lloyds Bank and Scott Barnes of Grant Thornton.

Jeff Lampert

(Former Chairman Heritage plc (in Liquidation))

IN SUPPORT OF "TWIN-PEAK" REGULATION (2)

SME"s IN UK: Current state and some recommendations.

The economic importance of Small and Medium enterprises (SMEs) can hardly be exaggerated. First, this sector accounts for a significant employment in the UK economy if we consider just sheer numbers. A recent study shows that there are more than 4.5 million small businesses operating in different corners of the country.  Second, the breadth of this sector also represents the extent of diversity as they tend to produce a wide variety of goods and cater to various kinds of services.  Finally, they are also indicators of the size of risk taking entrepreneurs in the country because many of them have started small with the hope of making it big someday. Many have left safer pastures of employee jobs in secure big companies.

Moreover, successful leaders in this sector create examples for the next generation of entrepreneurs and provide the base for a dynamic economy across succeeding generations.

However, financing of projects within the ambit of SME sectors has always been the thorniest issue due to asymmetry of information, lack of collaterals as well as inability to pledge income to lenders for reasons related to provision of incentives. The information asymmetry implies that on many occasions, an owner of an SME has more information about his or her capability to conduct the business than banks or other lenders. Banks tend to ration credits if screening costs are very high. Lack of collaterals imply that better and more able owners may not come with own equity to signal their worthiness. Lenders in order to circumvent these problems very often charge higher fees and loan rates and thereby exacerbate incentive problems of the entrepreneurs, who are often left with smaller profits afterwards. All these factors suggest rationing of funds or outright denials of loans to entrepreneurs are very commonplace even when the overall economy is in the upswing phase.

Several empirical studies and reports confirm the above mentioned financing problems encountered by the SMEs. These studies point out in some cases the rejection rate from banks exceed 70%. The prevalence of a pecking-order in financing observed in the SME sector indicate that they tend to secure funds from personal sources and after these sources have dried up, they tend to rely on short term borrowing such as overdrafts. Frequently properly structured bank debt comes last. The costs charged by the banks for executing transactions are often very high and vary substantially across banks. That is, SME clients are charged different fees by banks for undertaking the same type of activities. Very often, problems of asymmetrical nature of information are often magnified by greater institutional control and centralization of decision making powers which strip a branch manager of power and discretion. Very often a loan might not be sanctioned to SMES who had been favourably rated by the local loan officer. All these issues on pricing of loan, denial of credits, poor rates on their deposits surface even when the economy is in the upswing. One can only imagine the plight of many SMEs in the current financial crunch and recession. SMEs are hurt by (a) lacklustre demand for their products (b) severe contractions of funding (c) lack of proper regularity protection.

In the UK, the problems are magnified by the fact that four banks, namely, Barclays, HSBC, Lloyds Banking Group and Royal Bank of Scotland - control 80% of the SME market. With all four banks jostling for survival, several SMEs already had run into problems and with 13 million people working in this sector it is facing huge hardship. Since in our last APPG report, we dealt with financial problems of ordinary consumers, we will concentrate here more on the SME issues. 

The Government has arranged an extra £1.3 billion to banks for Enterprise Finance Guarantee scheme but it is too early to make proper evaluations of the scheme. Our recommendations to improve the economic conditions of the SMEs would take two forms. The first one is to give a temporary lifeline especially to those which had a good track record in payments prior to the crisis. This would prevent a systemic collapse of the SMEs and prevent destruction of jobs. The second one goes beyond the current horizon and aim at improving the long term growth and state of Finance for the SMEs. The first two recommendations below belong to the first type and the remainder deals with medium and long term issues.

• Use fund from Enterprise Finance Guarantee scheme for reducing the penalty for late payments that normally cripple chains of businesses in the times of recession. This could take the form of waiving the penalty if the delays in payments are reasonably in shorter durations. 
• Many SMEs depend on trade credit for making payments to suppliers who usually pull the plug and make things worse for the sector as a whole. A temporary subsidy on production could alleviate the liquidity problem of both SMEs and suppliers. Banks could be encouraged to rewrite onerous covenants and renegotiate contracts to gain from increased profits from their clients from such a policy.
• Chartering a strategy based on cluster development that offers a holistic and integrated approach to SME sector"s development for a region.  This has been one of the success stories which has helped offset other policy failures and has been shared by many other developed economies, including the European Union. to promote their SME sector.  Exchange of ideas, economies of scale, network externalities are some of advantages that could accompany development of such clusters. Tax breaks, subsidies and other incentive packages could make this approach feasible and could contribute to its long term growth.
• A suitable exit plan in the form of an organized stock exchange focused on SMEs may bring a host of other institutions like Rating Agencies and attract source of funding other than banks. This would make markets for SME finance more competitive, reduce high and often discriminatory fees and alleviate informational asymmetry. The government could solicit bids from private institutions for setting up an exchange.
• Proper regularity protection from bank abuse of the Law.

To conclude, we observe that large banks had already received huge favours from different governmental schemes, in order to continue to trade. This has been done with the hope of rejuvenating the rest of the economy. SMEs occupy an equally important place in that economy. However, they continue to be sacrificed to the worst excesses of the banks. Small and medium enterprises are suffering and net lending to this sector has even gone down. If large banks could receive such a large bailout, criterion of efficiency and fairness demands the similar plans for this sector to be combined with long term plans is the current need.

Since short term problems and long term issues with the SMEs are complex, a discreet regularity body specializing in their and other small consumers, predicaments is necessary. This will allow the FSA to maintain control over the stability of the Banking System, without any apparent conflicts of interest.

To sum up, the "Twin-peak approach to banking regulation is an important first step towards resolving the problems within the UK financial system. In this context we support the recent appointment of Julian Edwards as consumer senior adviser at the FSA,

Dr. Sanjay Banerji, Essex Business School, University of Essex

Wednesday, 24 February 2010