8 September 1995

Negligent advice brings speculation over bank funding

By Philip Clarke

MEDIA speculation was rife this week that banks would have to change their approach to funding small businesses when Lloyds Bank was ordered to pay £77,500 compensation for giving "negligent advice".

The case related to a £150,000 loan made in 1988 which a local branch manager advised a couple to take to buy, improve and sell a property. But things went wrong when the housing market collapsed and a High Court judge this week ruled that the bank was in breach of duty for having given this advice.

This prompted suggestions that banks would now be much more circumspect in the guidance they offered potential borrowers. Others said it could lead to banks increasing their margins over base rates to act as an "insurance" against future challenges.

But the word from the banks agricultural managers this week was that it would be "business as usual".

Lloyds was quick to point out that the case set no legal precedent and it would continue to offer customers practical information, although any advice would be of a general nature.

Clydesdale Bank, which advertises itself as being able to "arrange overdrafts or help with the day-to-day running of your business", agrees it will not need to change its style.

"If you are not going to enter into a dialogue with your customer – sharing knowledge, experience and common sense – then you might as well have a computer as your agricultural bank manager," said Charles Stewart.

"There are many areas where we discuss proposals in detail and some part of that discussion could be perceived as advice. But at the end of it, the decision is the farmers. We are not going to have our mouths sealed by this one specific case."

View echoed

This view was echoed by John Page of Barclays. "There is a lot of professionalism in agriculture. Most farmers have worked out what they want to do before they come to us. If we think it makes sense, we will provide the funds. That is our role as bankers."

This weeks High Court case makes it clear the single act of lending does not imply any kind of recommendation.

"Our agricultural managers are well aware of the rules for giving advice and would be circumspect anyway," said Norman Coward of Midland Bank. "But this does not preclude us from asking if a potential borrower has considered all the options." But the Lloyds case was still a "sharp reminder".