Firms fail after owners claim they were misled about the Enterprise Finance Guarantee
Like construction companies across Britain, the bitterly cold winter of late 2009 and early 2010 hit trading at Clive May’s small bricklaying business hard.
Determined to return his company to financial health, Mr May met NatWest, his bank, in August 2010 to discuss the impact that the “big freeze” would have on that year’s accounts.
According to Mr May, the meeting set off a chain of events in which the chill extended to his company’s credit facilities and contributed to the failure of C May Brickwork, a venture with a turnover of £2.6 billion that he had spent more than 30 years building up.
The culprit, he alleges, is mis-selling and abuse of a government scheme that has provided more than £2 billion of lending to small companies since 2009.
Enterprise Finance Guarantee places the government as a guarantor on individual bank loans to encourage lenders to help small firms. Mr May believes that thousands of small companies may have been misled about the protection that the EFG provides.
Mr May’s allegations are — belatedly, in his view — being taken seriously: his two-year battle against Royal Bank of Scotland, which owns NatWest, has resulted in Labour and Conservative politicians taking up his cause, while a number of RBS’s most senior bosses, including Ross McEwan, the chief executive, have taken a personal interest in the circumstances surrounding the demise of his business.
Mr May says that his problems began when NatWest suggested replacing much of his £245,000 overdraft with an EFG. Bank documents show that he was to be offered a £150,000 guarantee, with his overdraft reduced to £70,000.
Why would a business susceptible to seasonal swings in sales and resulting cashflow problems agree to its overdraft being slashed? Mr May alleges that the EFG was sold on the basis that he would be liable for only 25 per cent of the debt if his company failed.
In fact, EFG loans are designed to encourage lenders to back viable small businesses that lack the security for a conventional bank loan — they give banks a 75 per cent taxpayer guarantee, but the customer remains liable for the entire debt. Yet correspondence sent to Mr May in September 2011 reads: “Your liability to the bank would be 25 per cent of the EFG loan balance.”
EFG loans are also designed to provide working capital for growth, not to replace the overdrafts of established businesses.
Most seriously, correspondence seen by The Times shows that RBS admits that one of its relationship managers asked Mr May to remove valid security — a second home — from his application form. The property should have disqualified C May Brickwork from securing a guarantee. However, a second form that did not refer to the property was submitted to the business department by NatWest, allowing the government-backed loan to be drawn.
The reasons for the removal of the security are disputed, with RBS so far having offered three different explanations to Mr May, including an erroneous claim, seen by The Times, that the property was held in the name of Mr May’s wife “following the death of one of her relatives”. No such death had occurred and, as the first application form showed, the property was jointly owned by Mr May and his wife, both shareholders in the business.
Mr May eventually was released from his EFG liability without explanation. He is now engaged in a legal battle for compensation; he believes that his business failed because the £70,000 overdraft was rapidly ratcheted down.
“If we hadn’t lost our overdraft on the back of a mis-sold loan, we’d still be trading. I left school with no qualifications and built a company that had a cracking reputation. To go from that to telling people you’re going under, the emotional toll has been huge,” he says.
The business department told The Times that it would ask the state British Business Bank, which runs the scheme, to conduct a full audit of Mr May’s case. It is understood to be concerned about RBS’s conduct over this loan, although it believes the vast majority of EFG loans have been sold correctly.
It is also looking into how lenders are recovering money when customers default on EFG debts after The Times supplied documents suggesting that Lloyds benefited from both repayment by the business owner and the taxpayer. Lloyds is claiming the entire outstanding EFG debt from a failed small Devon-based community farm business, even after it received 75 per cent of the outstanding amount from the government and charged the small business further fees plus interest.
Lloyds says that it will pay the government back as it receives funds from the customer, but a business department source said that it is “wholly inappropriate” for banks to charge interest to customers in default on any funds that have been repaid by the taxpayer.
Lloyds says that it will “amend interest charges to reflect the amount outstanding and the reducing sum held under the claim on the guarantee”.
There is no suggestion that the Lloyds or RBS cases are part of the “far-reaching research case” the Serious Fraud Office is understood to be carrying out into SME lending.
Lewis Patterson, who ran North Devon Farm Park, the recipient of the EFG loan, claims his loan was mis-sold. He claims the “sales pitch” was that the EFG loan was “underwritten by the government” to his benefit.
Lloyds says that it explained the EFG to Mr Patterson correctly and that the government audit of its EFG performance is at the “highest [level] possible for the way we test customer eligibility”.
The Times has seen testimony from numerous small companies with EFG loans secured from a range of high street banks who allege that their lender told them the guarantee was to protect the business rather than the lender.
Julie Bottomley and her husband Richard were mis-sold a £100,000 EFG loan for their Lincolnshire construction products start-up. They claim they were told they would be liable for only 25 per cent of the losses if the company failed, which it did in 2012.
RBS admits that it “mis-advised” the business on its EFG loan, eventually offering to reduce the liability to 25 per cent and pay £1,000 compensation.
“There’s a real scandal going on,” Ms Bottomley says. “How many people have been told the same as us?”
However, supporters of the initiative, including RBS — the biggest user of EFG — note that it has provided millions of pounds of funding to companies that would not otherwise have been able to secure loans. BIS research suggests that it has delivered a £1.1 billion boost to the economy.
RBS declined to comment on the cases of Mr May or the Bottomleys, although it is understood that the bank feels that an internal review of its EFG sales shows that mis-selling is not an endemic issue. It says it conducts regular audits of its use of the scheme.
“RBS has helped over 8,000 SMEs access lending through this government scheme. We work with our customers to explain the finance they are applying for and inform them of the terms,” a spokesman said.
A source familiar with the operation of the EFG scheme, who asked to remain anonymous, said: “This is not on the scale of the mis-selling of interest rate swaps, but there is a significant problem. There needs to be an admission that mistakes have been made.”