Prompt Payment Code

Lord Mendelsohn Excerpts

Thursday 10th May 2018 Lords Chamber

[Lord Mendelsohn (Lab)]

My Lords, I thank the noble Baroness, Lady Burt, for her excellent speech and for securing this debate.

There are two questions at the heart of this issue: do the signatories to the Prompt Payment Code perform better on payment practices than non-signatories; and has the overall picture of late payments been shifted in a positive direction since the establishment of the code?

On the first question, it is hard to make an assessment. The code’s website provides no aggregate data and I can find no detailed reported data. On the website, companies are asked to supply data on how to get paid, and most do; their procurement policy, and some do; and their reported payment information, and I found none that did. Some have put in details under “payment terms comments” which are quite unbelievable. From the random—and undoubtedly totally unrepresentative—sample I looked at, 20% of the companies had written in payment terms of 90 days, which is against the code.

I welcome the new duty to report on payment practices but will the Minister give some indication of how both datasets will relate to each other? There is no evidence available to test the direct impact of the code on the companies that are signatories but public confidence is not evident. The last IoD survey from February this year showed that, as a means of addressing late payments, businesses felt that the Prompt Payment Code did not feature and that kitemarks for best practice as sector-specific codes carried the confidence of only 3% each. No doubt this relates to the performance of some individual signatories, and the example of Carillion is perhaps instructive.

Let me make a sobering point in an attempt to draw a conclusion on performance. In a survey on late payment by MarketInvoice, five of the worst offenders were shown to pay an average of 83% of their invoices late. Three of those—John Lewis, Marks & Spencer and Kingfisher—were and remain signatories of the code.

On the question of whether the bigger picture has improved, the evidence, unfortunately, suggests the opposite. The cost of late payments to SMEs is £40 billion to £50 billion and getting higher. However, I draw your Lordships’ attention to an excellent new index developed by Lloyds Bank called the working capital index. This was created to draw attention to the area of financial operational efficiency in the UK and is soon to publish its third report. It is an account of a variety of missed opportunities but reveals some important points about the problems of payment practices and late payments. It reveals that there is a £680 billion opportunity in the UK to release working capital and that, as a result of payment problems, working capital makes up 25% of net company debt.

The latest data shows that around a third of all invoices are reported as being paid later than agreed terms, and four times as many small firms reported longer payment times from customers compared to larger firms as part of the survey. Why has the code not had the intended impact? Put simply, there is no consequence for non-compliance. Transparency is low, enforcement is piecemeal, accountability is absent and trust in the system has eroded. Checks, investigations, improvements and the role and functioning of the code’s compliance board need to be addressed. Naming and shaming has not worked when you look at any company that has faced such a problem; the example of Debenhams and its terrible performance is instructive.

Companies need to take this seriously. When I first addressed the House on this matter in 2015, when the legislation establishing the Small Business Commissioner was passed, we contacted a number of companies to try to find out how they used the Prompt Payment Code. Not once were we directed to the finance department. Not once when we contacted the finance department did they know that they were members of the code. In every example of the companies we used—also probably unrepresentative—we were directed to either the PR department, the corporate affairs department or the social responsibility department. It was not tied to finance. As a voluntary code, it needs to be tied to the part of the business that pays the bills.

I want to make a few suggestions on how to improve this. First, the code needs to be enhanced operationally. Naming and shaming and expulsion from the code—as the Federation of Small Businesses suggested—should be an absolute minimum for the worst offenders, while we should always find ways to commend the good performers. Secondly, by far the most useful thing would be to link the Government’s initiatives more strategically. The Government should place the code in the office of the excellent Small Business Commissioner, Paul Uppal. He and his brilliant team are doing very well in establishing the right approach and are well placed to make best use of and help with not just the PPC but the payment reporting requirements. I recommend strongly that the Government look into this.

Finally, some strength could be given to the areas where there seems to be a consensus and the Government’s determination to pursue good practice is backed up by a determination to bear down on bad practice. I plan to introduce a Bill on these measures soon and I hope that the Minister can indicate the Government’s willingness to support: in relation to payment practices, outlawing retrospective drops and requiring companies to publicly provide details of charges made to suppliers for storage, marketing or any other deduction or contract term that helps them to change or vary the price of supplied goods; outlawing payment dates of 120 days; dealing with the increasing problem of companies avoiding being taken to account for late payments by reclassifying them as payment disputes, by ensuring that a 30-day limit for resolving payment disputes becomes a part of all relevant sector codes and public sector contracts; and, finally, outlawing the idea that suppliers should be forced to accept giving a company a discount on the agreed price for paying on time.

The current measures employed by the Government are insufficient because there is too strong an economic incentive for cultural change to work. All evidence and economic analysis indicates this. Practices have to change the culture, not the culture change the practices. At the heart of this problem are the asymmetries of power, information, scale and capacity, which work too strongly in favour of late payment, particularly against small businesses. Without a degree of enforcement or compulsion, we can never overcome the legitimate fear for a small business that challenging a larger company will have adverse consequences. If reporting remains a problem, it is unlikely that the Prompt Payment Code will ever be effective.