Enterprise Bill [ Lords ] (Second sitting)

Lucy Frazer Excerpts

Tuesday 9th February 2016 Public Bill Committees

[Bill Esterson]

Welcome to our deliberations, Ms Buck. It is a pleasure to serve under your chairmanship.

This group of amendments and new clauses covers access to finance, cash retention, the enterprise investment scheme and seed enterprise investment scheme, and how they relate to the small business commissioner. When we talk about the small business commissioner’s remit being extended to cover complaints about access to finance, it is not so much about dealing with specific complaints about specific funding applications, but about having someone who will listen to small businesses’ concerns about access to finance, who can signpost them to help them navigate the system—one of the roles that the Government do envisage for the commissioner—who can take complaints about flaws in access to finance and who can advocate at a high level for small and medium-sized enterprises, something which the US Small Business Administration does extremely well.

In the 2014 Department for Business, Innovation and Skills small business survey, 39% of SMEs said that they had difficulty in getting the money they wanted when applying for finance. For microbusinesses, that figure rose to 42%. It was 32% for small businesses and 25% for medium businesses. Some 48% of SMEs had difficulty accessing finance through bank loans. For Government grants, it was 53%. It seems odd that the small business commissioner’s remit would be so narrow as to overlook such a basic issue faced by so many SMEs. Most small businesses who talk to me say that late payment is the No. 1 issue, but that is closely followed by a lack of access to finance, as borne out by the Federation of Small Businesses, which is why this is such a potentially important area of interest for somebody called a small business commissioner.

If the commissioner is to offer a signposting service, although that is not what is needed on late payments, it would certainly suit the question of access to finance, particularly when it comes to the opportunities of peer-to-peer lending and Government contracts, because SMEs cannot navigate the system and do not know what is available to them. As the Chair of the Business, Innovation and Skills Committee told us on Second Reading last week:

“The problem of access to finance remains a pertinent issue for firms, which is why the Select Committee has launched an inquiry into it. If the Bill’s purpose is to make the UK the best place in Europe to grow a business, why does it not tackle access to finance? If the Government are serious about ensuring growth, why does the Bill not put in place measures to facilitate an expansion of scale-ups to power employment and economic growth?”—[Official Report, 2 February 2016; Vol. 605, cc. 837-838.]

Lord Mitchell, using his vast experience in business, spoke on the matter during deliberations in the Lords and discussed the problems in various Government schemes, saying that there had been good growth in non-Government schemes, but not so much in Government initiatives. He said that the market for alternative finance had grown, but

“largely as a result of the paralysis of the high street banks”—[Official Report, House of Lords, 3 March 2015; Vol. 760, cc. 129-130.]

Challenger banks have made good progress—Metro Bank and Aldermore, and Santander, if it can be regarded as a challenger bank, are changing the landscape. Peer-to-peer lending has taken off and is providing an interesting opportunity for many small firms. The changes are welcome and most hon. Members would accept that the traditional high street banks have not done the job of providing good sources of finance, to smaller businesses in particular, over many years. Having alternative sources of finance stepping in is welcome.

We need to know what is happening, and this is where the opportunity for the small business commissioner comes in. We need to know whether what is happening or what is changing is adequate.

Lord Mitchell gave the example of a start-up company from Merseyside, similar to the one I quoted earlier. A start-up company director found access to government funding so incomprehensible she gave up searching—a young entrepreneur with a tech start-up in the north-west, a prime example of the sort of start-up the Government have said repeatedly that they want to help to get off the ground. When she ran her postcode on the Government site she was presented with several hundred schemes for Wales and Scotland. When she entered her details for updates on suitable funding schemes she could bid for, she received a call from a company that wanted several hundred pounds upfront, not to help her put together bids, but to navigate the Government website on her company’s behalf, and email her with a list of schemes she could bid for. Many companies exist to charge start-ups for understanding the Government funding scheme for them. While this is clearly an example of entrepreneurialism on one level, I suggest it says more about the difficulties in navigating the Government’s funding processes.

A small business commissioner would be in a very strong position to represent the interests of small businesses, especially start-ups, when it comes to championing their interests on access to finance, whether from Government or elsewhere. Traditional lending is not doing the job that it needs to do. Alternative finance is a major opportunity and the small business commissioner should be a part of that.

Research undertaken by Everline and the Centre for Economics and Business Research towards the end of last year found that although small businesses have big growth plans for 2015, they are unable to carry them out due to a lack of finance and talent with the right skills. In the current market, most SMEs will only approach larger banks when seeking finance, even though the process can be time consuming and the rejection rate is about 50%. Those small businesses have the potential to drive growth and employment in the UK but are hampered by not only a lack of finance but a lack of confidence in trying to access the working capital they need—more than half think that traditional lenders are not interested in lending to them, and they may well be right, given the feedback that I have received.

