Reporting on Payment Practices and Performance Regulations 2017

Lord Prior of Brampton Excerpts

Thursday 9th March 2017 Grand Committee

Moved by

[Lord Prior of Brampton]

That the Grand Committee do consider the Reporting on Payment Practices and Performance Regulations 2017.

[The Parliamentary Under-Secretary of State, Department for Business, Energy and Industrial Strategy (Lord Prior of Brampton) (Con)]

My Lords, the purpose of these regulations is to implement a requirement on large businesses to report on their practices and performance in paying suppliers. The first instrument on payment practices applies the requirement to large companies, while the second applies the requirement to large limited liability partnerships.

Late payment can be a significant issue for businesses, especially smaller suppliers. It is estimated that small and medium-sized businesses are owed £26 billion in late payments. This Government have several measures in place to tackle late payment. As well as the reporting requirement, which I will talk about in more detail, the Government are also currently recruiting the small business commissioner, which noble Lords discussed in this House in the last Session.

Alongside other measures, there is also the Government’s support for the Prompt Payment Code, which is an industry-led code of conduct. The code sets standards for payment practice, and the Government are committed to signing up strategic suppliers to the code. Small and medium-sized businesses often lack information about the larger businesses they supply. They have no choice but to take it on faith that they will be paid in line with the agreed terms and conditions. There are sometimes calls in the House for more prescriptive measures to support suppliers. However, in response to the 2013 discussion paper on options for tackling late payment, businesses said that they did not want to see government constraining their freedom of contract. Instead, the reporting requirement focuses on transparency.

We are not therefore banning business practices, or unduly interfering in customer- supplier relationships, but we want suppliers to have the information they need to make good business decisions, and to encourage a culture change in payment practices. When we consider new obligations such as these, we have to be careful to balance the burden on large business with the benefit to small business. That is why we have taken longer to implement this requirement than we estimated at the time of the debates on the Small Business, Enterprise and Employment Act 2015. This is the legislation enabling us to make the regulations before us today. We have taken time to ensure the requirement works in practice for large businesses, so that we can be confident that the resulting data will be robust and helpful for small businesses.

In our recently published impact assessment, we estimated the annual net cost to business at £17.7 million. That sounds like a large number—indeed, it is—but it has to be considered against the potential benefits to businesses that a reduction in late payment could bring. Even a small reduction in late payment could have a significant impact, especially for small suppliers, and especially for those for whom cash flow is of the essence. We have continued to engage with stakeholders following the public consultation on the policy. My officials have had an ongoing dialogue with stakeholders across different sectors on a wide variety of topics related to the reporting requirement. They have been listening to businesses, representative bodies and other stakeholders to make sure we get the balance right between the burden on large business and the benefits to small businesses. This has also included independent research commissioned to provide additional evidence for the impact assessment and user research to inform the development of the web service.

I now turn to the detail of the regulations. They implement an obligation on large businesses to publish information about a number of metrics relating to their payment practices. Businesses will need to report on these metrics for their first financial year, starting once the regulations come into force on 6 April 2017. Each reporting business will need to publish information twice each financial year. To ensure the information is up to date and relevant, it must be published within 30 days of the end of the reporting period. The metrics include three types of information. They require businesses to publish statistics about their payment performance, including the average time taken to pay and the percentage of invoices paid in 30 days or fewer, between 31 and 60 days, and later than 60 days. They require businesses to give narrative statements about the business’s standard payment terms and dispute resolution processes. They also require businesses to state whether the business’s payment practices and policies provide for supply-chain finance, e-invoicing and deductions for being on a supplier’s list.

These metrics were the subject of the 2014-15 consultation. We received diverse feedback about certain points and have sought to find a balance between the needs of small and large business. Specifically, we cannot require businesses to report on all pay-to-stay practices. The House was notified of this in a Written Ministerial Statement in December 2016. The metrics of interest owed and paid are not included in these regulations, but we will learn from the public sector’s introduction of a similar metric of interest owed from later this month.

The regulations require businesses to report on any deductions from payments to suppliers as a charge to remain on a supplier’s list. A broader metric to cover more types of pay-to-stay practices will be kept under review. Businesses will be required to publish their reports on a government web service and, as soon as the business publishes it, the information will be available to suppliers. The web service is being developed with input from users of the service and will be available from April 2017. To ensure that it is accurate, the information published must be approved by a named director. This will help late payment become a reputational issue. The public nature of the reporting will motivate businesses to comply. However, it is a criminal offence if a business fails to publish a report, or publishes false or misleading information.

On conviction, the business, directors or, in the case of false statement, the individual will be liable for a fine. The reporting requirement will increase transparency, making it easier for suppliers to find information about large businesses’ payment practices and performance. The improved transparency will help suppliers make better-informed business decisions and encourage large purchasers to make prompt payment. The public nature of the data will highlight good payment practice, while also shining a light on poor practice that is potentially damaging and unfair to suppliers. This measure is an important step towards a change in business culture to one where late payment is considered a reputational issue and prompt payment is valued by all sizes of business. I commend these regulations to the Committee.

