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Date
27 February 2014

Mishcon Thinks: Strained relationships between banks and borrowers

In this film Derval Walsh, Partner and a member of Mishcon's Finance and Banking group, is in conversation with broadcaster Katie Derham on the strained relationships between banks and borrowers.

Transcript

Mishcon Thinks: Strained relationships between banks and borrowers

Mishcon Thinks: Derval Walsh

Katie Derham

Derval Walsh you are a partner in the finance and banking group at Mishcon de Reya and I am hoping we can have a bit of a chat about the way you see the relationship changing between banks and customers and businesses particularly because things do seem to be changing in the general mood and the behaviours.

Derval Walsh
Partner, Finance and Banking

I think the mood music has certainly changed over the last five years.  It was once the case that customers had very close relationships with their banks and in particular their relationship managers at the banks.  I think that relationship has changed, it appears to be much more interventionist and not as collaborative as it once was and in some cases the banks are being extremely aggressive actually in their dealings with their customers so this is probably a change for the worst.

Katie Derham

So give us a few examples of this change of behaviour.

Derval Walsh
Partner, Finance and Banking

Well I have seen situations where established relationships going back twenty years have pretty much changed overnight.  Where banks have looked for, actively sought out what previously would have been regarded as technical breaches of loan facility obligations with a few to applying pressure on customers to repay early, to pay higher fees, higher margins – various things which in the pre-2008 world would have been inconceivable and were certainly new to customers dealing with banks.

Katie Derham

So why is this happening?

Derval Walsh
Partner, Finance and Banking

Obviously when the financial crisis happened in 2008 things fell apart so there was an incredible strain put on the banks and I think that they got instructions from upon high that they needed to take whatever measures they could take to improve their balance sheets and that often resulted in attempts to extract value from borrowers and customers.

Katie Derham

So it is not just selling them new products, it’s actually getting rid of them if they are not making them enough money?

Derval Walsh
Partner, Finance and Banking

Absolutely and in some cases financial institutions have made a deliberate decision at a business level, at a management level to exit a particular market.  So for example, the commercial property market.  What happens when that happens is the bank loses any interest in having a continuing dimension to the relationship or a future dimension to the relationship so they are not interested in preserving goodwill, they are not interested in doing business with customers in twenty years’ time, their focus is on extricating themselves from the position, reducing risk, maximising recovery and basically getting loans off their books as quickly as possible and that effects and informs their conduct towards customers.

Katie Derham

It is shocking if you are a business finding yourself in this position with as you say, a previously trusted relationship with your bank and suddenly it all changes.  Is it across the board?

Derval Walsh
Partner, Finance and Banking

It very much depends on the particular motivation at a specific financial institution.  Some financial institutions are around for the foreseeable future and they do have an interest in preserving goodwill and they have an interest in doing business and in lending to customers not just now but in twenty five years’ time, fifty years, a hundred years’ time.  For other institutions who have made a decision to get out of particular sectors those factors aren’t relevant and so they don’t inform the decision making that happens.  From a borrowers perspective it is extremely unfortunate because what it actually does when banks decide to leave a sector is it reduces the available sources of capital and actually is arguably less competitive from their perspective in terms of what they can obtain from lending institutions.

Katie Derham

But not only is it economically short-termist but also just my gut reaction would be aren’t banks unpopular enough already without behaving in this way?

Derval Walsh
Partner, Finance and Banking

I think banks have had such adverse PR arising out of PPI, libel rigging, the mis-selling of interest rate protection products that to a certain extent it is water off a ducks back now.  The Teflon factor really has kicked in and I think from the bank’s perspective the most important motivation in terms of its conduct towards its customers is the bottom line actually and its balance sheet.

Katie Derham

So really as customers we all ought to be aware that this is what’s happening behind closed doors.  That really their priorities have changed so that certainly in some cases as a business customer, they don’t really care?

Derval Walsh
Partner, Finance and Banking

In some cases that is true.  There is a massive emphasis now on the balance sheet and shoring up balance sheets and reducing risk.  Paul Tucker is on record as saying that going forward in terms of the Prudential supervision of banks and building societies, the messaging will involve messages along the lines of your bank is not as strong as you think it is, it’s not as financially robust.  You need to reduce the risk on your loan book and the banks and the building societies have already taken that message on board and it’s a very strong message, it’s a message that is being peddled by politicians, it’s a message that’s being peddled by the Regulator and it is a message that has been assimilated and internalised within the banks and it is being reflected in their conduct to customers.

Katie Derham

Okay so let’s put ourselves in the shoes of the customers now.  If you are aware that this is the background to the treatment you are going to get or potentially going to get at your bank.  How can you best protect yourself?

Derval Walsh
Partner, Finance and Banking

If I were a customer I would be very careful in my dealings with my bank.  I have seen customers commit themselves to positions in their dealings with their banks and only consult for professional advice somewhere down the line and often it is either too late or it is significantly more difficult then to remedy a position which could have been avoided if the right professional assistance had been obtained at the start.

Katie Derham

I mean that is really good advice but in your experience do you think a bank would respond positively to you challenging them on the terms of their loan agreement?

Derval Walsh
Partner, Finance and Banking

What I would encourage borrowers to do is to empower themselves to actively engage, to enrol the right legal or accountancy assistance and to push back because in certain respects the banks, the banks will concede on points.  If the banks are adopting an unreasonable position and that has been pointed out to them I have seen numerous examples of, of a mutually beneficial accommodation being reached.  But of course if you don’t ask, you don’t get and the problem is more often than not the customers don’t ask.

Katie Derham

And if things go wrong.  If you get yourself into hot water with your bank, how much power do you have then?  Is there anything you can do to try and get compensation?

Derval Walsh
Partner, Finance and Banking

It depends on the nature of the issue. I mean for example, there has been a lot of publicity recently surrounding the FCA review into mis-selling interest rate protection products.  So it very much depends on a case-by-case basis but in situations where there has been mis-selling of a product or a customer feels legitimately that the customer has a grievance I think it is absolutely imperative to consult with the right people and see whether or not there is a way to take that forward to see whether or not compensation is achievable because it is happening and people are being compensated

Katie Derham

Derval Walsh thank you very much for talking to us.

Derval Walsh
Partner, Finance and Banking

Thank you.

Mishcon de Reya