U.K. lawmakers continue to crack down on unfair business practices, particularly when it comes to small business lending. But MPs are turning to a new strategy to ramp up their efforts: get the Supreme Court involved.
Reports in SmallBusiness.co.uk last week said MPs have petitioned the Supreme Court to make changes to financial services regulations related to "reflective loss," which would widen the opportunity for small businesses to sue banks. It could be particularly important for the small businesses that were forced into insolvency by financial institutions including Clydesdale, RBS and Lloyds, all of which have admitted to wrongdoing and have taken various measures to remedy issues of unfair treatment to small business clients.
Reflective loss is a legal principle that a company, not its shareholders, has the right to recover company losses, as Finance-Disputes.co.uk explained in a 2017 article.
MPs' request to the Supreme Court could allow some small businesses to sue their bank for the first time.
Kevin Hollinrake, MP and co-chair of the All-Party Parliamentary Group (APPG) on Fair Business Banking, led the group's unprecedented intervention in an ongoing Supreme Court case last week, championing legislative changes that would enable small businesses to sue banks. Current rules mandate that the insolvency practitioner only has the power to initiate such legal action. But because that insolvency practitioner often comes into the picture after a bank makes insolvency orders, those practitioners are reluctant to sue that financial institution.
"SMEs may be able to sue banks that put them in an un-winnable situation," Hollinrake told the publication. "If you're a shareholder of a business and your company goes into administration, and you believe somebody's at fault, currently there's nothing you can do about it.
"If your bank has unfairly sold you an expensive loan and the payments rose and rose, eventually putting your SME into administration, then you as a shareholder have no action against the bank," he added.
Hollinrake said having the Supreme Court move forward with the APPG's request "would be a huge step forward, a real milestone in commercial case law, because it allows small businesses to fight back against being unfairly treated."
The APPG is also calling for the formation of a financial services tribunal, which would require banks to pay the legal costs of small businesses if they lose a case against a bank.
Reports said the group hopes the Supreme Court will make a decision within a few weeks.
Legal Fights Ramping Up
A range of scandals in the small business banking market, from RBS's Global Restructuring Group forcing small businesses into administration, to banks mis-selling products to small businesses for more than a decade, has led many small business proponents to call on lawmakers to make it easier for small to medium-sized businesses (SMBs) to sue their banks, arguing that FIs' compensation programs and the development of a dispute resolution service, which is due to launch later this year, are not enough.
Earlier this month, Reuters reported about 150 businesses have initiated a lawsuit in London against Clydesdale Bank and former owner National Australia Bank for unfair small business lending practices nearly two decades ago.
RGL Management is managing the group claim for the SMBs, reports said, and expects hundreds of more small business claimants to join the lawsuit by the end of 2019. The legal action hopes to recover millions of pounds in losses. RGL reportedly instructed lawyers in Scotland to initiate similar legal proceedings against the bank as soon as legislation in the country is changed to allow group claims. At present, such group claims are often the only legal path a small business can take against a bank.
Regulatory changes have moved to the center of the debate over banks' mistreatment of small business clients.
Late last year RBS Chief Executive Ross McEwan said that a lack of regulation is what made it possible for RBS to treat small businesses the way it did via its Global Restructuring Group.