Small and Medium Sized Business (Credit Information) Regulations 2015
Lord Ashton of Hyde
That the Grand Committee do consider the Small and Medium Sized Business (Credit Information) Regulations 2015
Relevant document: 4th Report from the Joint Committee on Statutory Instruments
Lord Ashton of Hyde (Con)
My Lords, I shall speak also to the draft Small and Medium Sized Business (Finance Platforms) Regulations 2015. With permission, I will refer to these as the draft regulations henceforth.
The Government are committed to ensuring that small and medium-sized enterprises—SMEs—can access the finance that they need to grow and to create jobs. Currently, the four major banks account for 80% of SMEs’ main banking relationships. The Government believe that such high concentration levels are bad for business and they are determined to see a significant change in competition in the UK SME banking market.
These draft regulations represent the final legislative piece of two flagship measures to improve competition in the SME lending market. They will remove major structural barriers to entry in the SME lending markets—namely, a lack of availability of credit information, a lack of understanding of alternative finance providers and a tendency on the part of most SMEs to give up when they are declined for finance.
It may be helpful at this point if I provide some detail on the need for these regulations. Although these draft regulations are linked and complement each other, I will start by focusing on the aspects relating to credit information.
A lender needs to know the creditworthiness of an SME in order to lend to it. The major banks have access to those data, particularly current account data, which gives them a comparative advantage in assessing the risk of a borrower. The control of information on the creditworthiness of SMEs by existing providers is a barrier to entry in the lending market. Lack of access to those data limits the ability of challenger banks and alternative finance providers to accurately assess credit risk, both in absolute terms and relative to those lenders that hold the relevant information. This barrier can be removed through the sharing of credit data by lenders. In the UK, data are shared through private credit reference agencies—CRAs. However, certain data, particularly current account data, are shared through “closed user groups” and not on an equal basis. This puts newer lenders that do not have access to the full range of data at a disadvantage in taking well-informed credit decisions.
The Office of Fair Trading, the Competition Commission, the Bank of England, the Boosting Finance Options for Business review, headed by Tim Breedon, and numerous think tanks and informed commentators have all highlighted the lack of SME credit information as a barrier to competition in the SME banking market and SME lending in particular.
These draft regulations will open up the closed groups that have access to certain types of information. This will level the playing field between providers, allowing alternative finance providers and challenger banks to accurately conduct SME credit risk assessments and make it easier for SMEs to seek a loan from a lender other than their bank. More available data should also enable a better understanding of the SME sector, which should further stimulate competition and innovation in SME lending, improving the cost and quality of services offered.
I will now turn to the finance platforms draft regulations, which will also have a major impact on the ability of SMEs to access more and better finance and on the ability of challenger banks and alternative finance providers to compete effectively.
Survey data show that many small businesses approach only the large banks when seeking finance. A large number of these applications are rejected. In the case of first-time small and medium-sized business borrowers, the rejection rate is around 42%. We know that when applications are declined, a large number of smaller businesses cancel their plans rather than exploring alternative options. As other finance providers with different business models may be willing to lend to these businesses, this represents a market information failure, with borrowers looking to borrow and lenders willing and able to lend, but an inability on the part of both to identify each other.
Under this legislation, designated banks will be required to offer any SME they decline for finance the chance to have its details shared with an online platform that can help match it with other finance providers. This will help put together the alternative finance providers and challenger banks that may not be aware of the SMEs seeking finance and the SMEs seeking finance that may not know about alternative providers and challenger banks. This will help facilitate more lending to SMEs that are looking to grow and expand.
Challenger banks and alternative finance providers have been very supportive of both proposals, as are the UK’s major business groups, including the Federation of Small Businesses and the Confederation of British Industry. The major banks and the British Bankers’ Association have also been supportive.
Together, these policies have the potential to create a significant change in the market for SME finance. However, for this to happen it is essential that SMEs have confidence in how their data are being used, and that the necessary protections are in place to safeguard the quality of those data. The Government have ensured that SME protections are key elements of the policy design.
