Small and Medium-sized Businesses: Access to Finance

Lord Popat Excerpts

Thursday 30th January 2014 Lords Chamber

[Lord Popat (Con)]

My Lords, I thank all those who have contributed, particularly the noble Lord, Lord Berkeley, who initiated this important and timely debate. I say that it is timely because a lot is happening, although there is a lot more to do. In my response I shall outline the measures that the Government are taking to improve access for our small and medium-sized businesses through schemes such as Funding for Lending, the creation of the British Business Bank, and by increasing competition in the business finance market.

The UK economy is recovering from the biggest financial crisis in generations. Alongside the Government’s strategy for deficit reduction, we have committed to ensuring that businesses can obtain the finance they need for investment and growth. The Bank of England’s most recent Trends in Lending and credit reports show that confidence is beginning to return, helped by interventions such as the Funding for Lending scheme and the British Business Bank. However, we recognise that challenges remain for smaller businesses.

Let me start with Funding for Lending. In April last year, we extended the Funding for Lending scheme to bring non-bank credit providers into scope. We also increased the Funding for Lending allowance that banks earned by lending to SMEs. In November, additional changes and incentives were announced to focus the scheme still further on encouraging lending to SMEs, the sector of the economy where it is now most needed. The evidence to date is that Funding for Lending has kept the overall cost of credit to SMEs down, which has helped in a tough trading environment. However, with the recent changes there is scope for it to do even more to encourage SME lending.

A number of noble Lords, including the noble Lord, Lord Berkeley, mentioned the British Business Bank. Substantial progress has been made in setting up the bank, which will be fully operational in the autumn of this year pending state aid approval. We will need European approval to get the state aid approval through. The chair, the senior independent director and the chief executive officer are in place. Collectively, they have strong financial sector backgrounds and small business lending experience—from the private and public sectors, but most importantly from the banking and regulatory sector—so we will have a good team to run our new British Business Bank. The British Business Bank will support economic growth by bringing together public and private sector funds to create more effective and efficient finance markets for our small and medium-sized businesses. It will do this by bringing together the management of existing government loan guarantee and investment schemes, and it will have the flexibility to develop new initiatives to form a comprehensive package of support for UK businesses. I will outline this in more detail.

Existing British Business Bank schemes are already delivering. They supported total lending and investment of £650 million in 2013, an increase of 70% compared with 2012. As of the end of 2013, over 25,000 smaller businesses were benefiting from British Business Bank support. The Government are determined to build on this level of support. We have developed a new wholesale loan guarantee programme that will make small business lending more capital-efficient for banks, thus incentivising them to increase lending to businesses. Through the British Business Bank, a £300 million investment programme is designed to increase the supply and diversity of finance available to SMEs through non-bank lending channels. It operates on a commercial basis, with the Government investing on equal terms to the private sector. This includes challenger banks and peer-to-peer lenders. Overall, as my noble friend Lord Storey mentioned, the British Business Bank’s resources will help to unlock up to £10 billion of additional financing for smaller businesses over the next five years.

The third point is on competition, which was mentioned by the noble Lords, Lord Berkeley and Lord Stevenson. Alongside the British Business Bank, the Government are also taking steps to increase competition and choice in traditional banking and raise awareness of the support available. There has been an acknowledged overreliance on our four biggest banks, which between them account for 85% of business current accounts. However, action on a number of fronts is being taken to change this. First, two new banks, Williams & Glyn Bank and the Trustee Savings Bank, are being spun out from the Royal Bank of Scotland and Lloyds Bank and will establish a significant presence in the banking market. Other challenger banks such as Metro Bank, Shawbrook, Aldermore and Cambridge & Counties are also growing in scale and significance.

Secondly, significant changes have been made by the financial regulators to reduce the entry barriers for new banks. New entrants now face lower capital liquidity requirements and approval processes have been streamlined. These changes are already making an impact; there are currently more than 20 applications for banking licences being considered by the financial regulators so, given time, we will have real competition and a real regional presence as well. Apart from the five we already have in place with Williams & Glyn and the TSB coming forward, those 20 new applications will, I hope, mean that we will have a substantial number of new banks in the market and that competition will close some of the problems we currently face. Thirdly, the Office of Fair Trading is currently undertaking a market study of SME banking. We await the findings with great interest and will consider them carefully.

