Queen's speech: Banks face fines for breaking new lending rules

Published 03rd Dec 2008

Britain's banks will face potentially huge fines if they refuse to lend fairly to small businesses and individuals under legislation to be announced this afternoon.

The Queen's speech is expected to include making the current voluntary code of practice for the banking sector legally binding, as part of several major reforms to the financial sector contained in a new Banking Reform bill.

The move comes after a flood of complaints from small firms whose banks have suddenly raised their fees or hit them with more restrictive loan arrangements, even if they had been trading profitably for years.

Having bailed out the banking sector with a £500bn rescue package, the government is concerned that small businesses could be driven to the wall as the repercussions of the credit crunch continue to batter the UK economy.

The existing code of conduct sets out the minimum standards that banks must provide to their customers. This includes lending responsibly, giving help for customers who hit problems, and more transparent bank charges.

However, the most severe penalty for a breach is only to be "named and shamed". The plans that are expected to be announced today will include unlimited fines for banks that break the rules and refuse to improve their service. It will be policed by the FSA.

HBOS announced new support for businesses this morning. Small and medium-sized firms who are customers of Bank of Scotland will be offered funding worth £250m, which will be available at up to 80 basis points below base rate, it said. The company added that it will guarantee pricing on Bank of Scotland small business customer overdrafts for 12 months from the date of arrangement for new loans and renewals.

HBOS is receiving a multi-billion pound injection from the government as part of its rescue merger with Lloyds TSB.

A row is already brewing between HBOS and the FSA over its tracker mortgages. Like several other lenders it operates a "collar" that stops the rate of repayment falling below a certain point. The Bank of England is expected to cut interest rates again tomorrow, and the FSA has already indicated that it expects any reduction to be passed on – even it that would take repayment levels below the collar.

The Banking Code:

The Banking Code was last updated in March this year, when these changes were added:

• A new commitment on responsible lending
• A new commitment on current account switching
• More help for customers who may be heading towards financial difficulties
• Strengthened credit assessment practices to enhance responsible lending
• Clearer information about products, including pre-sale summary boxes for unsecured loans and savings accounts
• Prohibition of account closure as a result of a customer making a valid complaint
• Information on how to find lost accounts
• Greater clarity of cheque clearance times
• Clearer information about credit cards and credit card cheques, upgrading current accounts, moving or closing branches, alternatives to Chip and PIN, and protecting accounts

Source: ' Guardian '

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