[Lord Foster of Bath (LD)]

My Lords, I begin by saying how welcome these proposals are, as developed from the Small Business, Enterprise and Employment Act 2015. The duty to report, as the Minister said, is one in a package of measures that begins to address a problem that has existed for far too long around late payment to small businesses. As the Minister said, we have 5.5 million small businesses in this country and it is estimated that, between them, they are owed over £26 billion. The impact this has on them is incalculable. It has been estimated by a number of people that implementation of these measures—and further measures, which I will touch on in a second—could prevent the death of about 50,000 businesses per year.

The other measures that I welcome include the Prompt Payment Code, to which we have already heard reference, and there are further measures that I hope will be adopted, which are referred to within the corporate governance Green Paper. Reference is made, for example, to one board member having responsibility for representing the views of small businesses within the supply chain. I welcome, too, the increased transparency about payment in other regards, as also referred to in that Green Paper, but that is probably not directly relevant to today’s debate.

Having said that I support these proposals, I will confine my remarks to asking a few short questions. First, in reference to the duty to report, it remains unclear who is responsible for verifying the statistics contained in the report. The Minister has said—and it is clearly explained in the Explanatory Memorandum—that the figures must be approved by a named director of the company. However, as I suspect the Minister might accept, that looks rather like the company is marking its own homework. Will the Minister explain what opportunities there would be for people concerned about the statistics to draw attention to that, and to whom would they do so? Given that failure to report is a criminal offence, it is not at all clear whether failure to report accurately would be deemed a criminal offence and what the penalties would be. Again, I would be grateful for clarification on that matter.

--- Later in debate ---

[Lord Stevenson of Balmacara (Lab)]

My Lords, I will follow closely the words of the noble Lord, Lord Foster. Like him, we accept that these are good regulations. They stem from a Bill that we spent a lot of time on in 2015, talking about small businesses and their problems. It is good to see the output in terms of large companies and large limited liability partnerships, and to see the detail. I support that.

Like the noble Lord, Lord Foster, I have a number of questions, which I am sure the Minister will be able to respond to. Where the noble Lord finished is where I would like to start. There is no mention in either set of regulations about the role of the Small Business Commissioner, and I find that very surprising. From the reports that are circulating about the appointment of the Small Business Commissioner, it is clear that the department sees that as being one of a package of measures that will implement the small business Bill. However, there seems to be no mention of it and no role for the commissioner in the regulations. Perhaps the Minister has an explanation for that.

Having said that, the second question that comes to mind is: what is the role of the Small Business Commissioner? The Minister was not in post when we discussed this in 2015, but I think he will have been briefed about the general feeling there was in Committee and on Report that the move to introduce the Small Business Commissioner—it was a major change by the Government, who had previously set their mind against it—was a good thing, but that the powers were lamentable given the case that had been made by the Federation of Small Businesses in particular, which, after all, might be expected to know a bit about the problems that small businesses face.

It is brave of the department to bring the chair of the FSB on to the appointments panel—that is a good sign. However, as far as I can understand from the press comments he has made, he is still worried that even though he is on the panel, the post is not going to be sufficiently empowered or resourced to do the job it has to. He does not think that it begins to tackle the problem referred to by the noble Lord, Lord Foster, of 50,000 small businesses going broke each year because they cannot get the money they are owed out of the larger companies. There is also the question of whether or not the will is there in the department to try to help shape the culture, rather than simply shine a light on current practices.

The Explanatory Memorandum to both instruments before us gives a little context about where all this has come from. The noble Lord, Lord Foster, mentioned one of those issues, the Prompt Payment Code, which has been heavily trailed by the Government and used as their only fig-leaf when we talked about this in Committee and on Report. However, it has proved to be a completely hopeless way of trying to achieve culture change. At the time that the Prompt Payment Code was being lauded, we had examples within this very House of major companies that were not even signed up to it, and many of those that had signed up had operating practices that would have made it impossible to stay in the code, and yet there was no apparent sanction as it is a voluntary organisation. The pay-to-stay scandal and the unilateral changing of payment arrangements from 30 days to 60 days to 90 days and all sorts of other things were going on in companies that should have been adhering to much higher standards. That is a clear example that the process does not work in practice. At least we now have a transparency arrangement, and I like a lot of the things that are included.

Delays always happen but I suspect that there is a bit of a story behind the way in which this has come out and around the engagement with both the major and the smaller companies in trying to find a way to make this work. Extraordinarily, but rightly in my view, the department has decided that the only way to get this to work in practice is to run its own website. It cannot rely on companies coming forward with material because it feels that that would be too difficult to interpret. Again, that is brave. I cannot say any more than that—I think it is terrific and I am sure that it is the right thing to do. Perhaps it opens up a new, aggressive policy chapter in BEIS, and it is actually going to do things that help businesses instead of just standing back and watching as they go under. However, I may be making the point a little too strongly.

