Business Loans Appeals System

Lord Stunell Excerpts

Tuesday 17th June 2014 Westminster Hall

[Sir Andrew Stunell (Hazel Grove) (LD)]

It is a pleasure to serve under your chairmanship, Ms Dorries, although it is probably a pleasure that neither of us would have expected in an earlier existence. It is good to be here, and it is good that the Minister is also here. I hope that he gets his breath back and will be ready to listen.

This subject has come up at an appropriate time, because Professor Russel Griggs’s third annual report on the performance of the banks’ appeals system for businesses refused finance by them was published yesterday. It is also only three weeks since the British Chambers of Commerce commissioned its Business Banking Insight website, which provides bank customer feedback and gives a clear picture of the performance of some 74 banks, as set out and decided by some 5,000 businesses across the country. Plenty is going on, and I will certainly acknowledge the Government’s good work. However, I am driven to bring the matter back to the House, having first done so some 15 months ago, by the needs of small and medium-sized enterprises in Hazel Grove. The Government have done a lot, but there is more to do. I will set out why that is and some things that should be done.

The most obvious problem is the huge gap between what the banks tell the Government and Members of Parliament about what they are doing and about their performance on the one hand, and what they tell small and medium-sized enterprises when they knock on the door and say, “Please can we have some help” on the other. Every Member of Parliament—it is certainly true for me—is approached by small and medium-sized enterprises in their constituency who say that they have been treated badly by the banks and do not believe that they are in a friendly environment.

The figures for the number of small enterprises are astonishing. There are 4.8 million companies with fewer than 50 employees, employing 11 million people, so they form a significant part of the industrial and commercial ecology of this country. There are another 30,000 SMEs with between 50 and 250 employees that employ 3 million staff, so there are many enterprises out there.

I received a letter in January from HSBC, one of the principal banks, that stated:

“SME demand for finance is low…. In Q3 2013, 78% of SMEs were ‘happy non-seekers of finance’. These businesses have neither sought loan or overdraft facilities in the 12 months prior to interview, nor felt that anything had stopped them from applying for credit.”

That quote was in the context of HSBC saying that everything was fine, as banks often do. I took a ruler to that: 78% were happy, which means that 12% were not happy, and 12% of the total number of SMEs is 585,000 companies. According to the survey quoted by HSBC, therefore, 585,000 companies were discontented. If that was evenly distributed, it would be 900 enterprises per constituency across the whole country. I want to put that in the context of the briefing sent to me by the British Chambers of Commerce when it heard that I was speaking today. On accessing finance, the BCC said:

“In 2013, 60% of first-time applicants ended the process with no facility in 2013, compared to 51% of applicants in 2012”.

In other words, the number of first-time SME applicants getting banking facilities had dropped, with the refusal rate increasing from 51% in 2012 to 60% in 2013.

As a consequence of all this and of my previous discussions, I wrote to the big five banks at the beginning of this year, asking them, “How much has your bank loaned out to SMEs in the last three years? How much was repaid by SMEs to your bank? What proportion of all loan applications for SMEs that you received was approved, and what proportion was refused? Of those who were refused applications, how many appealed? How many of those appeals were successful?” I did that because I was less and less happy that the bank review process overseen by Professor Griggs was really giving us the kind of information that would be useful in deciding whether the system was working.

I should perhaps say that the system is internal to each bank, but it is closely supervised and monitored by Professor Griggs and his team. Each year, he produces a report, the third of which was produced yesterday, and I am happy to have had a conversation with Professor Griggs yesterday, in which we discussed some of the report’s findings. He has published how many appeals were made to banks and how many were successful. The figures are used quite widely, including by the Government, to illustrate that the system works. Just over 11 months ago, I received a letter from the then Financial Secretary to the Treasury, my right hon. Friend the Member for Tunbridge Wells (Greg Clark), in which he said:

“Results out recently showed that for the second year running, 40% of decisions to refuse lending were overturned on appeal. This shows that the process works.”