The Government have provided SME protections in a number of ways. I will start by outlining the protections afforded to SMEs under the credit information draft regulations. First, data will be shared only where the terms of the products themselves allow data to be shared with credit reference agencies. This reflects the existing framework for the sharing of personal data in the UK and is in line with Data Protection Act legislation. Secondly, the finance provider requesting access to the information from the CRA must gain the express permission of the SME to do so and can access the information only for the purpose of undertaking a credit assessment.
Thirdly, the vast majority of SMEs—sole traders, small partnerships and unincorporated bodies—have the right to action in respect of any incorrect data held about them by a CRA. This allows a complaint to be made to the CRA seeking correction, a complaint to be made to the FCA or the Information Commissioner and, ultimately, a court to order the CRA to rectify, block, erase or destroy any incorrect data. These rights are enshrined in the Data Protection Act and Consumer Credit Act legislation. However, there is currently a difference in protections if the CRA in question is FCA regulated or non-FCA regulated. CRAs that handle mainly business data do not need to be regulated by the FCA as the provision of commercial credit data is an unregulated activity. The credit information regulations will modify both the Data Protection Act and the Consumer Credit Act to ensure that the protections apply for data held by all designated CRAs.
Fourthly, these draft regulations will extend the right of action in respect of any incorrect data provided under the draft regulations to all SMEs, including companies. This allows a court to order the CRA to rectify, block, erase or destroy any incorrect data held on any SME. Finally, the draft regulations will extend the remit of the Financial Ombudsman Service so that any micro-business with a dispute with any designated CRA can seek a Financial Ombudsman Service decision which replicates the situation in other areas of the regulated financial sector.
I turn now to the protections provided to SMEs under the finance platforms draft regulations. First, data are provided to finance platforms only with the SME’s agreement, and finance platforms can provide those data to finance providers on their lending panel only in an anonymised form. Finance providers will then make expressions of interest through the platforms, and SMEs will have the choice to allow specific finance providers to see their details and begin a bilateral conversation. This process will ensure that the business seeking finance remains protected and in control throughout the process.
Secondly, and mirroring the credit information draft regulations, the finance platforms draft regulations will extend the remit of the Financial Ombudsman Service so that any micro-business with a dispute with any designated finance platform can seek a Financial Ombudsman Service decision. Taken together, these are a welcome strengthening of protections for SMEs and have been welcomed by SMEs themselves and business groups.
I turn now to the issue of designation and I will identify the banks, CRAs and finance platforms upon which the obligations contained within these draft regulations will fall. The Government have already announced that they intend to designate RBS, Lloyds, Barclays, Santander, HSBC, Allied Irish Bank, Bank of Ireland and Danske Bank. This decision was made on the advice of the Bank of England based on market share and the importance of these banks in the SME lending market in both Britain and Northern Ireland. Capturing these banks achieves the policy objective of opening up competition in SME lending without imposing the burden of sharing data on smaller credit providers. The Government have not yet announced which CRAs or finance platforms will be designated under these draft regulations. The British Business Bank is currently undertaking a due diligence process on CRAs and finance platforms that have expressed an interest in becoming designated and will advise HM Treasury on designation later in the autumn. This due diligence process will ensure that any CRA or finance platform which is designated has the required systems and processes to ensure that the obligations and policies within the draft regulations can be carried out while providing the necessary protections for SMEs. This will help ensure that these policies are successful and can make a significant positive impact in the SME lending market.
I hope that my words this afternoon have assured noble Lords that the draft regulations are needed and welcomed, and that they will make a positive impact on the SME lending market and therefore provide for improved outcomes for the UK’s SMEs when accessing finance. They will help to create a level playing field between finance providers and make small businesses aware of alternative finance options, while maintaining and strengthening protections for our smallest businesses. This will mean that the small businesses that are so vital to the UK economy can have confidence when accessing finance and can continue to get the finance they need to grow and expand.
