Business Loans Appeals System

Matt Hancock Excerpts

Tuesday 17th June 2014 Westminster Hall

[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.