Enterprise and Regulatory Reform Bill

Lord Mitchell Excerpts

Wednesday 12th December 2012 Grand Committee

Moved by

[Lord Mitchell]

24BC: Schedule 4, page 89, line 31, at end insert—
“11A (1) The CMA shall have a unit dedicated to matters affecting relating to competition issues amongst affecting small and medium-sized enterprises.
(2) Such a unit will pay particular focus to the availability of finance to small and medium-sized enterprises.”

[Lord Mitchell]

My Lords, despite the prompting of my noble friend Lady Hayter, this will not be a quake-making day. We are much more concerned with doing some serious probing and finding out where the Government stand on certain issues.

One thing that came out of the payday loans amendments, to which my noble friend Lady Hayter referred, was that that issue was not highlighted and made clear in that Bill. The subject that I should like to deal with today is SMEs and how they are addressed in this Bill. We are concerned to make sure that SMEs get prominence and that they are not lost in the fine print of the legislation.

I always have a problem with the expression “SME”. I do not know what it means. A small company can be a one-man band. Then there are medium-sized companies and large companies. Sometimes I feel that medium-sized companies have more in common with large companies than they do with small companies. One definition of a small company is that it has up to 50 employees, a turnover of up to £6.5 million and a balance sheet of up to £3.25 million. For medium-sized companies, the figures are between 50 and 250 employees, a turnover of up to £26 million and a balance sheet of up to £13 million. There are several companies with a turnover well in excess of £26 million but I have never considered them as being large companies; in fact, I have always thought of them as being at the lower end of medium-sized companies. Therefore, I am afraid that some of these definitions are probably very out of date.

However, what is not out of date, as I am sure everyone will agree, is that this business sector—let us call it the SMEs—is very keen to lead the economic recovery of our country. All sorts of reports, including one carried out by GE Capital in conjunction with the Warwick Business School, have come to the conclusion that growth, employment and exports are going to come from this sector and that this is going to be the propellant for any recovery. Indeed, the noble Lord, Lord Heseltine, in his magnificent tome, No Stone Unturned, which I thought was very good and very refreshing, said that if one in 10 of the firms that are sole traders hired their first employee or an extra employee, that would increase employment by 480,000. Therefore, recovery comes from even a small business of three people taking on one extra person.

The first part of the amendment suggests that there is a need to dedicate a unit to matters relating to competition affecting SMEs. Small firms are often faced with problems that big firms also face but, of course, small firms do not have the resources, facilities or expertise to deal with them, and recruiting or hiring a legal team is prohibitively expensive. They do not have the time to read the regulatory judgments; it is just a fact of life. Therefore, we feel that such a unit could be one way of helping small firms to grow. The first part of the amendment would provide SMEs with a specific and direct point of contact within the CMA.

The second part of the amendment proposes that the unit in the CMA will focus particularly on the availability of finance for SMEs. Noble Lords will probably have heard me speak on this issue on several occasions but it is something that concerns me all the time. At the moment, many government financing plans are being announced but most of them are not working and, frankly, I do not understand most of them myself. I wonder how people in small businesses who are not involved with them on a day-to-day basis get to grips with some of these programmes.

My constant mantra is that businesses will not grow unless there is a strategy for growth. What business needs is confidence, certainty and clarity. Not surprisingly, 85% of SMEs bank with the big four high-street banks, but this increases the cost of lending and decreases its availability. That hampers growth because SMEs collectively produce more than half of Britain’s GDP. SMEs are too dependent on the banks. I hear so many stories of the proprietors of an SME or its directors going in to see a bank when they need to finance a good project. The bank manager says “no”, and they walk out as if that is the end of the matter. To many it is the end of the matter, but it should not be. There are many other sources of finance out there, and it would be great to me if the banks had less dominance and influence.

I also feel in my heart of hearts that the high street banking sector is not particularly interested in SMEs. They have had their heads turned and, no matter what happens in the other directions that they have gone into, such as investment banking, I cannot see them ever returning to supporting SMEs as they used to. The Federation of Small Businesses has persistently pointed to this as preventing growth in SMEs, which collectively produce more than half of Britain’s GDP. We think that there should be research on this by the CMA on an ongoing basis, which will be dealt with by my noble friend Lady Hayter in a later group.

A couple of weeks ago, a few Members from the Houses of Parliament went to Germany to see the Sparkasse in Berlin. We have all heard about these organisations, but they really were very impressive. They are small savings banks that are responsible for 40% of German lending, just to the SMEs sector. Because they, by culture, have a long-term investment in their clients, they are able to defer and assess credit risks to a much greater extent than we do with our banking organisations, which seem to assess any lending possibility on a computer model that comes out with a yes or no.

There is a real opportunity for new types of financing banks in this country that would help growth. There is a new business bank called Aldermore. Yesterday, much to the Government’s credit, they announced a £100 million facility for peer-to-peer lending. That is a very interesting new development whereby individuals can lend to businesses. It works on a bidding basis, almost like the reverse of eBay. It is a very exciting area, involving companies such as Funding Circle, Zopa, Boost Capital and Credit Asset Management, which I doubt that any of your Lordships have heard of—and to be frank, neither had I. However, it is a fast-growing area of new funding for small businesses. To summarise this part of the amendment, a unit within the CMA that looks to address this problem on an ongoing basis would be of great benefit to initiating and sustaining economic recovery.

