Noel Edmonds leads anti-fraud fight for small-business owners

Television presenter Noel Edmonds seems to have paved the way for fellow small-business owners, who feel they've been mistreated by the banking industry, to gain easier access to help in the future.

Due to growing concern that banking scandals affecting small businesses are not being fairly resolved, the financial watchdog announced last week that small and medium-sized enterprises (SMEs) will be given access to the Financial Ombudsman Service (FOS), which acts as a mediator between financial companies and their customers. The news follows anger over the fall-out from scandals involving Lloyds Banking Group and Royal Bank of Scotland (RBS), where some small businesses affected insist that the voluntary compensation schemes set up by the banks are not impartial or fair.

The scandal at Lloyds involved a fraud which was carried out on SMEs by a branch of its HBOS subsidiary in Reading. From 2002 to 2007, the bank referred struggling companies to a turnaround consultancy, "loading them up" with unmanageable debt, and then taking them over and stripping them of their assets, reports the Financial Times.

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Such treatment led to the collapse of Edmonds' Unique Entertainment firm, he claims. Lloyds' handling of the situation has been highly publicised, at least partly because the bank was bailed out by taxpayers during the financial crisis.

Although Lloyds said it has now offered compensation to around 60% of customers affected by the fraud, some cases are still being bitterly contested including a dispute with Edmonds, who says he lost tens of millions of pounds because of the scandal. During a high-profile campaign against the bank, Edmonds has suggested that the person chosen to review the scheme was not sufficiently independent.

Similarly, in the RBS case, the bank has been accused of mistreating thousands of companies through a global restructuring scheme. Critics point out that the compensation scheme has been set up with different definitions of customers affected to those used by regulators.

At the moment, the FOS can only consider complaints from individuals and "micro-businesses" (firms which make annual sales of no more than €2m, and have fewer than ten employees), which leaves SMEs with little recourse in situations such as those involving Lloyds and RBS. An extension of the FOS should provide for a more standardised compensation process, and generally give SMEs more support. The regulator, which has also proposed raising the maximum claim amount from £150,000, says it will publish more detailed proposals soon.

What to do if you're refused a loan

If your bank turns you down for a small-business loan, it has a legal responsibility to refer you to potential alternative sources of finance. Unfortunately, not all banks fully understand their obligations, meaning some small businesses are missing out.

Introduced last November, the bank referral scheme requires the UK's nine largest banks to pass on the details of every firm they turn down for finance to four designated platforms. These platforms Funding Xchange, Business Finance Compared, Funding Options and Alternative Business Funding then share this information with the most appropriate alternative lenders registered with them.

During its first nine months, the scheme helped 230 small businesses to access around £4m of finance, according to data from the Treasury, with an average loan of around £16,000. However, there is still some misunderstanding among banks about when the referral requirement applies.

In fact, any business turned down for finance, even if the rejection is accompanied by an offer of an alternative product, has to be offered a referral to the platforms. This applies if you are turned down for credit cards, invoice financing, or any other business credit products, not just overdrafts and loans. If your bank fails to refer you, ask them to do so.

Finally, although the referral scheme can provide a useful introduction to other funding providers, if you get rejected for one type of finance, it's worth checking whether your bank would consider extending a different kind of credit. You're also legally entitled to appeal a rejection of your application via an externally reviewed scheme.