Lord Sharkey
Main Page: Lord Sharkey (Liberal Democrat - Life peer)
Lord Sharkey
To ask His Majesty’s Government what steps they are taking to improve access to banking and finance for small businesses.
Lord Sharkey (LD)
My Lords, according to the Commons Library, in 2024 there were 5.5 million small and medium-sized businesses in the UK, which was 97% of the total business population. These companies accounted for 60% of all UK jobs and 48% of all business turnover. These small businesses are the engines of job creation. Large businesses are net destroyers of jobs. These small businesses are engines of creativity. Large businesses often are less creative and frequently try to make up for this by buying smaller companies. The health of our economy and the prospects for growth are directly affected by the health of our SMEs.
The Government are well aware of this, as were previous Administrations. Over the last 20 years, there have been many studies of the SME universe, and we are not short on facts. In March, the Government launched a new consultation on small business access to finance. The call for evidence notes that, in the fourth quarter of 2023, only 3% of SMEs applied for new or renewed funding and only 1.5% applied for bank loans. This compares with 20% of SMEs in the euro area for a similar period. It was noted that, even if the approval rates doubled to over 90%—similar to those obtained before the great financial crash—the overall proportion of SMEs successfully applying for finances would only move from 1% to 2%.
The consultation closes one week from today. I hope that the Minister will consider the suggestions and observations that are made in our debate today alongside the responses to the consultation. This debate is about both banking and financing for SMEs. To take banking first, there is a growing concern about the accelerating closure of bank branches and uncertainty about whether replacement banking hubs will be able or willing to provide the services that an SME might need. The former APPG on the Future of Financial Services, which I co-chaired, conducted a short inquiry into the issues involved and will publish its final report in a week or so. I can give some sense of its likely key findings and recommendations.
The banking hub model is proving generally successful but needs accelerating. Local communities should be able specifically to request a banking hub before the formal procedures start. We also recommended that the Post Office, a critical partner, should be given the power to pro-actively recommend new hubs to LINK. As an aside, I was very pleased to hear yesterday’s announcement of the Post Office’s continued provision of basic banking services. The FCA has regulatory power in terms of access to cash, but not in terms of access to banking services. This should be remedied.
Regulation in general needs some appraisal. We strongly believe that the current FSCS limit of £85,000, dating back to 2010, is much too low. This could be artificially pushing SMEs into holding deposits with larger incumbent banks despite challenger banks offering higher interest rates and better service. I am glad to see that the PRA is consulting on raising this to £110,000 with effect from December 2025. We also believe that the thresholds that trigger increased capital requirements for lenders are set too low and are way below equivalent EU and US thresholds. We would like to see a significant increase in these thresholds as soon as possible.
There is also the issue of debanking. A significant number of businesses are debanked every year. Leaving aside the Farage farrago, this debanking merits more serious consideration. Does the Minister believe that, in general, banks are behaving rationally, reasonably and proportionately when it comes to debanking? Can he say what evidence there is to suggest that debanking is being properly justified and properly communicated?
There is a more general concern about financial stability. As traditional bank lending to SMEs is replaced by other funding sources, as it is being, what does this say about the regulator’s ability to maintain stability in the system? The former Economic Secretary to the Treasury, Bim Afolami, recently gave evidence on this point to your Lordships’ Financial Services Regulation Committee. He suggested that the growth in the proportion of credit supply to SMEs by non-bank lenders was problematic from the perspective of systemic risk and financial stability, due to these sources receiving less regulatory scrutiny in comparison to the banks. He also highlighted that this was hotter money that could flow out of the UK more quickly by comparison. Does the Minister share Mr Afolami’s concerns? What conversations have taken place between His Majesty’s Treasury and the PRA about the implications for systemic stability, as non-bank lending continues to replace more of bank lending?
Lending to SMEs overall has now fallen back to 2012 levels, according to Allica, a challenger bank. This means, according to Allica, that lending is up to £90 billion below where historic trend lines suggest that it should be. Responsible Finance, the industry body for community lenders, also notes that, for smaller businesses looking for £150,000 or less, this equates to around £11 billion of unmet financing needs each year. Both Responsible Finance member CDFIs and Allica Bank are deeply involved in SME financing. Allica is, as I mentioned, a challenger bank specialised in SME lending. Responsible Finance speaks for our CDFIs—community development finance initiatives.
My noble friend Lady Kramer will expand on the role of CDFIs in a moment, but I want to register some points made by Responsible Finance. It quotes the Government’s own estimate that around 850,000 small businesses see access to finance as a major obstacle to growth. It notes that the financing gap is particularly acute in areas of high deprivation and that businesses with ethnic minority leaders face very high barriers to finance. These people face a decline rate two and a half times higher than the average for all SMEs. Does the Minister agree that this needs urgent investigation?
In general, acceptance rates by lenders are too low. Only 47% of SMEs applying for bank finance got the funding they wanted, and the chief reason for refusal was given as current business performance, which at least has the merit of sounding rational. But 21% of applicants said that no reason was given for refusal. Alarmingly, of the businesses whose proposals were declined, few were offered the opportunity to have their application referred to an online platform. This clearly suggests that the signposting scheme is not working. This is surely something that the Government could address quickly. Can the Minister tell us what steps he might take to make signposting the helpful option it was created to be?
It is perhaps not surprising that, when it comes to service, many of our large and established banks rate well behind challenger banks. CDFIs are generally seen as quick, responsive and efficient. Service access, generally online, is seen as slick and efficient, especially if you are a start-up or a micro small business. CDFIs generate some feedback concerns that the offered product range can often be limited, particularly for larger and more-established businesses. I note that, when it comes to CDFIs, the Government deserve congratulations on the new funding vehicle launched by the British Business Bank. This new Community ENABLE funding programme will provide a much-needed £150 million in initial funding to expand CDFI lending and, handled properly, should also be an attractive vehicle for institutional investors.
I conclude by rehearsing some of the barriers to SME lending and by noting some of the suggestions for improvement made to me, chiefly by challenger banks. The CEO of Allica Bank, Richard Davies, highlighted that lending for SME housebuilding carries an RWA treatment at 150% of loan value. He suggests that this could be reduced if a domestic bank’s lending to housebuilders is, for example, no more that 10% of its balance sheet. Given the Government’s very ambitious housing target, this surely should be seriously considered. I would argue that there is no serious prospect of building 300,000 homes a year using only the few remaining large-scale builders. Does the Minister agree with that?
Last year, the Treasury Select Committee’s report into SME finance identified several key factors limiting SMEs’ access to capital. Three seemed particularly important: thresholds created by capital requirements on SME lending determined using RWA; disproportionate use of personal guarantees; and a lack of awareness of the services provided by the British Business Bank. I would add the failure of the signposting system and the urgent need to turbocharge the growth in the CDFI ecosystem.
I realise that the Minister might not have time to address all these barriers and the other questions that I have raised, so I would be very happy if he could answer as time permits and write to us about the rest.