Amendment 25G deals with super-complainants. I am going to say barely anything on it, except that we want groups to be super-complainants, if they want to be, and represent SMEs and want to apply for the status. That leads into Amendment 26E, which would mean that “consumers” includes small businesses with up to 50 employees. That change to the definition of consumer would mean that organisations representing SMEs can apply for super-complainant status. Currently, the OFT has to publish a response to any complaint from a super-complainant in 90 days or refer it to the Competition Commission for further investigation. The CMA will now have those responsibilities. The competition issues that SMEs face, such as those previously concerning the concentrated banking sector and any other problems, could then be quickly highlighted. There is often very little difference between a consumer and a small business. Mr Mike Cherry, the chairman of national policy at the Federation of Small Businesses said, in front of the House of Commons Committee,

“our key message would be that, in very many cases, small businesses are, in fact, no different from consumers.”––[Official Report, Commons, Enterprise and Regulatory Reform Public Bill Committee, 19/6/2012; Q49.]

The Federation of Small Businesses has also said that, while it is not in a position to become super-complainants at this stage, it would welcome the possibility that organisations representing small businesses would be able to apply in future. This amendment therefore seeks to recognise that by changing the definition of consumer to include SMEs, thus opening up the possibility that at some point in future it will be able to register as super-complainants. I beg to move.

[Viscount Younger of Leckie]

My Lords, I am grateful for these amendments, initiated by the noble Lord, Lord Mitchell, which highlight the importance of competitive markets to small and medium-sized enterprises. I welcome the noble Lord to the Dispatch Box and I hope that I can do a little better, in his eyes, in addressing his issues and concerns than perhaps I did before.

I agree that Britain’s small businesses are absolutely vital in leading the economic recovery, and the Government take its role in this area very seriously. This Bill contains a number of measures that will deliver real benefits to SMEs by strengthening and streamlining the competition regime; for example, it will make entry into markets easier, deter anti-competitive practices and speed up competition cases. While I support the overarching intention behind Amendment 24BC—to support SMEs—I do not believe that a dedicated SME unit within the CMA is necessary.

First, the competition authorities already undertake a range of work that directly benefits SMEs. For example, following an OFT market study into the retail pharmacy sector, a number of administrative restrictions on entry were removed, which enabled more competitors, including SMEs, to enter the market. Another example is in banking, which I know the noble Lord, Lord Mitchell, is particularly focused on. OFT interventions in markets such as personal current accounts, small and medium-sized enterprise banking and cash ISAs have found long-standing problems, such as high concentration, low transparency of fees, low levels of switching and high barriers to entry, which hamper effective competition.

The OFT has launched a programme of work designed to achieve a more competitive and customer-focused retail banking sector, and this will consider both personal and SME banking. The OFT also works actively with bodies representing SMEs, such as the Federation of Small Businesses and the British Chambers of Commerce, to identify competition problems faced by SMEs. The Government expect this engagement to continue when the CMA is established.

I urge caution against restricting the CMA’s ability to allocate its resource independently, according to the priorities of the day. There is also a risk that a dedicated SME unit would be inundated with complaints about competitors, rather than competition issues. This would take vital resources away from competition enforcement itself.

The new clause inserted by Amendment 25G would have the effect of bringing small businesses within the definition of “consumer” in Part 4 of the Enterprise Act, which deals with market investigations. This means that super-complaints could also be brought to the CMA about potential competition issues affecting small businesses.

We need to take care when thinking about small businesses within competitive markets, so that the line between consumers and competitors is very clear. The Government consulted on whether to extend the super-complaint system to SME bodies, as the noble Lord’s amendment proposes. The consultation asked for evidence of the type of issues that may be brought to the CMA as a potential super-complaint by small business organisations, but we did not receive any. Furthermore, the majority of responses to the consultation on this question actually opposed the proposal. Respondents felt strongly that SMEs should not be given special status, which could allow them to challenge business practices that might be pro-competition and efficiency-enhancing.

Amendment 26E would have the effect of bringing small businesses within the definition of “consumers” for the purpose of Part 4 of the Bill, which deals with competition reform. This would have the effect of enabling the CMA to launch a market study into a market which seemed not to be working well for small businesses.

I agree with the sentiment behind this amendment, that the CMA should be able to look at markets that are not working well either for consumers or small businesses. I do not believe that it is necessary because the existing legislation has not to date constrained the OFT from considering business-to-business markets. If there are competition issues in these markets, they will usually ultimately affect end consumers as well.

For example, the OFT’s current review of retail banking will look at SME banking as well as personal consumer banking. The OFT’s aggregates market study, which has now been considered in more detail by the Competition Commission for a market investigation, considered how easy it was for small ready-mixed concrete businesses to source cement and aggregates competitively. I hope that noble Lords will see that the competition authorities already carefully consider competition issues that affect SMEs in the existing regime and that legislating to assign resources to a particular area may prevent the CMA from focusing where enforcement is most needed. I would, therefore, ask the noble Lord to withdraw his amendment.

[Lord Mitchell]

I thank the Minister for his comprehensive reply. There is a need for a dedicated unit; small and medium-sized enterprises need a particular focus point to which they can refer. Our amendments are a “may”, not a “must”. The Minister gave an example of banking and the OFT. That may be, but here we are today, with high street banks still dominating and other types of banking organisations only just coming through.

In summary, we are trying to set up a mechanism that will enable the CMA as it progresses to take actions in favour of the SME sector—to enable it specifically in that area. I ask the Minister to think about what I have said. We will think about what we have said, and with that, I beg leave to withdraw the amendment.

Amendment 24BC withdrawn.