Earlier this week, the Independent Commission on Banking released its interim report on their recommendations for banking reform in the UK.
The commission, which was set up by the government last June to review UK banks after the financial crisis, said it was looking at forms of “retail ring-fencing”, under which retail banking would be carried out by a separate subsidiary of a banking group, that banks needed to hold more cash in reserve to protect against future crises and there should be increased competition in both personal and investment banking.
The findings focus mainly on consumer banking – suggesting changes to promote a better deal and better service for consumers and increased protection against ‘high risk’ activities. The report doesn’t go on to suggest any changes to the current practices and restrictions on investment banking, however, and seems to suggest that even further caution in this area is needed. As a corporate law solicitor, specialising in all areas of corporate and corporate finance work regularly working with companies wanting to undertake acquisitions and disposals, this is somewhat concerning.
Despite the high street banks claiming to be lending more and having lending targets in place, our experience is that the process is still hard going. The initial application process seems much more difficult and the subsequent credit approval stage more challenging and expensive than ever before.
Even where banks are agreeing to lend, this is often done on their terms and with large arrangement fees and high interest rates. This is forcing businesses to look elsewhere and to that end we are still seeing deals being financed in different ways to traditional bank borrowing. Management buyouts in particular are being completed with a higher level of deferred consideration and we are seeing more use of private equity investors or other non-high street commercial lenders.
Banks are right to be cautious and we fully support the careful vetting of new customers and proposals for more responsible lending, but their current attitude and the strict filtering process is not proving effective. Financially solid businesses with many years of excellent trading figures and history with the banks are being refused finance or are simply being put off by the level of scrutiny and the price of lending further funds. If we are to see real growth in the economy the banks will need to learn how to filter out “the bad’ whilst supporting “the good’ thereby minimising their exposure, without quashing the entrepreneurial spirit this country was once known for.
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