* Cash-strapped small firms underserved by current system
* Banks act as ‘judge, jury and criminal’ in complaints procedures
* Lenders recognise need for reform, focus on ombudsman’s remit
By Sinead Cruise and Emma Rumney
LONDON, June 28 (Reuters) - Small businesses that are victims of fraud, conspiracy and misconduct by British banks could soon be able to sue their lenders in a tribunal dedicated to helping them bring banks to justice without fear of financial ruin.
The proposal comes amid ongoing fallout from two of Britain’s biggest corporate lending scandals; namely the uncovering of systematic mistreatment of troubled borrowers by Royal Bank of Scotland’s turnaround unit and a major fraud at Lloyds Banking Group’s HBOS Reading division, which saw six people jailed last year.
British lawmaker Kevin Hollinrake, chairman of the All Party Parliamentary Group (APPG) for Fair Business Banking, told Reuters that the APPG would propose the tribunal, likely funded by the banks themselves, in a report in July.
It would offer a recourse for small businesses which currently have few options if they are dissatisfied with remedies or compensation offered by the banks.
One current option is to appeal to the Financial Ombudsman Service (FOS), which will only accept complaints from businesses with turnover of under 2 million pounds ($2.62 million) and fewer than 10 employees. It can only compel financial services firms to pay compensation up to 150,000 pounds.
The second is to take lenders to court - a route that can be slow and financially painful.
Hundreds of small firms were affected by scandals at Lloyds and RBS, with some losing their businesses and livelihoods. Many victims felt their complaints were never properly remedied by the banks or the authorities supposed to keep them in check.
Both lenders set up redress schemes to compensate customers. RBS apologised for the misconduct of its staff and Lloyds hired a retired judge to see whether its management could have handled the fraud better.
“We must address a lack of accountability at the banks in order to restore trust in the financial system and serve as a deterrent to those who break the rules,” Hollinrake said.
He said small businesses - often seen as the engine of the British economy - are becoming increasingly reluctant to borrow from traditional lenders, even it means crimping their business prospects and limiting overall economic growth.
Hollinrake’s proposals would require new legislation, but he said under the current system banks end up acting as judge, jury and criminal in many compensation claims.
“They have vast resources at their disposal to manage and crush legal threats. Customers know they can only contest unsatisfactory damages if they have millions of pounds to spare,” Hollinrake said.
Britain’s four biggest lenders told Reuters they agreed the system needed reform, while trade body UK Finance has also commissioned an independent review into possible alternatives, due to be published later this year.
A spokesman for Lloyds said the bank was open minded about possible options while RBS said it would consider any proposals.
“We are committed to rebuilding SME trust and confidence in banking and recognise that, as part of this, it is essential that SMEs have access to dispute resolution options that they can have confidence in and which can be relied upon to deliver inexpensive, unbiased and prompt decisions,” the RBS spokesman said.
But UK Finance, Barclays and HSBC said they would rather back an extension of the Financial Ombudsman Service (FOS) proposed by regulator the Financial Conduct Authority.
This would allow the FOS to accept complaints from firms with turnover of under 6.5 million pounds, and fewer than 50 employees. The FCA is currently consulting on the proposals.
“The most important thing is to have a system that SMEs can trust, that is easy to use and cheap to access, and which reaches decisions quickly and efficiently,” Ian Rand, chief executive of business banking at Barclays said.
$1 = 0.7632 pounds Editing by Elaine Hardcastle