Lord Tunnicliffe (Lab)
My Lords, I thank the Minister for his clear and thorough presentation of these two sets of regulations. As he outlined, these two statutory instruments will help small and medium-sized businesses access finance. The first instrument concerns the information available to finance providers of SMEs where the SME in question has given permission. SME lenders above a certain market share threshold will be required to share credit data on their SME customers with credit reference agencies for the purpose of credit scoring. CRAs will also be required to ensure that there is equal access to this data for alternative credit providers.
The second instrument addresses SMEs’ ability to access the finance they need in order to start and sustain their business models. The orders would require designated banks to refer details of SME applicants who are turned down for finance, with the SME’s permission, to private sector platforms that will facilitate contact with alternative finance providers that are looking to offer finance. The intent of both these measures is to ensure that the process behind SME lending is easier and that the present barriers experienced by many SMEs are removed. These are principles which the Labour Party wholeheartedly supports. The Federation of Small Businesses states that small firms account for 99.3% of all private sector business in the UK. They employ 15.6 million people and have a combined turnover of £1.75 trillion. The country’s economic success depends on small businesses thriving.
Given this, as my honourable friend Rob Marris said in the other place, we will not oppose these orders. That said, there are still a number of points that I would like to raise which I hope the Minister can clarify in his response. In 2012, the Breedon task force stated that the Government have a role to play in encouraging lending,
“through the disclosure of data that sits within public bodies.”
Can the Minister outline what the Government have done in the intervening three years to play their role? For example, did they encourage RBS and Lloyds Bank to lend particularly to SMEs? As has already been outlined, the first statutory instrument relates to the need to make credit information on SMEs more accessible. Can the Minister indicate what greater data sharing banks have done with non-bank providers? Are there examples of best practice that can be followed and will these be included in the implementation guide? The Explanatory Memorandum states that an implementation document will be produced; can the Minister set out a timeline for its introduction?
Turning explicitly to the finance platforms instrument, in section 10 of the Explanatory Memorandum the Government state:
“It has not been possible to monetise many of the benefits of this measure”.
Yet the impact assessment dedicates two pages to setting out the benefits for small businesses, saying that, applying these averages across the 25,500 successful businesses seeking loans from alternative providers via platforms suggest that this policy could increase the supply of credit to SMEs by approximately £1.4 billion. I ask the Minister very simply: which one is it? The Government can either provide monetised estimates or not; they cannot do both. I would be grateful for some clarification.
I would like to make a final point specially relating to these measures concerning credit reference agencies—CRAs. During the debate in the other place, the Financial Secretary to the Treasury said:
“The Government have not yet announced which CRAs or finance platforms will be designated under the draft regulations. The British Business Bank is currently undertaking a due diligence process on CRAs and finance platforms that have expressed an interest in becoming designated, and it will advise the Treasury on designation later in the autumn. The due diligence process will ensure that any designated CRA or finance platform has the required systems and processes to ensure that the obligations and policies within the draft regulations can be carried out, while providing the necessary protections for SMEs. That help will ensure that these policies are successful and have a significant positive impact on the SME lending market”.—[Official Report, Commons, Third Delegated Legislation Committee, 5/11/15; col. 6.]
While I accept that the necessary due diligence has to be carried out, it is regrettable that these regulations were introduced before a decision on the CRAs had been made. There may be a perfectly reasonable explanation, and I would be grateful if the Minister could say something more on this. Does he not think that a more informed and constructive debate could have taken place if we had had ready access to information about who the credit agencies are going to be? Finally, can the Minister say when he expects a full list of the CRAs and finance platforms to be available and whether further regulations will be required?
It is also up to CRAs, as I understand it, to apply to be designated under the credit information regulations. Will the Minister explain to the Committee the Government’s thinking on why that will not be compulsory? As I have already said, we support any attempts by the Government to make the life of small businesses easier, and that is why we are not opposing these instruments. They do, however, deal very much with the start of a small business’s life and, in ending, I would like to ask the Minister about the other end of the spectrum, which is of course inextricably connected.
