SME Finance

Harriett Baldwin Excerpts

Thursday 9th May 2024 Commons Chamber

[Dame Harriett Baldwin (West Worcestershire) (Con)]

Thank you, Madam Deputy Speaker, for granting this wonderful opportunity to present the report that the Treasury Committee published yesterday on access to finance for small and medium-sized businesses.

As every Member will know, small and medium-sized enterprises form the backbone of the UK economy. All of us in our constituencies will be aware of amazing small and medium-sized businesses. In fact, 99% of the businesses in this country are small and medium-sized, which gives us an idea of how important they are. Well over half of our constituents who are employed work for SMEs. Access to finance for small and medium-sized businesses, which the Committee has been looking at, is therefore a really important issue. I want to highlight some of the points raised in our report. This is an opportunity not only for Members to hear those points but, I hope, for the Minister to take them on board.

No one can deny that, with the pandemic and the energy price crisis, the past five years have been an absolutely torrid time for everyone. SMEs have often been at the forefront and have experienced the brunt of those crises, but without the huge resources that larger businesses have to be able to cope. Through those crises, the Government took extraordinary steps to provide support in terms of access to finance for small and medium-sized businesses, but we are now in a different environment. In fact, all the evidence and data published this week show that small and medium-sized businesses are beginning to feel much greater confidence—we are seeing some real improvement there. Nevertheless, issues remain from that difficult time and also more structurally following financial regulation measures set up since the banking crash in 2008.



I want to flag up a few of the points that we made in our report. The first concerns the Business Banking Resolution Service, which was set up after the banking crisis and was designed to provide access to resolution, mediation and outcomes for businesses that were too large to access the Financial Ombudsman Service but had nevertheless been treated pretty badly during the financial crisis. I think it fair to say that the Committee formed the view that the Business Banking Resolution Service had not been a success. It is owned and run by the banks, which raises questions about conflicts of interests in the first place, or certainly the perception of a conflict of interests. Moreover, it has spent about £40 million during its lifetime and has awarded only £2 million worth of compensation, because it drew the access criteria so tightly that very few businesses were able to qualify. As a result, there were very unsatisfactory outcomes for businesses that used the resolution service because they could not access the Financial Ombudsman Service, and the Committee agrees that it should close as planned. We look to the Government to come up with a consultation on a new mechanism by the end of this calendar year.

Secondly, there is a Government initiative called the British Business Bank. The Committee thought highly of what it heard in evidence from BBB, and welcomed the announcement in the Budget that the covid recovery loan scheme had been rebranded as the growth guarantee scheme. We expect that to be an important source of credit to help small businesses to grow when they would otherwise have struggled. However, we noted that very few small businesses even knew about this organisation, and we have tried to publicise it through the report. We urge the Government to assess the effectiveness of BBB every year, because we think it has an important role to play and it is pretty successful where it is known about, but it is not widely known about.

Thirdly, we were greatly concerned by what we heard in the evidence about something that sounds very niche but is actually very important. It is known in the trade as Basel 3.1. After the financial crisis a committee set up in Basel, the Swiss city where the central bank of central banks is located, came up with some proposals which were then known as Basel III. The Prudential Regulation Authority—part of the alphabet soup of financial regulation that was set up after the crash—is currently consulting on a tightening of the criteria for lending to small and medium-sized businesses. At present there is a discount factor relating to the risk to banks’ balance sheets from lending to such businesses, but the PRA wants to tighten that arrangement considerably.

The Committee is concerned because, according to the evidence that we heard, such a move could withdraw about £44 billion of lending to businesses from the UK economy. We therefore urge the PRA not to proceed, particularly because we also heard evidence that the proposal would not be implemented in the United States or in the European Union. In fact, for many years when we were members of the EU we did not implement what the Basel Committee was recommending. The committee then issued a statement expressing concern and saying that we were in violation of its recommendations. That shows that it is perfectly possible not to implement them: all you will get is a reprimand. We have therefore concluded that the support factor for small and medium-sized businesses should not be changed at this stage in the economic cycle.

A fourth issue that came up in the evidence we received, and which has really shocked the Committee, is the extent to which banks are simply closing the bank accounts of businesses across the country. I expect that every Member of this House will have had a piece of casework that involved one of the businesses in their constituency being told that its bank account was closing, with absolutely no reason or notice given by the bank. We asked the banks about this issue, and they confessed that they had closed over 140,000 business bank accounts during the course of 2023. Obviously, there can be perfectly good reasons for doing that: there will be businesses that do not reply to any questions from their banks, and there will be businesses that are suspected of money laundering or that have actually been found to have done so. However, we also found that banks can use phrases such as “risk appetite” or “reputational risk” to close the bank accounts of organisations and businesses that we would think are a perfectly fair part of the fabric of this country. For example, amusement arcades and pawnbrokers can struggle to get access to a bank account.