If 40% of appeals were overturned in another system, it would seem that something was wrong with the first round of decision making. I discussed that with Professor Griggs and his report comments on it quite extensively. It is worth noting that that figure has been reduced to 31.7% in the latest report, so the overturn rate is lower and the number of appellants is higher, which has to be good news. However, that does not provide a good indication of anything at all when one thinks about it.

The responses that I received from the banks were somewhat disappointing. I will deal only with the response from what I will call bank A. Bank A told me that in 2013 it received 265,000 loan applications, of which it granted 80%, resulting in loans of £2.7 billion. That sounds pretty impressive, but the 20% equates to 50,000 refused loan applications. Of the 50,000 refused, 2% decided to appeal, which is just over 1,000. Bank A gave me a precise figure of 1,063. It tells me that 11% of the appeals were overturned, meaning that 117 appellants had success.

In his report, Professor Griggs says that last year he paid particular attention to the people who did not appeal, but who were refused, to see whether any of them could or should have appealed, and if they had, whether they would have been successful. I must say that he did that in a thorough way. He sampled the different banks, and he reports that between 2% and 5% of the refusals where there was no appeal could have had a case for being reconsidered. He does not say that they would have been successful, but that they could have had an opportunity, had they appealed.

I do not know whether bank A has a 2% rate or a 5% rate, but a 2% rate would mean that 10,000 SMEs were refused, but did not appeal, and yet had a chance, Professor Russel Griggs believes, of having their decision overturned if they had appealed. If the rate was 5% in that particular bank’s case—we do not know which bank has which figure attached to it—then 25,000 applicants were potentially in that position. Quite a large number of companies are not being drawn into the appeals system, but should at least have considered an appeal, according to Professor Griggs’s study of their cases. The appeals system is therefore delivering fairly well, but as the figures from bank A show, appeals are not yet running at a level that can give us real confidence that that system is doing its job fully.

The British Chambers of Commerce refers to many businesses being discouraged from applying in the first place. I certainly have a case in point in my constituency—a company that came to me in the most recent quarter to say that it needed some short-term bridging finance from its bank. The company applied and was refused, but decided not to appeal simply because the appeal would have taken so long that the short-term bridging finance would have been irrelevant to its circumstances. The company made do with other arrangements. The BCC also made the point about there being no effective transparency or open competition between the banks on business by SMEs. The five banks that I wrote to cover 90% of all business accounts and lending in this country. There is a widespread call for the Government’s new business bank to be more active and, in particular, to be in direct contact with businesses, rather than using the banks as its proxy.

The Minister might say that all that can be explained away if the banks were in fact lending more to businesses, weeding out the bad guys—the defaulters and the no-hopers—and giving money to everyone who might possibly deserve it. In fact, however, lending by banks to small business has gone down in each year; in the two years since the Government’s funding for lending scheme was introduced—in which time the Government have provided £41.9 billion to the banks to lend to businesses—the amount of outstanding loans to businesses has gone down, not up, by £25.9 billion. In other words, the banks have fattened themselves up to the tune of £67.7 billion. SMEs around the country are not accessing the appeals system as much as they could—and, in Professor Griggs’s view, should, because it would benefit them.

Please will the Minister promote greater transparency of data? I should not have to say “bank A”, “bank B” or “bank C” to the House; we should know the performance of each bank. If there is to be open competition that is meaningful for small businesses seeking finance, we certainly need such transparency. I had the information provided by bank A, and I got some information from bank B, but the other three banks simply said, “We conform with the process established by Professor Griggs.” In other words, they were not prepared to tell me whether they were 40%, 11% or 20%. They had no information that they were prepared to disclose about how good their systems, including their appeals system, were.

I want the Minister to say that he wants to work with the British Bankers Association and with the banks—I had in mind the word “push”, rather than “work with”—to get more of those who are refused applications into the appeals system. Some money is being spent, and there is a campaign, but it still strikes me as odd that a refusal letter is not automatically required to have information about the appeals system set out at the bottom of it. Some banks do that, but not all.

