Lord Altrincham
Main Page: Lord Altrincham (Conservative - Excepted Hereditary)
Lord Altrincham (Con)
My Lords, I thank the noble Lord, Lord Sharkey, for bringing forward this debate and for his continued focus on, and interest in, banking services in this country. I also thank the Minister for hosting this debate and for his dedication in doing so in the last slot in Grand Committee just before the holiday weekend. I welcome the opportunity to contribute to this debate today, because this is an important and pressing issue relating directly to the wider challenge of growing the economy.
Small businesses are the backbone of the British economy. The DBT reports that 61% of people employed in the private sector work for small businesses. The Federation of Small Businesses reports that small businesses contributed a turnover of £1.8 trillion at the start of 2024. These organisations matter deeply.
Given this, we are proud of the steps taken by the previous Government to support small businesses, such as the formation in 2014 of the British Business Bank—which continues to be supported by the CBI and the BCC—as well as small business rates relief, the start-up loans scheme, and of course the Coronavirus Business Interruption Loan Scheme and Bounce Back Loan Scheme, which protected small businesses during Covid. Small businesses were also affected by the debanking issue, which has been partly addressed by the FCA, as was raised by the noble Lord, Lord Sharkey. Maybe we could also ask the Minister for his observations and the progress on that.
However, despite these welcome steps, it is evident that small businesses are operating in increasingly difficult economic conditions. Noble Lords across the Committee are well aware of the challenge inflicted on small businesses by the Government’s decision to increase national insurance, alongside minimum wage changes. The Institute of Directors said that this will cause small businesses “precious little” other than pain, and Hospitality UK has said that the policy will be a “brake on growth”. Can the Minister assure us that this Government will keep this area and impact carefully under review?
As we have heard in the discussion so far, small businesses struggle to access banking and financial services. This is an issue that noble Lords have touched on before. I note the welcome debate initiated by the right reverend Prelate the Bishop of Newcastle on bank closures to rural communities—issues picked up again by the right reverend Prelate the Bishop of St Albans today. Points were also very well made about the importance of banking hubs.
Several factors led to the present state. Small businesses are a perennial problem for banks, partly because many of these businesses are very small and may fail after a few years. The sector has never been profitable for banks. Small businesses tend to start by using retail accounts, before moving to business accounts, and lending would normally be in the form of a one-year revolving credit facility and, less commonly, five-year loans. However, both have very high defaults, hence the reluctance by banks to lend.
Banks are very familiar with this problem. Noble Lords may have seen the letter sent by the bank bosses to the Chancellor over the weekend that highlights some of the challenges the banking sector faces in supporting small businesses, among other banking services. Does the Minister recognise the position outlined by the executives in that letter? In practical terms, bank capital regulations mean that traditional lenders are deterred from lending to small businesses. The higher collateral threshold mean that banks prefer low-risk property-backed loans. These criteria do not match up with the needs of modern, service-orientated small businesses with limited tangible assets.
The other effect of the regulatory framework is the burden that it places on banks in compliance costs. This again deters banks from operating in low-margin geographies where small, local branches may not justify the capital cost. As we know, 63% of branches that were open at the start of 2015 have since shut. The numbers are headed below 1,000 and many people will have very limited access to any kind of branch. It is important to mention that access to branches is not just access to credit but access to advice. It is someone to talk to and understand what financial services can provide to your business.
Allica Bank, as mentioned by the noble Lord, Lord Sharkey, estimated this week that there remains a substantial SME credit gap of up to £65 billion. Clearly, it is just an estimate from one source, but this kind of credit opportunity is enormous in terms of the importance to SMEs in this country and an opportunity in the loan market for small businesses. Technology may offer a partial solution. There has been a rise in non-traditional lending, making up some of this shortfall. However, these non-traditional lenders come with their own risks, meaning that they are not always appropriate sources of capital. These lenders are often riskier, with lower due diligence standards, and several challenger banks are not yet profitable.
Given this credit problem and the importance of small businesses for employment and growth, this situation needs addressing. The Government announced a financial services growth and competitiveness strategy at the end of last year, although it has not yet produced any report or strategy. Can the Minister update the Committee on when a strategy will be forthcoming? The swift publication of the Government’s strategy would be a welcome signal to this community that its needs are being considered, with possibly regulatory adjustments to maximise their capacity to grow their businesses and grow our economy.