Although a large number of alternative finance providers are willing to lend, and might also have more suitable product solutions, small business owners often are not even aware of their existence. As a result, small businesses need support to increase their knowledge of other finance options and prevent banks from always being the default choice. That should ultimately improve the supply of cash flow to viable small businesses who need additional working capital to aid growth, fill a cash gap or take advantage of a market opportunity.

How can we improve access to finance for small businesses? There is clearly a significant demand for easier access to finance for small businesses. To date, the market has been dominated by banks, whose products are often not adequately tailored to the specific requirements of small businesses. Particularly problematic are short-term cash flow needs, which demand a level of control and flexibility around speed of access and repayment timeframes that simply is not available from traditional lenders.

The small business commissioner could provide two things, if we are considering the scope of the office, both of which sit logically with the signposting and advocating approach that the Government want the office to take. They both also offer a shift from a person who reacts to complaints to one who actively supports SMEs and helps them to grow. The first thing it could provide is an accessible signposting service that offers clear advice to SMEs about the finance options available to them and helps them to capitalise on alternative funding, similar to that offered by the Small Business Administration in the United States. The other provision is also similar to what is offered by the US system. It would give the interests of small businesses on the issue of access to finance a real voice before Government. So much of the problem is not about whether the money is there or not, but about making sure that the Government do the right thing in making SME funding available. The Public Accounts Committee report in 2013 made many of the same points: SMEs do not know what is available to them, or their appeal rights, and the Government are not doing enough to link them to finance options.

Let me move on to cash retentions. Cash retentions in the construction industry are a particular problem of late payment covered by this group of amendments. They have been particularly problematic over many years, particularly for smaller firms in the supply chain. For example, a firm in my constituency, Jenkins, showed me the shelf full of files of cash retentions from contracts it has been involved in—some of them reaching back two or three years or more, some five, six or even 10 years.

[Lucy Frazer (South East Cambridgeshire) (Con)]

I am looking at the amendments—does the hon. Gentleman think that they are really necessary? Clause 1(2)(b) refers to “payment matters”, and clause 4(4) defines “payment matter” as relating to a request for payment, which generally relates to a question of supply. Is it not possible to say that cash retentions, which are in effect a request for payment, are included in the Bill? Would that definition not give some flexibility to the small business commissioner to focus on what really matters to him, whether that is late payments per se or some aspect of late payment?

[Bill Esterson]

That is an interesting point. I am sure that the Minister will have some theories in response to that intervention. This was debated at length in the Lords, and the Minister there accepted that cash retentions are an important, separate set of issues. I am sure the Minister will talk in detail about why the Government have agreed to set up a review of the issue and make proposals. These are very much probing amendments to consider this particularly acute issue of late payment within the construction sector. That is why we have tabled the amendments and why the Lords spent so long on this issue and a similar amendment.

Cash retentions in the construction industry are withheld as a form of security to encourage firms to return to remedy defects. In practice, the prime motivation for the withholding can be to improve the working capital of the withholding party. In our deliberations this morning, we talked about some of the problems of late payment being used as a form of working capital, or to support treasury in the public sector; a similar point applies in the construction sector. Cash retentions are ultimately funded by small and medium-sized enterprises in construction supply chains. Each year, small businesses lose millions of pounds of retention moneys because of upstream insolvencies or because they give up chasing the release of the moneys. New clause 12 is designed to ring-fence retention moneys by placing a statutory obligation on organisations withholding retentions to deposit moneys in a retention deposit scheme. It should be noted that retention moneys legally belong to the party from whom they have been withheld. They are required to be released to that party—half on handover of the work and the other half normally 12 months later. In practice, the period is considerably longer. I mentioned Jenkins, a firm in my constituency where that has often been the case, but where it is common for it to take three or four more years.

Subsection (1) of new clause 12 states that unless the party withholding retention moneys deposits them immediately in a deposit retention scheme, any contractual clause enabling such withholding has no legal effect. Any moneys previously deducted must be returned in full. Construction firms already have a statutory right under part 2 of the Housing Grants, Construction and Regeneration Act 1996 to suspend their work for non-payment. The retention deposit scheme could be modelled on the tenancy deposit schemes introduced by regulations issued under the Housing Act 2004, as amended by the Localism Act 2011. Currently, three tenancy deposit schemes are Government-approved. Landlords of shorthold tenancies must place tenants’ deposits in one of these schemes. Tenants’ deposits are provided as security for the performance of the tenants’ existing and future obligations; retention moneys serve the same purpose.

One of the schemes is run by a not-for-profit enterprise. The Dispute Service Limited, not surprisingly, operates a scheme called the Tenancy Deposit Scheme. The scheme held—at least when my notes were written—more than a million deposits. It is funded by the interest earned on the deposits and any excess profit is channelled into a charitable foundation to be used to raise standards in the letting sector of the property industry. I am informed that the CEO of the scheme has already expressed his interest in expanding the scheme for the purpose of depositing retention moneys. Therefore much of the new clause reflects the requirements of the Housing Act 2004 in so far as they relate to tenancy deposit schemes.