I also want the Minister to respond to what the British Chambers of Commerce is saying about the British business bank. The BCC has welcomed the £1 billion that the Government have put into the bank, as I do, but the BCC is also saying that it needs to be bigger—the bank needs to be sufficiently big to lever in external finance. It also needs to be organised in such a way that businesses can approach it directly, rather than having to go cap in hand to the banks, with their miserable performance. The banks are of course taking all the credit for the loans that they give and, on the whole, are not saying, “We’re giving you this money because of the Government’s finance for lending programme”, yet they are sheltering behind that programme to fatten themselves up to the tune of £67 billion and counting.

I look forward to hearing what the Minister has to say about that. I hope that he and I can work together to loosen the grip of the banks on the Government’s money, in order to ensure that small businesses in my constituency become the beneficiaries.

[The Minister for Skills and Enterprise (Matthew Hancock)]

It is a great pleasure to serve under your chairmanship, Ms Dorries, I think for the first time. I am grateful for the opportunity to reply to the debate of my right hon. Friend the Member for Hazel Grove (Sir Andrew Stunell) and to answer his questions about bank finance.

The context is of course that the economy is recovering from the biggest financial crisis in generations and, while bank finance is important—most of my response will be on bank finance and the specific points made—sometimes too much focus in the UK is put on it, as opposed to other sources of finance. As we recover from the financial crash, the use of new technology to allow peer-to-peer lending, the growth of crowdsourced finance, the increased private placements market and the development of challenger banks increasingly offer a positive and long-term solution to some of the problems that my right hon. Friend outlined. Alongside the strategy for deficit reduction, of course, turning around the banks is a mission-critical part of the economic recovery, to ensure that small businesses can obtain the finance necessary for investment and growth.

The business lending appeals process is an important part of the answer. In 2011, the banks agreed to give businesses with a turnover of less than £25 million the right to appeal if turned down for credit. As my right hon. Friend said, appeals are to the same bank, but they have to be handled fairly, promptly and transparently—I will come on to that point in more detail later—and the whole process is subject to external audit by Russel Griggs. I want to pay tribute to his work over three annual reports, with the latest one published recently. It is important that that process takes place internally to the banks, because an external appeals process would leave an external decision-maker de facto in charge of a bank’s decision-making. People may ask questions about whether that is a good thing when bank loans are good, but when loans are bad, the question of who takes the hit would be a real one.

The report from Russel Griggs shows an improving picture. Over the past year, there have been more than 3,500 appeals and in 32% of cases the original decision has been overturned. It shows that the process is robust, but, as my right hon. Friend says, that means that since 2011 more than 9,000 small businesses have appealed a bank’s decision and, of those cases, 36% on average have been overturned, so nearly £42 million in additional lending to small businesses has occurred that would not have occurred otherwise.

Equally important has been the increased attention that the appeals process has given to lending processes and improving dialogue between banks and their business customers. The decline in the overturn rate is an indicator that things are moving in the right direction.

As my right hon. Friend said, there is a concern that some businesses do not or might not appeal when they could have secured finance if they had decided to do so. The fact that only between 2% and 5% of declined borrowers would have succeeded in obtaining finance if they had chosen to use the appeals process suggests that that is not a significant problem. It affects some borrowers, but those figures are relatively low.

[Sir Andrew Stunell]

I appreciate that 2% does not sound very large, but in the case of bank A, which I quoted, it would double the number of people who came into the appeals system and more than double the number of people who would have succeeded.

[Matthew Hancock]

If 2% of the total proportion of those applying for finance are in a position where they could have succeeded had they chosen to appeal, that will be relatively small in terms of the process’s macro impact. Of course the situation has an impact on the companies affected, but out of the 100% applying for finance only between 2% and 5% chose not to appeal but would have been able to obtain finance had they done so. There may be other reasons for their choosing not to appeal that we do not know of.

Awareness of the appeals process among the small business population at large is still too low. The latest SME Finance Monitor figures, for the first quarter of this year, show that awareness is at only 12%, a decline of 2% on the previous quarter’s results. There has been discussion about whether the right population to measure is the small business population that is actively seeking finance or a broader set of businesses that may not be seeking finance because they suspect that they will be turned down. Clearly we need to make inroads into the broader small business community. The banks have started to take steps to raise awareness of the appeals process, and launched an industry-wide campaign in January. But those efforts need to be sustained and picked up by individual banks.

