SMEs: Access to Finance

Pat McFadden Excerpts

Tuesday 9th November 2021 Westminster Hall

[Mr Pat McFadden (Wolverhampton South East) (Lab)]

Thank you for your chairmanship, Mr Pritchard. I am grateful to the hon. Member for Darlington (Peter Gibson) for proposing the debate and to the hon. Member for Thirsk and Malton (Kevin Hollinrake) and the APPG on fair business banking for their work on the issue.

As we have heard, small and medium-sized enterprises are at the heart of the economy. They employ millions of people and are responsible for much of the innovation and creativity that makes this country such a special place and such a dynamic economy. They have, of course, been through a tough time over the past 18 months or so. Many small businesses could not trade at all for much of the period, and others only in very restricted circumstances. In that context, programmes such as the bounce back loan scheme and the coronavirus business interruption loan scheme were important and welcome. As we now unwind from that level of Government support, it is important that the repayment mechanisms and the schedule are realistic. The SNP spokesperson referred to the burden of debt that has been left. It is also important that we have a proper assessment of the level of fraud and the use of public money in those schemes. A lot of money went out of the door and it is important that the taxpayer gets good value for money in support schemes of that nature.

As we recover from the pandemic, many SMEs are facing labour shortages, rising crises in materials and other effects, and our capacity to recover economically from the covid pandemic will depend to a large degree on how SMEs meet those challenges and manage to fare over the coming years. There are, as we have heard, particular traditions when it comes to access to finance for SMEs here in the UK. They include a dependence on loans from a relatively small number of traditional high street banks, a major focus from banks on mortgage and other property lending, a relatively new group of challenger banking entrants and less-developed non-bank sources of finance that are not always easily available to SMEs. The hon. Member for Darlington mentioned community development financial institutions in that regard and I believe they have an important role to play. I am familiar with the role of the Black Country Reinvestment Society, which operates in the area I represent. It has been able to step in at times and offer loans when the main high street banks have turned people down, and I believe it has helped around 1,500 businesses in the west midlands region over the years. I am sure it is a similar story in other parts of the country with other CDFIs.

The debate has also seen some discussion about the challenger banks and their potential to do more. The Minister heard the points made by the hon. Member for Darlington about MREL funding. That is important, because there is an active debate between the banking sector and the Bank of England about how that operates. The concept of bail-in debt was introduced after the financial crisis to avoid the situation where the taxpayer has to step in if a bank goes belly up—or, as it was termed, privatising the gains and nationalising the losses. With bail-in debt the bondholders are supposed to be on the hook, not the taxpayers. That is the right thing from the public interest point of view, but inevitably it entails a cost that will be applied to those who are lending to banks under those circumstances.

In this country, once a bank’s balance sheet increases above the range of £15 billion to £25 billion, the MREL bail-in rules kick in, although the Bank of England has indicated recently that the staircase for compliance will be shallower and over a longer period than was previously the case. The thresholds elsewhere are much higher. In the European Union, the threshold is €100 billion. In the United States, it is $250 billion. That means that bail-in in those jurisdictions is aimed at much bigger banks. There is another factor, which is related to the different ways that deposit insurance works in those jurisdictions, which has an impact on the risk appetite of regulators, but those are still much higher thresholds than in the UK and they allow medium-sized banks to grow before having to adapt to this new regime.

The challenger banks argue that if the threshold for requiring bail-in debt was higher, that would release more capital, which could be lent to the SMEs that are the subject of today’s debate. When the Minister winds up, I would be really interested in his reflections on the debate about challenger banks and the minimum requirement for own funds and eligible liabilities.

For the purposes of clarity, I should say that this is not a Brexit issue. The differential balance sheet limits for MREL predate Brexit, but challenger banks have all made the point that it places a ceiling on their capacity to grow.

[Kevin Hollinrake]

The changes that the Bank of England has made on MREL are very modest and will not help a bank such as OakNorth, which is a very successful challenger bank, in terms of its ability to lend more, which it could do if the limits were changed. Does the right hon. Gentleman agree that it seems perverse that bail-in requirements are there to try to protect the taxpayer and to take away the systemic risk, but the biggest systemic risk is having all the banking concentrated in a few big banks?

[Mr McFadden]

There is a potential tension here between competition and safety. The rules were brought in to insulate the taxpayer, but, at the same time, the Bank of England, the Treasury and the Government—everybody—subscribe to the idea of more competition in the UK banking sector, so I believe this discussion will continue.

More broadly, the issue of access to finance is also related to the question of economic growth. Economic growth has been sluggish in the UK for the past decade, averaging just 1.8%, which is significantly lower than pre-financial crisis rates of growth. Once we strip out the covid effects of huge plunging growth last year and a sharp bounce back this year and next, the recent report from the Office for Budget Responsibility, published at the same time as the Budget, predicts a return to those sluggish growth rates, averaging just 1.5% between 2024 and 2026.

Let us be clear: taxes are increasing because economic growth has been low. It has been low for more than a decade, and the Government cannot continue to blame that on the past. This low growth has left the country less wealthy than it would have been, and it has made it harder to fund public services adequately without upward pressure on taxes. Low growth is the foundation for the series of tax rises that the Chancellor has announced over the past year. That is a much bigger factor than the pandemic; the OBR report makes that clear. In fact, in that report it downgraded the long-term impact of the pandemic on GDP from 3% to 2%. Its estimate of the long-term impact of the Prime Minister’s Brexit deal was a hit to GDP twice as high as that from the pandemic.

We are talking about the financial services industry today. It was hung out to dry in the Prime Minister’s Brexit deal. It is not that the Government fought for market access and lost—the Government did not even try. This is 10% of the UK economy, hundreds of thousands of jobs around the country. It was simply left by the wayside when the Government negotiated the Brexit deal.

It is in everyone’s interests to address the issue of the UK’s sluggish economic growth. If the economy grows more, tax revenues will increase without tax rates having to rise. The country will become more prosperous and we will be able to pay our way. That is another reason why a healthy and properly financed SME sector is so important. Businesses need access to finance to be able to invest in expansion, to make the new idea happen, to be able to buy the new piece of equipment that might be able to do the job in a greener or more efficient way, to move into new premises, and to increase capacity to meet new orders. That is the foundation of economic growth, and right now we do not have enough economic growth. That of course is not the only thing that will impact growth.

If we talk to many businesses, they will tell us about business rates. In advance of the Budget, we called for an increase in the threshold for small business rate relief from £15,000 to £25,000. That could have lifted many small businesses out of paying business rates altogether, but that did not happen. Nor did the more fundamental reform needed to ensure that business property tax fits the economy of today and tomorrow, rather than the economy of yesterday. There will be other factors, too—not least our education system and whether we are equipping the workforce of tomorrow for the labour market of the future. Every time talent or potential goes unfulfilled, it is a drag anchor on economic growth, and that denial of opportunity is not just socially unjust, but economically destructive. We need to examine everything that can contribute to economic growth, and that means an SME sector firing on all cylinders.

This debate calling for more access to finance for SMEs is timely, but access to finance is not an end in itself. It is a contribution to the economic growth that the UK needs if it is to escape the high-tax, low-growth trap in which it finds itself, and for which households and businesses will have to pay the price in the tax rises recently announced, which will kick in over the next few years.