Perhaps most alarmingly, we heard in one of our evidence sessions with banks that even someone in the defence sector can have their bank account closed or struggle to open one. This is often to do with the share- holders of banks wanting to observe the environmental, social and governance rules. We all think that such rules are good, but they can lead to some unintended and inadvertent consequences, whereby defence companies are effectively debanked and cannot get access to a bank account in this country. I am sure that all Members present will recognise that the defence of this country is a foundation for ESG compliance, and should not, therefore, lead to people struggling to get a bank account. We urgently request that the Treasury introduce the legislation on debanking that it has promised, and we look forward to that happening before the end of July. It is something that we are keen to see.

I see that my 10 minutes are up. I thank everyone for their attention, and I hope my statement has provided food for thought for Members across the House.

[Dr Thérèse Coffey (Suffolk Coastal) (Con)]

I am on the Treasury Committee, and I commend my hon. Friend for her great chairmanship. She has already mentioned the need for transparency, and I am delighted that the Treasury will bring that forward, but I was particularly struck by how difficult it is to open accounts. Even for farmers, it can take multiple months. Most importantly of all, the PRA’s approach is going to choke the growth of many small businesses, and we need our small businesses to become much bigger for the prosperity of our country. Does my hon. Friend agree that the PRA really needs to understand the importance of this issue to ensure that the entire country prospers, which will only happen if small businesses prosper?

[Dame Harriett Baldwin]

I agree with my right hon. Friend. Inflation is the worst tax on our economy and important steps are being taken by the independent Bank of England to raise interest rates, to make sure that inflation gets back to its target zone. That all seems to be on track. Monetary policy has been tightened already, and we see that in the environment in which our small and medium-sized businesses are working. They have been squeezed by higher interest rates, and the evidence we received showed that the acceptance rate for credit has fallen from 80% to 50%, so it does not feel like the right time to be tightening access to finance for small and medium-sized businesses through a change in regulations. It particularly does not feel like the right time to be doing so unilaterally, when the EU and the US are not following the Basel 3.1 rules.

[Keir Mather (Selby and Ainsty) (Lab)]

I am also a member of the Treasury Committee, and I thank the Chair for all her hard work on this report.

On the overall question of the confidence of SMEs in their ability to access finance, the report raises some interesting figures. There was a £95 billion finance gap in large high street bank lending to SMEs between 2015 and 2022, alongside the softer pressures of SMEs fearing rejection in lending and the lack of trust in the lenders themselves. Will the Chair please provide an assessment of how she feels that appetite looks across the rest of this year and beyond? What tools are at our disposal to deal with the inherent caution in the SME lending market?

[Dame Harriett Baldwin]

I thank my excellent colleague for his question. He is absolutely right that the inquiry received evidence on what I would describe as financial apathy. Small businesses sometimes choose not to borrow, choose not to grow, In fact, only 5% of small businesses that seek lending would even consider shopping around to find another provider if they were rejected by their main bank.

There is work to do to encourage and guide SMEs, and the British Business Bank has a very important role. It is not well enough known, which is probably holding back the growth of many excellent small businesses. I am so proud that our Committee has been able to champion this.

[Peter Grant (Glenrothes) (SNP)]

I am grateful to the Chair of the Treasury Committee for making this statement today. She will be aware that one of the main reasons why a lot of small businesses have to rely on bank funding is because bigger businesses do not pay their bills on time, and all too often do not pay their bills at all. A lot of small businesses in my constituency, particularly in construction-related work, tell me that they sometimes have to wait six months or more to get paid. That increases the risk factor for a bank, because it is much more likely that the small business will fail. Has the Committee looked at the problem, or does it intend to do so, where small businesses, particularly in the construction sector, are not paid for their work?

[Dame Harriett Baldwin]

The hon. Gentleman makes an excellent point that everyone in this House will recognise as a challenge. Getting paid by bigger businesses is a bane of the lives of many small business owners. I know there has been a lot of work in the Department for Business and Trade, and the Government need to lead by example by promptly paying for services. The Committee heard evidence that small businesses continue to be frustrated by this.

[Madam Deputy Speaker (Dame Rosie Winterton)]

I thank the Chair of the Treasury Committee for her statement and for answering questions.