Probes into bank failures to be made public

The Prudential Regulation Authority, the new financial services regulator, will have greater powers over the banks and will make public its investigations into banking failures.

Hector Sants, chief executive of the Financial Services Authority, which will be replaced by the Prudential Regulation Authority (PRA), said the new agency will also be given more powers to block bonuses and dividend payments by UK banks.

The new powers will come under a more intensive supervisory approach that has been adopted by the FSA since the financial crisis.

Sants said the PRA will utilise powers to block bonuses if it believes that such payments break new rules on risk management and capital adequacy. 

His comments emerged as the Bank of England and the FSA published a joint paper, entitled The Bank of England, Prudential Regulation Authority – Our approach to banking supervision, which sets out how the PRA will supervise banks, building societies, credit unions and investment firms.

Hector Sants, PRA chief executive designate, said: “The PRA’s purpose is fundamentally different from that of previous regulatory regimes and will lead to a significantly different model of supervision to that which was in use pre-2007.

“In designing this new model we have incorporated both the lessons learned from the last financial crisis and those from firm failures of the past.”

He said the new regulatory model will be based on forward looking judgements and will be underpinned by the fact that the PRA has a single objective: to promote the stability of the UK financial system.

Andrew Bailey, FSA director of UK banks and building societies and PRA deputy chief executive designate, said: “Maintaining financial stability is an objective in public policy which we should all value highly. We have seen what happens when we lose it. 

"But achieving and maintaining financial stability does not mean that we have an industry in which no-one can fail."

Angela Knight, chief executive of the British Bankers’ Association (BBA), said the trade body supported “sensible reform” and the formation of the PRA to “take forward the lessons we have all learned.”

She added that the new body needed to attract high calibre staff as supervisors.

Small firms may miss out on £2.5bn fund

Most small businesses seeking affordable finance will miss out on a new £2.5bn equity fund launched by the UK’s largest banks, a business lobby group has warned.

The Forum of Private Business said the criteria to access the Business Growth Fund, launched by banks and the British Bankers’ Association (BBA), will put many businesses off from using the scheme.

The Business Growth Fund allows banks to take stakes of between 10 per cent and 50 per cent in high growth businesses, with turnovers of between £10m and £100m, in return for investments of £2m to £10m.

But according to the latest figures from the Department of Business, Innovation and Skills (BIS), just five per cent of small and medium-sized enterprises (SMEs) have funding requirements of £1m or more, with just under a quarter (23 per cent) needing between £10,000 and £24,000.

The FPB said a paltry one per cent of SMEs are seeking equity finance (down from two per cent in 2006/2007), with most choosing not to sacrifice a stake in their businesses and preferring debt lending in the form of bank loans (40 per cent), and overdrafts (35 per cent).

The forum said it is concerned that the fund will not help the vast majority of firms struggling to find the cost-effective finance necessary to compete for new contracts, create jobs and drive economic growth.

FPB senior policy adviser Alex Jackman said: “The Business Growth Fund aims to bridge the clear gap in funding for high growth firms identified in the Rowlands Review back in 2009 and so is certainly a welcome step and one that is long overdue.

“But we cannot allow this to overshadow the real problem – the lack of affordable lending being made available by banks to start-ups and other small businesses – those that are not eligible to benefit from the fund.”

Jackman added: “There is a real danger that these firms will be left behind and that would be disastrous for the economy.”

Under the Business Growth Fund the banks are committing to provide £1bn of equity capital over three years and £1.5bn over 10 years.

Conceived as part of the BBA's taskforce last autumn, the fund was central to the Project Merlin deal struck between the government and major banks. The deal included an increase in lending to SMEs and restraint on bank bonuses.

Insolvency Service to tackle termination clauses

This week we have attached an article that is relevant to many of our clients. The issue of keeping suppliers on board when re-structuring is an important one, however suppliers who “blackmail” clients during these times need to be deterred from doing so. Whether a new  moratorium will be effective remains to be seen.

The Insolvency Service has confirmed that it will finally tackle termination clauses, under wider proposals to create a moratorium for firms which need debt restructuring.

Termination clauses, whereby suppliers can cancel vital contracts and therefore threaten a firm’s rescue plan, will be looked at as part of the Insolvency Service’s next stage of considering how to create a moratorium.

The Insolvency Service recently published responses from the profession to proposals for creating the moratorium.

The moratorium would provide viable businesses some breathing space, outside of a formal insolvency procedure, to restructure their debts successfully.

While publishing the industry’s response to the moratorium proposals, Edward Davey, the minister responsible for the insolvency regime, said: “There have been suggestions that a greater impact might be achieved by the restructuring moratorium were it also to tackle issues such as termination clauses.”

The minister also confirmed that responses suggested the moratorium could tackle “cram down” mechanisms, to reduce the power of small creditors to block proposals.

He added that there would be further talks with stakeholders to explore the level of support for addressing these issues and “the best way to do so.”

His comments follow a campaign led by the insolvency trade body R3 for a law change to stop suppliers threatening to cancel contracts, thereby preventing them from blackmailing insolvent firms which are trying to engineer a rescue plan.

R3 estimates that around 2,000 more businesses could be saved annually as a result of tackling these practices.

R3 president Frances Coulson said: “R3 has been campaigning vigorously on this issue as part of its Holding Rescue to Ransom campaign to stop suppliers taking unreasonable actions during an insolvency, thus sabotaging any potential rescue.”

The Insolvency Service, while providing a summary of responses to the moratorium plans, said the urgency of the case for introducing it was “not as great as previously thought.”

One of the key elements that will need to be refined is the powers and responsibility of who monitors the moratorium.

Both HSBC and Royal Bank of Scotland told the Insolvency Service that qualifying floating chargeholders should consent to the choice of monitor.

Views were split on whether to have an extra court hearing for the extension of a moratorium to cover the formal approval of a CVA proposal. The vast majority of respondents said the court should grant any extension of a moratorium.

Insolvency Service officials will now refine the moratorium proposals and consider in more detail the issues raised.

SMEs risk export losses through currency "knowledge gap"

A "knowledge gap" about protecting businesses from currency fluctuations means British SMEs risk losing thousands of pounds on export deals, a new report has warned.

The study by American Express FX International Payments showed that despite belief in an "export-led recovery" being generally strong in the UK, 23 per cent of companies are actually looking to pull back on their international trade due to worries over volatile exchange rates and red tape.

Over half (56 per cent) of those who are losing confidence in exports cite the sharp fluctuations in the euro as their biggest concern.

American Express said the UK's top export markets - Germany, Spain and Poland - all use the euro and, without safeguards against the risk of currency volatility, the 55 per cent of SMEs that trade internationally could lose thousands.

It added that a company with an exposure of €300,000 over three months starting in October 2010 could have saved £19,745 if it had purchased an incoming forward contract rather than taking the spot price for the euro in January 2011.

However, despite the potential losses, 55 per cent of SMEs do not use such protection and 28 per cent have never even considered it.

American Express FX International Payments general manager, Rocco Magno, said, "After a tempestuous year for currencies, it's not surprising that currency fluctuations are the number one concern for SMEs trading internationally.

"Worryingly, these fluctuations are not only affecting confidence, but also the bottom line for SMEs due to a knowledge gap on how businesses can protect themselves from these fluctuations."