The cause of these zombie businesses is interest rate hedging products (IRHP) and liabilities.
Much has been said about mis-sold interest rate swaps and the failures of the current FCA review, but it is the issue of liabilities which is at the heart of the stagnation in the SME sector, and has led many businesses to insolvency – unfairly, for many.
There are two types of liability, a market-to-market liability which can be disclosed by the bank at any time during a contract, or a contingent liability which is put by the bank on a company’s credit file.
It is these contingent liabilities which have curtailed customer borrowing potential, but have never been disclosed to the business because the liabilities were hidden from them, and often within the terms of a loan which in itself was an embedded swap, such as the Tailored Business Loans we have seen used by RBS, among others.
At the point of sale these contingent liabilities were not disclosed to businesses, they were in effect a ‘soft’ liability. Once interest rates dropped, however, and the true nature of the penalties and termination fees of the swaps was revealed, these liabilities were treated as ‘hard’ by the banks.
This meant that a business was not only suffering from a mis-sold product, but was being penalised on its credit file, leading to financial stagnation and no further lending. In many cases this led to businesses being unable to grow, while in worse scenarios it has seen job losses and even insolvency – the banks penalising businesses that were unaware of these liabilities.
I would question why, at the point of sale, these liabilities were never disclosed and why this was also not the case in some of the audited accounts – did the accountants not know about the contingent liabilities and if so, how can a business person with no grasp of forensic accounting be expected to be aware of it?
Furthermore, it seems as though some of the banks have used these liabilities to seize control of businesses’ assets such as property – often with dubious valuations – and, even, the businesses themselves.
The Treasury has spoken at length about the need to facilitate greater SME lending but at the moment there is no legal precedent for showing that the banks had a duty of care to these businesses to be aware of these liabilities, they seem to be treated as ‘buyer beware’.
The hundreds of businesses who find themselves either insolvent or stuck in no man’s land are certainly not aware, and the fact this has happened under the watch of the Treasury is the truly frightening thing.
We need to bring the zombies back to life, only then will the SME sector be able to kick-start the economy.
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