Introducing a lending appeals process and raising awareness of it is just one part of our broader efforts to improve access to finance for small businesses. Recently we published research showing that 37% of businesses appear to give up their search for finance and cancel their spending plans after their first rejection, without looking elsewhere—a problem that my right hon. Friend mentioned. That figure of 37% is far too high for us to be comfortable with it, so we have recently launched a consultation on whether to mandate banks to refer businesses that are declined finance to alternative providers. That would be good for the businesses concerned, which would be able to explore a wider range of alternative financing options, and good for the development of a more diverse sector with challenger banks and a competitive market for business finance, as well as augmenting the current appeals process. The consultation closed at the end of April and the Government will respond shortly. Although I cannot possibly prejudge that consultation, my right hon. Friend may have noticed my enthusiastic tone.

The Government are also committed to legislating through the small business, enterprise and employment Bill that was announced in the Queen’s Speech to require banks to share credit data on their small and medium sized business customers with other lenders through credit reference agencies, a measure that I think will have a big impact. Again, it is designed to help challenger banks and alternative providers by helping them to conduct accurate risk assessments on borrowers, so making the market for access to finance more competitive.

Another measure to improve the situation, announced by the Chancellor of the Exchequer on 28 May, is the decision to commission a survey of banks to measure how more than 5,000 businesses rate their banks against factors such as value, appetite for lending and how well they keep their customers informed. The survey is being taken forward by the Federation of Small Businesses and the British Chambers of Commerce. The first results were published in May, and the survey will be repeated every six months. The idea is to develop a tool that over time will help businesses choose the best lender for them, based on the opinions of their peers. It is similar to a ratings system that small business borrowers can use to rate their bank.

A further area allied to the problem of access to finance is late payment, which continues to have a serious effect on the cash flow of some small businesses. Professor Griggs’s report yesterday pointed to 48% of declined loans over £25,000 being declined on grounds of affordability. Late payment squeezes cash flow and has a direct effect on the ability to repay loans. Through measures in the small business Bill, we will require large businesses to report on their payment practices and performance. We consulted broadly on the options for those measures, which will give small businesses the opportunity to judge better which companies they should trade with and to plan for external finance.

We will also introduce legislation that will override contractual bans on the assignment of receivables. That sounds rather technical, but it will allow companies to make effective use of their trade debt as an asset in access to external finance. If a company is engaged in international trade, that will give it more assets that it can use to access finance.

Finally, the British business bank has been established to make finance markets work better for smaller businesses. One of its key objectives is to help create a more diverse market for small business finance, with greater choice. That is reflected in its combined investment programme, which has a current portfolio of 10 commitments to nine finance providers totalling £172 million. It will support lending capacity of over £800 million through leveraging in other finance. That will support a whole range of alternative finance providers. Those include direct lending funds, peer-to-peer lenders, to make sure they can get up to scale, and supply chain finance providers.

To date, over £280 million of lending to smaller businesses has been supported as a result. We hope that the bank will also help to accelerate the development of competitors and alternative providers in this space. There is clearly further to go on that, and the British business bank is working hard to seek options to continue to expand competition in this market.

In conclusion, overall credit conditions are starting to ease. Gross lending to small businesses is ticking up, but repayments by small businesses are also increasing. There was £12 billion of new lending in the last quarter, up 18% on the same period a year before. New financial technologies such as crowdsourcing, the support of the business bank and Government policy changes mean that the position is more encouraging than it has been for some time, but I have no doubt that vigilance is required. We stand ready to take action as necessary to make sure that small businesses get appropriate access to finance. That is necessary to ensure that we can continue to finance the recovery, so that small businesses can create prosperity and jobs and ultimately work to strengthen the financial security of families around the country, which of course is central to the successful pursuit of our long-term economic plan.

Question put and agreed to.