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Law for Business

Knowhow - guidance - precedents

26 MAR 2013

Banks to codify dealings with small firms

By Zia Akhtar

The banks in the UK have agreed to set out regulations for dealings with the small businesses. These rules will become effective in July 2013 and they will bring in changes will prevent the smaller firms from being financially exploited. The businesses will be provided with an independent complaints service and also permit the self regulation of firms. http://businessmoneynews.net/index.asp?ItemID=2166&rcid=75&pcid=69&cid=75

The code which has been drawn up by the sector's trade body, the Asset Based Finance Association (ABFA). It represents 95% of the industry and is responsible for the promulgation of the code confirmed that it has taken this initiative in order ‘to ensure that [our members] continue to treat customers fairly'. This will provide a new framework of conduct and a dispute resolution service. The Asset Based Finance Association (ABFA) among its regulations.http://www.business.money.com/PDF/ABFA_Code_March_2013pdf

The members of ABFA lend cash to small businesses against their assets, and advance cash on invoices by taking security over companies' debtor books. The industry provided approximately £17bn of credit to small businesses is to give its customers but there have been allegations of unethical behavior by the banking institutions. This has been manifested by the lenders levying the business customers excessive fees and also reaping a turnover at the expense of the taxpayer and other creditors.

Reforms to the system

The changes that are being made to the system is to make it more structurally sound and to provide it more objectivity. The process is being accomplished by the appointment of an external, independent system of dispute resolution that will comprise an industry Ombudsman who will deal with the complaints. The lenders will be obliged to accept the decision of the office of the Ombudsman.

However, there is a ceiling that will be effective that will meant that the service will only be open to businesses with annual sales of less than £6.5m. This would cover 80% of clients according to ABFA research. There has also been the establishment of the Professional Standards Council that is composed of the independent members of the industry. The terms and conditions of this body will be to ‘consider issues emerging from the complaints system and make recommendations on actions to further enhance the reputation of the industry'. The lending institutions will be obliged to provide a cogent and transparent reason for charging a contract fees.

There have also been practice directions from ABFA which has informed members that it must inform companies if they paid commission to any third party to win their business. The lending institutions will have three months to become compliant with the new code. The ABFA's would expel the members who consistently breaks the code.

The legal sector has welcomed the code according to reports. Francis Coulson, the former president of insolvency trade regulator R3 and now a partner at law firm Moon Beever mentioned that the code is a "good statement of intent". She added that if the new professional skills council and its chair are robust then this may be a turning point in the industry." http://www.telegraph.co.uk/finance/yourbusiness/9946964/Lenders-agree-to-new-code-to-protect-small-firms.html

Coulson also cautioned as follows: ‘Until we see the outcome in detail of some complaints and how they are dealt with, it will be difficult to judge whether the new code will have a real effect in tackling the abuses in the industry. ABFA is a members' organisation not a regulator, so expulsion of a member would cause it financial loss.'

Shortcomings in the code

However, the new rules do not ban the controversial practice of sharing so called ‘termination fees' with brokers. These are paid to cover the risk of a client leaving before the end of their contract but are charged when a business becomes insolvent, often when the lender appoints an administrator. There have been complaints that some lenders are abusing these to profit from company failures

The code also recommends but does not compel a detailed explanation of the fees that will be levied when a company fails. The framework does not state any information about the lenders' relationships with insolvency practitioners, another controversial issue for the industry. There is also another handicap which is that it does not cover the relationship between insolvency practitioners who introduce business to lenders and expect administration in return. It also does not extend to those lenders that lend money to those businesses which are not a safe investment.

The chief executive of ABFA, Kate Sharp was quoted in the Telegraph report as stating that the lending banks should have a regulator but the organisation cannot be over prescriptive over lenders' relationships with the insolvency profession, or on the use of termination fees, because of ‘competition law'. This was because this would amount to dictating commercial practice and only the Office of Fair Trading [the competition regulator] can decide on further amend or extend this code.  


There has been discussion about the timing of the code and it has been compared to the British Bankers' Association to bring in new rules following the banking crisis. It also depends on the performance of the members of ABFA who have their own procedural guidelines. There are also a feeling that there is a shadier side of industry that the code has not addressed.

Zia Akhtar is a member of Gray Inn. He is a regular writer for Jordans and he specialises in Business and Competition law.

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