Cosy relationships between banks and leading law firms are preventing businesses taking legal action to protect themselves from being forced unfairly into bankruptcy, City regulators were told today.

The accusation appears in a hard-hitting report into banks' treatment of businesses in distress. It contains allegations that state-owned Royal Bank of Scotland (RBS) had unnecessarily engineered defaults to move businesses out of local management and into its 'Global Restructuring Group', generating revenue through fees, increased margins and devalued assets.

Author Lawrence Tomlinson, entrepreneur in residence at the Department for Business, Innovation and Skills, says that businesses transferred to restructuring divisions are 'trapped with no ability to move or opportunity to trade out of the position – they are forced to stand by and watch as otherwise successful business are sunk by the decisions of the bank'.

Legal recourse is often impossible because of the web of relationships between banks and leading law firms, the report says. 'Any law firm that does business with banks will have a clause in their contract, preventing them from taking action against the banks. This means that for businesses the pool of solicitors available to give them advice and take their case is extremely limited.'

With many of the top law firms conflicted, even if the business has the resource to pay them, they are not able to access the same class of legal advice that the banks can command, it says. 'Often their own solicitor, who has helped them and their business for many years, is even unable to help in this situation.'

Tomlinson concludes that the government needs to ensure that businesses are better protected to stop 'abuses of power' in the banking relationship.

Business secretary Vince Cable said today that he has passed the report, Banks' Lending Practices: treatment of businesses in distress, to the Financial Conduct Authority and the Prudential Regulation Authority to investigate.

Meanwhile, RBS today announced the appointment of magic circle firm Clifford Chance to investigate the claims.