Other work to increase competition includes the introduction last September of a seven-day switching service, which makes it far easier for consumers and small businesses to switch their current accounts. In December 2013, more than 83,000 customers switched their current accounts, an increase of 54% on the equivalent figure in December 2012.

A couple of noble Lords mentioned awareness. The banks are playing their part. Last week, the major banks launched a campaign aimed at restoring confidence among small businesses that finance is available. In other words, they are inviting SMEs to apply with a view to lending money to them. A core element of the campaign is raising awareness of the appeals process. If an SME has been rejected by the bank or is unhappy with the conditions it is offered, it now has a right to appeal. To date, more than 8,000 appeals have been submitted, of which more than 37% have been overturned, facilitating an additional £40 million of lending. The scheme provides a vital reassurance that banks will consider all lending applications thoroughly, but it needs greater visibility to encourage more businesses to seek funding. The banks’ campaign to address this is welcome.

The Government also recognise that more needs to be done to raise awareness of their own schemes. The noble Lord, Lord Bilimoria, mentioned a number of government schemes that are in place. We have launched the “Business is Great” campaign, a marketing campaign using digital and traditional media channels to raise awareness among SMEs of the support that is available.

The noble Lord, Lord Storey, mentioned the difficulty that SMEs have in getting export finance. I was privileged to set the remit of and be in the ad hoc committee chaired by my noble friend Lord Cope, which the noble Lord, Lord Storey, mentioned. The committee met a large number of SMEs and listened to the difficulties of raising money. I am pleased to say that the committee’s report has been published. It made recommendations to the Government, and the Government have taken action through UKTI and have come up with a number of schemes to help SMEs to learn more. One in five SMEs exports. If we achieve a figure of one in four, we will clear our huge deficit on external trade. I commend the contribution of that committee because it made a hell of a difference. Unfortunately, for my sins, I had to step down to join the Front Bench.

Credit conditions for SMEs are improving. The noble Viscount, Lord Hanworth, mentioned that there is not enough lending. SME gross lending was 39% higher, year on year, in November 2013, and net lending has been positive in three out of the past nine months, but I accept that although gross lending has gone up, net lending has gone down. Lately, it has picked up. In nine out of those 12 months, net lending dropped, except in the past two or three months when it started to pick up. This is partly due to many schemes that are now available for SMEs to borrow money, not necessarily from their traditional banks.

A number of issues were raised. I will try to be as brief as possible in view of the time, and I will be very happy to write to noble Lords. The noble Lord, Lord Berkeley, mentioned the lack of finance. We have come up with a number of schemes. He mentioned existing businesses that want to grow. I agree with him. The restaurant he mentioned was a classic example of a successful SME business that goes to the bank to borrow money with a view to expanding. From what I have heard, and from having been an SME for 30 years, I know that it is very difficult to raise money, and quite often the banks want to renegotiate existing loans, adding covenants and higher margins. It is difficult for existing successful businessmen to raise money because the banks want to renegotiate and renege on the original contract. I accept that that is an issue that a large number of SMEs face. We have heard stories recently about the banks pulling the plug at the last minute.

The noble Lord, Lord Sheikh, said that SMEs are key to our recovery. Of course they are. They are the engine of the economy. There are 4.6 million SMEs. The good news is that since 2010 about 460,000 SME have been created. The noble Lord mentioned late payments; I will certainly cover that in my letter.

The noble Lord, Lord Bilimoria, mentioned a number of things, some of which I have addressed in my speech. On the relationship between customers and banks, the noble Lord is right. It is important that banks have a good relationship with their customers. Quite often, from what is said, the banks appoint lawyers from their panel of solicitors, who tend to charge a lot more than the market rate. The banks are effectively checking the work done by the customer. There is the same problem with valuation. The banks should really give their customers a choice, whereby those customers can negotiate legal and valuation fees. The noble Lord has asked me to see whether I can have a meeting with the banks’ chief executives; I will endeavour to do so.

The noble Lord, Lord Leigh, whom I commend on his experience in this field, mentioned regulation and the equity gap. On regulation, the Government’s policy is, “One in, two out”. In the past three or four years, we have managed to get rid of a large number of regulations, saving SMEs £850 million.

My time is up. I would be delighted to write to noble Lords who have raised points which I have missed.

House adjourned at 6.26 pm.