Does the Minister not agree that, while it is all well and good enabling the start-up of more SMEs, this means very little in the long term if they are not sustainable because so many are held back by late payments? The Government are not doing nearly enough to compel larger businesses to pay their smaller counterparts. Does the Minister not agree that we need to promote a culture of prompt payment and that the Prompt Payment Code just does not go far enough? The Government need to start legislating to create these obligations, rather than expecting things to change by sticking to the status quo.
The SME access to finance study found that two-fifths, or 43%, of businesses say that they are concerned or very concerned about cash flow over the next 12 months, but their biggest problem, experienced by a quarter of SMEs, is late and failed payments from customers. Seventy per cent of small businesses do not grow—they remain small businesses—so, for the sake of their sustainability, it is vital that we get this right.
These are issues which we will be addressing in the Enterprise Bill. However, I would appreciate it if the Minister would respond to the points that I have made —if not now then in writing after the Committee.
Lord Ashton of Hyde
My Lords, I thank the noble Lord for his support for these regulations and I shall try to answer the questions that he asked. If I find that I cannot answer any of them in great detail, I shall be very happy to write to him.
I think that these draft regulations will generate a step change in the market for SME finance in terms of competition that could improve not only the amount of finance available to SMEs but also the cost and quality of services that small firms are offered. As I said in my opening remarks, a large body of evidence shows that there are currently market failures in the SME lending market, and these draft regulations will help to remove some of the barriers to entry identified by this evidence.
The noble Lord suggested that we should explore greater credit data sharing, and asked what the Government have done about greater data sharing for banks and non-bank providers. In fact, the regulations do just that: they apply to the UK’s major banks, which will be required to share data through the CRAs. The BBA and the major banks have been collaborative and supportive in ensuring that these regulations are effective in increasing the amount of data on SMEs that is shared on with finance providers. A footnote in the credit information Explanatory Memorandum or the finance platform Explanatory Memorandum gives the example of the sharing of data on VAT returns. That is another example of the Treasury—HMRC, in fact—consulting on credit and publicly held data.
The noble Lord asked what the Government have been doing to help SME lending with RBS and Lloyds, in which the taxpayer has a large share, albeit diminishing. Although RBS and Lloyds are mainly publicly owned, it was always a feature of that arrangement that operational decisions are not made by Ministers—that was never the Government’s approach. The best way of ensuring that the banking sector, including RBS and Lloyds, is in a position to lend to SMEs is to ensure that the overall economic situation is suitable for that, and that there are good lending conditions. Policies such as funding for lending were also designed to help banks in that regard. We established the British Business Bank to support the development of diverse finance markets for smaller businesses, bringing together the management of new and existing schemes into a single commercially minded institution. That bank will manage up to £2.65 billion of existing schemes and deploy a further £1.25 billion on new programmes.
The noble Lord asked why these regulations are being made before the CRA implementation guide is published. The banks and the CRAs, with input from the Government, have put together a technical specification guidance document that is aiding the IT development programmes being undertaken, and which will ensure that banks and CRAs can comply with their obligations. The document is therefore being used effectively and will be published in due course. However, a publication date has yet to be confirmed.
We said in the impact assessment that the benefits cannot be monetised. In it, we tried to put the costs to business and banks and took a conservative position, saying that although we expect the regulations to result in an increase in lending, we would not monetise and take notice of them. So, there may well be a benefit, but we do not take credit for that in the impact assessment. We are trying to give a worst case scenario but we obviously expect there to be a benefit; otherwise, we would not do this. It was simply a question of being sensible and not monetising something that is not definite.
The noble Lord asked why the CRA designation is not compulsory, as it is for the banks. In many ways, the situation with CRAs is the other way round. It is for the benefit of a CRA to be designated and to have available all this data. The issue for the Treasury in designating a CRA is to make sure that it is capable of dealing with and protecting the data. It is therefore important that CRAs are able to show that they can deal with data in line with the data regulations. We want to set the framework by these regulations so that, when the designation due diligence process takes place, we can get the system up and running as soon as possible. This is a framework which will allow the position to take off as soon as the designations are made.