The third thing I have to say is a compliment, which I rarely pay to BEIS and its officials because they are always in default on this. However, they have at last hit a common commencement date for these arrangements, and I am so pleased by that. However, it is extraordinary, is it not, and perhaps shines a different light on this area, when you discover that, uniquely, these are time-limited regulations, which is something I have never seen before. It is not so much a sunset clause but a total eclipse. We have the situation where these will come into force on 6 April 2017, which is great, and will then close on 6 April 2024 unless they are extended. There are substantial consultation arrangements around that, but it does not exactly send the message to small businesses that the Government are here to help and are on their side. The regulations are, at the very best, a pale imitation of where they want to get to, and are time-limited and will be withdrawn unless some future act of consultation comes through.

We welcome these instruments in so far as they go—it is exactly what the Government said they would do. They are late, but at least they are here. They will start very quickly and will be accompanied by an as yet unknown, but potentially powerful, person to take up some of the issues that are left undealt with here. With that, we support the instruments as they appear before us.

[Lord Prior of Brampton]

I thank both noble Lords for their broad support for the general thrust of this statutory instrument.

Potentially misleading or inaccurate information is a criminal offence punishable with a fine. Who is responsible for verifying the data? Our view is that the public nature of the data will ensure their accuracy. Businesses can raise their concerns directly with BEIS or the Small Business Commissioner. The whole thrust of this instrument is culture change. It is the reputational damage that firms will suffer, rather than the prospect of a criminal conviction, that will have the biggest impact on changing behaviour.

In terms of the scope and the companies caught by this, the definition of a large business for the purpose of having to make the disclosures is two of the following three: an annual turnover of £36 million; a balance sheet total of £18 million—I assume that that means net assets; and 250 employees. The noble Lord asked about a subsidiary of an overseas company—it could be a subsidiary of a domestic company, for that matter. As I understand it, this applies to companies or LLPs that are incorporated in this country. So I do not think that a small company over here that is a subsidiary in the US is captured by the instrument, but I will double-check that.

The noble Lord said that payment terms in the US were more typically 120 days rather than net monthly or 30 days but I am not sure that that is necessarily right. Also, we should be clear that in some big contracting industries, where there is delayed payment and that is negotiated upfront by suppliers, that is entirely legitimate. In their disclosures, big companies are perfectly entitled to say in their narrative that in their industry, a different payment schedule is typical. Where you have a long-term contract, which requires a different kind of financing, again, that can be disclosed and explained, and it will be perfectly legitimate. We are not saying that a longer period is necessarily worse than a short one; it very much depends on the industry. What is important is the transparency and a narrative around it.

Both noble Lords spoke about the appointment of the Small Business Commissioner. I understand that we will be appointing that individual during 2017. We launched the recruitment campaign on 12 February, with the intention of appointing later on in the year.

[Lord Foster of Bath]

Since it has been made public that the commissioner will start work in October this year, I hope that it will be some time in the course of this year, or there will be a difficulty.

[Lord Prior of Brampton]

I just wanted to reassure the noble Lord that the process has started. As it started in February, that appointment will follow in due course.

I thank noble Lords for their contribution to the debate. The importance of transparency is clear. One economic reason that makes this statutory instrument so important is that for many small, particularly growing, companies, cash flow, rather than profit, is critical. Delayed payment terms can seriously undermine the ability of small companies to grow. I think that all parties in the Committee are apprised of that.

[Lord Stevenson of Balmacara]

It is true that the terms are important, but both the noble Lord, Lord Foster, and I were at pains to make the point that it is the reliance on the contract with a large company that causes the difficulty. It is difficult for individual small companies to challenge the payment terms they are first offered—particularly if, once they are in contract with the large company, it decides unilaterally to change them—because they need the business. The Minister said that he has worked in business before, and I have run small businesses. When you are waiting for that cheque to come and it does not and you cannot pay yourself, you cannot rip up the contract because you are so dependent on it. It is that defect—for which no powers are being given explicitly to the Small Business Commissioner—that lies at the heart of where we disagree with the Government’s approach. I am sure that this issue will be addressed, because the figures are now so open and clear that it has to be sorted: £26 billion is a stonkingly large figure. If we could sort that out and speed it up—although the Explanatory Memorandum does not go into this—a 0.25% reduction of the costs of organising small businesses raises something like £22 million. A small calculation of what that cash flow change would be changes the dynamics of the whole arrangement.

[Lord Prior of Brampton]

The noble Lord makes a very good point. There is a big distinction between overdue payments where you are supplying on, say, net monthly terms and not receiving the money—and sometimes having to wait for months for it—and the situation where you knowingly enter into a contract where the terms are 60 days or 90 days. I do not know what the breakdown of the £26 billion is—how much of that is overdue against the agreed terms and how much is just longer than 30 days. When I go back to the department I might just get an analysis of that £26 billion and share it with noble Lords. On that basis, I hope that we can all agree to go forward with this statutory instrument.

Motion agreed.