IFT report uncovers new fundamental flaws in banking business support and recommends urgent changes to address the issue
Following extensive research, the Institute for Turnaround (IFT), Europe's leading representative body for accredited turnaround and transformation professionals, has revealed fresh evidence of questionable business practices taking place within banking business support, including RBS's Global Restructuring Group, and has today published a report recommending a new Code of Conduct to help reform business support units across UK banks.
Christine Elliott, CEO of the IFT, commented: "The IFT report has uncovered some deeply concerning practices within UK business support banking. The report highlights that a clear and major rethink is urgently required. If it is a policy objective to return under-performing businesses to viability in an open, fair and timely manner, then banks' incentives are misaligned to achieve this aim and should be refocused. Our recommendations propose specific and practical actions that can be implemented immediately to help the many small businesses that are being failed by the banks. Through IFT, bankers themselves are seeking reforms that will, over time, re-establish trust in our banks."
The report, "Benchmarking Best Practice in Business Support Banking", is based on unique research over the last year of over 250 businesses that were or had recently been placed in business support. In addition, it is the first evidence-based research that has included consultations with senior executives who had until recently been employed in leadership positions by major European clearing banks in bank business support units, including those of Barclays, HSBC, Lloyds and RBS.
The research highlights that a fundamental problem within business support units can be the incentives placed on bankers working with the companies placed there. With the size of some bonuses calculated on the basis of excessive fees that companies in business support can be required to pay, it is not surprising that bankers may be unhelpfully motivated. This may also explain the length of time that some companies stay in business support. In this way, companies are prevented from planning ahead and unable to attract the investment necessary to break free.
One non-core banking portfolio manager said: "There are examples of banks piling on fees, like those for an unnecessary independent business review, at a time a company is least able to afford them."
A RBS senior executive concluded: "GRG has a culture of taking aggressive action – not necessarily illegal – and encourages its people to do the same. You either like that approach or get out as fast as possible."
Such practices have meant that many companies going through distress that may otherwise have been helped to recovery were and still failing, while improving the short term health of banks' results.
'Benchmarking Best Practice in Business Support Banking' key recommendations
The IFT report, authored by Christine Elliott, CEO of IFT, with Iain MacRitchie, Chairman of IFT, outlines a Code of Conduct for business support banking, with five key principles to promoting a healthy relationship between banks and distressed businesses:
• Bank business support relationships, processes and behaviours should be customer-centric, monitored and measured in aggregate; geared towards treating companies fairly. Business support best practice is skilled and essential; it should be provided as a quality service for the customer's benefit. There should be the right of referral to an independent Ombudsman.
• When a borrower gets into difficulties the bank should work openly and constructively with the company in a framework that was provided in writing at the time of the lend; and whose aim is sustainably to return the company to viability in a timely and cost-effective manner; recognising that it is essential to have consensus among all key stakeholders.
• Banks' business support units should not be profit centres; and should be required to obtain robust, independent and transparent market valuations as a precondition to transferring in assets. Business support bankers should be incentivised only on returning companies to mainstream banking in the shortest practicable time.
• Banks are inappropriate owners of companies, given the nature of their skills and capital adequacy requirements; and should only acquire or retain a controlling interest in extremis.
• Fees levied by banks on troubled companies should be no more than those levied on fully viable companies; and should take account of companies' ability to pay. Future bank profits generated by way of reward for risk should be recovery related; and proportionate in scale (i.e. to the company's business plan and the required headroom within its capital structure). As recovering the original lend is often impractical, financial structures should allow a share in the upside to the extent of that lend, but permit other stakeholders to participate.
In addition, the relationship between company and bank must also improve:
• Communication and behaviour of bankers towards companies must be transparent, respectful, documented and open to challenge. In state-owned banks a customer communication protocol should be agreed with regulators and informed by evidence-based experience
• There should be a duty to inform a company when it is 'under observation', when it is being moved to business support, what may happen after this point and the key milestones to existing business support units
• The scope of any assessment of a company should where practicable be agreed with the company and there should be an indicative scale of charges considered reasonable to perform a business review
Finally, appropriate governance must be put in place to maintain the incentives of all stakeholders:
• Business support leadership to be appraised in light of these recommended new performance and values-based behavioural criteria
• An independent and discreet, no-blame whistleblowing outlet for bank employees and customers with serious concerns
• The option to refer to an ombudsman without the threat of penal action by the bank; or subsequent withdrawal, or further alteration to, the agreed lending terms.
• Business support portfolios should be monitored by means of simple and transparent criteria
The IFT is currently in discussions with both the Bank of England and HM Treasury about its research and its recommendations.
The full report can be found at: www.instituteforturnaround.com/default.asp