Mutual Guarantee Societies

Christina Rees Excerpts

1st reading: House of Commons
Tuesday 10th January 2017 Commons Chamber

[Christina Rees (Neath) (Lab/Co-op)]

I beg to move,

That leave be given to bring in a Bill to make provision for the creation of mutual guarantee societies, for their membership by small and medium-sized businesses for the purpose of lending to and by such business and for their operation; and for connected purposes.

I am a Labour and Co-operative Member of Parliament. I am proud that I am introducing this Bill at the start of the Co-operative party’s centenary year. My thanks also go to Co-operatives UK and Philip Ross for their work in pressing the case for this legislative change.

For 100 years, the Co-operative party has been putting forward the case for more co-operation in our country. Correcting the legislative anomaly of the UK not benefiting from mutual guarantee societies not only is another step towards expanding co-operation but, importantly, would ensure that we increase the level of small and medium-sized enterprise bank lending. Put simply, my Bill seeks to harness the positive power of co-operation in order to increase SME lending in this country. SMEs are vital to the UK economy, and they are major drivers of employment and wealth for the country. Ensuring that they have access to the right type of finance at the right time is essential to make sure that they maximise their growth potential and develop new job opportunities.

An economy that allows for SME investment and a financial system that is prepared to lend to SMEs are essential. House of Commons research shows that SME lending is, for the first time since the global economic crisis, starting to become net positive, but a look at the broader Bank of England “Credit Conditions Survey” for 2016 makes less positive reading. It shows that the availability of credit remains static at best; indeed, the proportion of loan applications from small businesses that were approved showed a decline in quarter 2 and quarter 3 of 2016. The survey also shows that that decline is predicted to continue. That trend must be reversed, and the creation of mutual guarantee societies can be part of the solution.

My Bill would allow for the creation of mutual guarantee societies, which are private guarantee institutions created by beneficiary SMEs. While there are different forms of mutual guarantee society across Europe, they typically share a co-operative or mutual status. That means that the mutual guarantee societies’ capital is provided directly by the SMEs that apply for a loan guarantee in the form of co-operative or mutual shares. Each member has an equal voting right and participates in electing the general assembly and board of directors of the mutual guarantee society. By working together, SMEs can then negotiate a better deal from banks. For the banks, the underpinning of the mutual guarantee provides partial security on otherwise unsecured enterprise lending. The risk is lower, so the price of money is lower. The deal flow is greater and underpinned by peer review from SME members, so access to capital is easier. A guarantee provided by a mutual guarantee society on behalf of the SME to the bank replaces collateral, enabling the bank to grant the loan. The guarantee is a financial commitment by the society to repay a certain percentage of the loan if the SME member cannot honour its payments.

In many ways, this Bill is a no-brainer. Mutual guarantee societies provide access to finance, achieve better credit conditions, provide assessments of companies’ intangible and qualitative elements, serve as a bridge between SMEs and financial entities, and can provide better advice and supervision in financial management. The creation of such societies in the UK would also be good for the banks because, among other aspects, they reduce banks’ overall risk, provide qualitative information for the banks, provide more detailed risk assessment at no cost, and allow them to work with supervised and reliable financial intermediaries. The OECD concluded in 2013 that mutual guarantee schemes

“represent a key policy tool to address the SME financing gap, while limiting the burden on public finances.”

The UK is almost unique in not making use of mutual guarantee societies. In Europe, it is estimated that around 2 million guarantees have been made for a value of €70 billion to more than 2 million customers. This represents about 8% of all SMEs in the European Union benefiting from the activity of mutual guarantee societies. The UK has no mutual guarantee market for SMEs to improve their access to finance because of inappropriate regulatory barriers. The provision of mutual guarantees by SMEs is interpreted as requiring the full regulatory burden of being an approved insurer under the “surety” category, with, as a result, far higher capital requirements and regulatory burdens than in any other EU country. Other countries have been able to specify mutual guarantee societies when transposing EU directives so that they are regulated in a distinct and appropriate way. As the UK has no such arrangement, we have, in essence, regulatory gold-plating that blocks the entry of new models of mutual finance of this form.

Following work with the co-operative sector in 2012, the Financial Conduct Authority clarified that the best fit for any mutual guarantee society in terms of regulated activities under current legislation is suretyship. However, this imposes significantly greater capital requirements than is the case in countries that have a bespoke scheme for mutual guarantee societies, and it is not a particularly good fit anyway. My Bill would change that. It provides a definition of a mutual guarantee society and adds mutual guarantees to the list of regulated activities set out in the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001.

Despite the problems and barriers within the existing regulatory system, there is one UK-based member of the European Association of Mutual Guarantee Societies—the British Business Bank. This institution, which was created to drive SME lending, might not be the type of mutual that I believe would be created following the legislative change proposed in the Bill, but it neatly demonstrates the point that mutual guarantee societies must be part of the answer to the question of how we increase SME lending.

I hope that we are pushing at an open door. I note that in written answers to my hon. Friend the Member for Wolverhampton South West (Rob Marris), Treasury Ministers have stated that officials plan to meet the FCA to discuss the possible development of mutual guarantee societies. I believe that this Bill would create a welcome mutual addition to our financial services sector and allow the UK to benefit from SME lending in the same way that other countries have done for many years.

Question put and agreed to.

Ordered,

That Christina Rees, Mr Gavin Shuker, Anna Turley, Lucy Powell, Stephen Doughty, Mr Adrian Bailey, Seema Malhotra, Mr Gareth Thomas, John Woodcock, Jonathan Edwards and Christian Matheson present the Bill.

Christina Rees accordingly presented the Bill.

Bill read the First time; to be read a Second time on Friday 24 February, and to be printed (Bill 119).