Banking giant accused of blocking loans to Scottish small businesses

HSBC has been reprimanded for failures that forced hundreds of small businesses in Scotland to keep or open an account with the bank in order to get a loan, breaking commitments to end the practice.

The Competition and Markets Authority (CMA) is tightening previous legally binding guidelines which required the banking giant, among other things, to ensure that all staff are aware of the ban on so-called ” bundling”.

In new guidelines issued yesterday, the regulator ordered HSBC to appoint an independent body to carry out annual compliance audits. The CMA also mandates the implementation of enhanced controls and staff training measures.

The breaches took place between 2002 and 2021 with a total of 221 loans affected, all but eight of which were issued in Scotland. HSBC notified the CMA of the breaches between July 2020 and May 2021, and followed up by reimbursing over £800,000 in fees and charges levied on the errant accounts.

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In its new set of instructions – which replace previous CMA instructions issued to HSBC in 2014 – the regulator noted the bank’s cooperation in reporting and correcting errors. However, given HSBC’s inability to “identify the breach for a significant number of years”, the CMA said it was necessary to ensure “all appropriate measures to ensure continued compliance”.

“The rules are clear – banks should not require customers to open or maintain business accounts in order to have a loan with them,” said CMA senior director Adam Land.

“It is right that HSBC has offered refunds and we will be closely monitoring compliance with our guidelines to ensure this does not happen again.”

In 2002, following a Competition Commission inquiry into banking services to small and medium-sized enterprises (SMEs), nine banks, including HSBC, agreed to end the consolidation in all circumstances except in one limited number of circumstances. These commitments aimed to “preserve the choice of small businesses as to the banking services they use”.

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Since 2014, the banks that have signed the consolidation commitments have been required to provide staff with annual written reminders of their obligations. Banks must also verify their compliance through their internal audit functions and report annually to the CMA.

On this basis, the CMA then concluded that HSBC had breached its obligations. The regulator issued its first set of instructions on bundling to HSBC in October 2014, calling for a series of measures to ensure compliance.

In its July 2020 annual compliance report, HSBC told the CMA that there was “a potential problem with a small number” of loans that included a clause giving HSBC the right to terminate the loan if HSBC ceased at the borrower’s main commercial bank. The issue was first identified in January 2020, although no breaches were identified at that time.

Until 2017, the clause was reportedly included in some Scottish loan documents by mistake because staff misunderstood the application of Scottish law to the narrow terms under which consolidation is permitted.

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Since the end of 2017, HSBC loan agreements have been prepared using a document management system. In these cases, the loan termination clause would have been inserted incorrectly due to an error in the coding of certain loan contract templates.

HSBC yesterday said it had again taken a “number of steps” to update its processes and procedures.

“We are sorry that an error in our legal documentation for 200 mainly Scotland-based customers potentially prevented us from changing banks,” a spokesperson said. “We have apologized to the affected customers and have proactively reimbursed all costs and charges they incurred during the time these terms and conditions apply.

“We have worked closely with the CMA and have made changes to our processes and procedures to ensure we are fully delivering on the commitments.”