Attempts to use taxpayer money to fund a new wave of business challenger banks were dealt another blow a fortnight ago as Nationwide Building Society announced it was scrapping a move into SME lending.
Britain’s largest mutual is the latest to hand back money it was given to expand its business proposition after Metro Bank was also forced to give back £50million in February.
It said its business plan was ‘no longer viable’ after coronavirus struck and the Bank of England’s base rate was cut to 0.1 per cent, but chief executive Joe Garner said it was ‘never planning to do significant lending’ anyway and it was already making slower than expected progress on the launch.
Metro Bank and Nationwide Building Society have collectively handed back £100m in taxpayer cash after they were unable to meet targets they’d made when bidding for it
But it raises yet more questions over the £425million Royal Bank of Scotland fund, which has been accused of making opaque and controversial funding decisions and has now seen close to a quarter of its handouts handed back.
It is rolling up Metro Bank and Nationwide’s refunds into another £100million pot which will be opened up to new applicants.
But although the Banking and Competition Remedies fund insisted it had ‘foreseen’ something like this happening and the news was ‘positive’, is there any reason why it won’t repeat the same mistakes again?
What was the fund?
The BCR is overseen by former Barclays banker Lord Cromwell and consists of a £425million pot of RBS money, handed over as a condition of its bailout during the financial crisis.
It is designed to help challenger banks beef up their business banking offerings and break the stranglehold of the big four banks, which dominate SME lending.
A separate £350million package of grants is also designed to incentivise existing customers to switch away, with RBS paying some customers thousands of pounds to push them out the door.
The £425m pot for competitors to beef up their business banking offerings was a condition of Royal Bank of Scotland’s bailout by the taxpayer during the 2008 financial crisis
The £425million was handed out in four pots, with the lion’s share handed out in ‘Pool A’.
Metro Bank received the biggest sum of £120million despite being in the middle of a crisis involving its loan book which subsequently wiped millions off its value and saw the departure of its chief executive and chairman.
Meanwhile digital challenger banks Starling and Tide together claimed £160million in a surprise coup which saw them beat out more established names like Clydesdale Bank, TSB and the Co-op Bank.
Nationwide took home the biggest prize of the second pot, claiming £50million.
It was intending to use the money to launch a business bank offering in partnership with Mastercard and ClearBank, which also partnered with Tide, which would supposedly include unsecured loans, credit cards and savings.
After a spell as a stock market darling, Metro Bank’s share price has tanked over the last two years after the bank was found to have wrongly categorised some of its loans
What went wrong?
Criticisms have been levelled at the fund for a multitude of reasons. Most obviously, two of the banks it awarded funds to have since handed it back.
Metro Bank didn’t return all £120million but gave back almost half after a £130.8million loss forced it to scale back branch opening plans from 71 to 24.
At the core of its business pitch was a pledge to open 30 new branches in the north of Britain, but this too has been slashed to 15.
Former Labour MP and Treasury Select Committee member John Mann described the original decision to award the money to Metro Bank as ‘absolutely wrong’.
Metro Bank chairman Vernon Hill (pictured) and chief executive Craig Donaldson were forced to step down after the accountancy scandal which engulfed the bank at the start of 2019
John Cronin, an analyst at the stockbroker Goodbody, said: ‘The BCR’s credibility was called into question when it elected to award Metro Bank £120million shortly after it became apparent that the bank had misreported its risk-weighted assets, and therefore its capital ratios, over a multi-year period.
‘Many questions had been asked, following that misreporting revelation, about the viability of the Metro Bank business model.
‘For the BCR to then proceed to award it the largest tranche of available Pool A funding seemed to me to be a staggering decision at the time and other banks like Virgin Money were clearly far more credible alternatives.’
For the BCR to proceed to award Metro Bank the largest tranche of available funding seemed to me to be a staggering decision at the time
John Cronin, analyst at Goodbody
He added: ‘To be fair the Nationwide giveback just served as a reminder of the questionable decisions that were previously made.
‘I wouldn’t level criticism at the BCR in respect of its initial decision to award Nationwide funding but the optics of the building society’s decision to now return the monies don’t look great.’
Hand-in-hand with that has been the suggestions that winning banks overpromised what they could achieve, especially the new breed of smartphone challenger banks with no branch networks.
Starling, which now has 139,000 business accounts, received £100million last February thanks in part to a pledge to lend £913million by 2023.
While it has recently beefed up its loan offerings with unsecured loans of up to £250,000 and overdrafts of up to £150,000, figures published in December showed it had lent just £782,000 since winning the money – 0.08 per cent of its pledge.
The bank previously said it was ‘confident’ it would hit its commitments.
Former Labour MP John Mann has criticised the way the RBS money has been handed out
Gabriele Sabato, the co-founder of SME credit rating fintech Wiserfunding, warned ‘lenders may relax their lending criteria in order to meet the demands of the fund to demonstrate increased market share’ and hand out more money to less creditworthy borrowers, ‘which could lead to higher default rates and increased costs for smaller lenders.’
Starling is aiming for a 6.7 per cent share of the market by 2023 and fellow smartphone bank Tide 8 per cent.
As well as who the funds have been handed to, criticism has also stemmed from how the money has been handed out.
Bankers and politicians alike have criticised the process as lacking in transparency.
Mann told The Sunday Times: ‘No one from the outside has a clue what’s happening.
‘It’s not just opaque, we can’t be certain the attempts at competition are in any way effective…there’s no public accountability of any kind.’
And one senior banker bluntly told the Financial Times: ‘The National Audit Office should have a look.
‘It has been ill-judged, non-transparent, and a pretty good example of how not to do it.’
What happens next?
The BCR has bundled up the £100million handed back by Metro Bank and Nationwide and will set out the application process from the end of April.
It’s a chance for spurned banks like TSB and Virgin Money to make a fresh bid for a pot of money which would be the second-biggest handed out so far.
But Sabato warned: ‘The last thing I would would be to put out two grants of £50million or one of £100million.
‘The best thing to do would be to break that money down into very small grants. Even £2-3million would be a lot of money for a small fintech.
‘This money could be used so wisely, my concern is whether the BCR have the capability to keep up if they awarded it like that.’
Perhaps more importantly then, it’s a fresh chance for the under-fire fund to potentially silence some of its critics.
But the answer to that, just like who is going to be awarded this new chunk of change, and why, at the moment still remains a mystery.
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