The chilling tale of the biggest bank scandal in history

This is not the story of the great banking crash of 2008, with its sub-prime loans and state bailouts. That tale has been told many times. Spank the Banker – directed by Bafta-winner Samir Mehanovic – reveals what happened next.

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The main UK banks – RBS, HBOS-Lloyds, Barclays and Aussie-owned Clydesdale – survived the 2008 debacle, if only just. But in the aftermath, they desperately needed to recapitalise. That is: they needed fresh funds to rebuild lending, and to meet new government regulations requiring them to hold in reserve liquid assets as a protection against a future crisis. But where to find these capital reserves?

The same answer occurred to all the banks simultaneously: they would simply loot the assets held by their small business customers, so-called SMEs. The vulnerability of SMEs to bank predation is three-fold. First, bank lending to SMEs is unregulated. When a bank lends money to a private individual, say for a mortgage, this activity is governed by legal rules that protect the customer. But SME borrowing is not protected which means small business customers can be intimidated and mis-sold all too easily. Unlike with private consumer debt, a bank can repossess the family home of an SME customer in default – literally putting young children in the street, as we show in my film. Incidentally, the banks continue to resist making SME lending a regulated business. This reform should be introduced quickly when Scotland is independent.

Secondly, SMEs – by nature of their small size simply – lack the resources to sue a bank for wrong-doing. The big banks have armies of lawyers to hand. Indeed, on repeated occasions, banks have taken cash from an SME’s account to pay for the bank’s litigation team. How Kafkaesque is that?

Third, the official bank regulator – the Financial Conduct Authority (FCA) – has proven craven before the banks it is supposed to keep in check. This is due to government pressure, as the Treasury wants to avoid another bank scandal that would make it more difficult to sell off state holdings in RBS and Lloyds. In 2015, George Osborne, then chancellor, fired the head of the then FCA, Martin Wheatley, when the latter threatened to jail bankers. Osborne also appointed John Griffith-Jones, previously UK boss of accounting giant KPMG, as the chair of the FCA. That is significant because KPMG has been at the heart of accounting scandals at HBOS-Lloyds, the Co-op Bank and Carillion, the collapsed construction and services company.

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With few legal or regulatory defences, SMEs were chickens ready to be plucked by the banks. The method of plucking varied from institution to institution. At RBS, many SME customers were transferred into the bank’s Global Restructuring Group, the notorious GRG. This unit was presented as a “turnaround” agency that would help small business who were in trouble. In fact, many firms forcibly transferred to GRG were perfectly healthy. But once inside the net, GRG had to powers to over-ride management and order SMEs about – ultimately in the interests of RBS, not of the business.

According to a 2016 FCA report, GRG simply raised SME prices and syphoned off company cash to the bank, at will. Also, values of SME assets were arbitrarily lowered, often on a very cursory investigation, with no right of appeal.

As a result, firms found themselves in breach of their lending covenant, because they were now “worth” less technically than the original loan – even though they were still making profits. RBS used this device to put SMEs into bankruptcy and then seize their assets. These undervalued assets were then sold, often to another arm of RBS called West Register. Legal: yes. Dubious practice: also yes.

At HBOS-Lloyds a different road led to the same overall destruction of SME customers. The HBOS equivalent of GRG was a unit based in Reading, run by a man called Lynden Scourfield, who subsequently went to jail.

Scourfield also put healthy SME businesses into “turnaround”, taking direct control of the firms. He appointed “consultants” who were really his associates. They forced SMEs to take an even bigger loan, which were then used to buy more “consultancy” advice. Eventually, customers were bankrupted, and the assets sold cheaply to these associates. The scale of the Reading fraud was truly massive.

Scourfield and co creamed off an estimated £1bn before he was fired. But the real scandal concerns HBOS-Lloyds senior management, who benefited from the bank’s various share incentive schemes. Lloyds took over HBOS in 2007. From early on, the new board was alerted to the criminal fraud at its Reading unit by Nikki and Paul Turner, whose successful music business Scourfield destroyed. But Lloyds management simply ignored this information for a decade, fearful of the impact on the share price. Even worse, the bank continued to pursue defrauded customers such as the Turners and television personality Noel Edmonds, for their homes and assets, as part of its recapitalisation strategy.

In 2013, a senior risk expert at the bank (Sally Masterton) was instructed to prepare a secret report for the board outlining the fraud. But her report proved too dangerous. Masterton was fired as part of a continuing cover-up. Copies of the Masterton report were leaked to the media, but the bank simply denied it had ever commissioned it.

In early 2017, Scourfield and others were convicted and jailed after a long campaign by the Turners. This forced Lloyds to pay limited compensation to some of the victims but still the bank disclaimed prior knowledge of the fraud.

Only last November, with a police investigation under way, did Lloyds board final admit the bank had commissioned the 2013 Masterton report. In the past decade, hundreds of thousands small businesses were wrecked by GRG, by the HBOS-Reading fraud and its coverup, and by toxic “tailored” loans issued by Clydesdale Bank to its SME customers.

A huge swathe of the UK’s small business sector has been destabilised, defrauded, saddled with excess costs, and had assets seized at a fraction of their true worth. This is one of the key causes of the UK’s disastrously poor productivity record. But there is a human cost as well. Families have been made homeless, marriages destroyed, and people driven to suicide.

With honourable exceptions, the British media (especially the BBC) have been reticent to publicise this new bank scandal, far less address the economic implications. Meanwhile the hordes of smooth-talking, over-paid bank lobbyists who infest Westminster and Holyrood have ensured that UK financial regulations were watered down and claims for better legal protection for SMEs rejected.

Conclusion: an urgent priority for an independent Scotland is to reverse this assault on our SMEs – partly for the sake of justice but also because rebooting our small business sector is the only sustainable way of rebuilding our economy.

Spank the Banker is being screened at Glasgow Film Theatre at 6pm tomorrow