Draft Limited Liability Partnerships, Partnerships and Groups (Accounts and audit) regulations 2016

Peter Grant Excerpts

Thursday 21st April 2016 General Committees

[Peter Grant (Glenrothes) (SNP)]

It is a pleasure to serve under your chairmanship, Mr Stringer. I do not intend to divide the Committee or oppose the regulations either; they are heading in the right direction.

In a former life, I worked in financial management and audit in the public sector and am still a member of the Chartered Institute of Public Finance and Accountancy. Although it is not traditionally involved in the regulation of financial services in the private sector—its base is in local authorities, public sector bodies, health boards and so on—the interface between those bodies and small and medium-sized companies becomes closer every day. With my background in public sector finance, I understand how essential it is that a local authority thinking of entering into a contractual arrangement with a small business needs to know that that business is sound and well run; at the same time, it does not want to put such a burden of administration on the small business that it goes under.

Many of the businesses that became limited liability partnerships in the early days were small firms of solicitors and accountants—the people who provide professional services to all the other small businesses. If we can help those professional services firms become more efficient and effective, the knock-on effect on the small business sector could be quite significant, even though on the face of it the definition of a micro-entity is almost vanishingly small. Twenty years ago, I worked in a small neighbourhood shop run by my in-laws. At that time, its turnover was almost at the maximum for it to qualify as a micro-entity. In terms of turnover, we are talking about quite small businesses, but if that business—rather than buying and selling foodstuffs—provides professional services and advice to 50, 100 or 200 other small businesses, and anything goes wrong with that LLP, the impact on the local economy can be many times greater than the partnership’s turnover would suggest. In assessing the size and importance of an LLP, we have to make sure that we are not simply looking at the balance sheet or at the profit and loss account. The impact of the failure of a firm of solicitors in a small town, for example, could be that many other businesses in that town start to struggle.

I have two questions for the Minister. The first is about the transition phase, when a business starts to grow, becomes medium sized and finds that it will no longer qualify as a micro-entity or a small business. How will we make sure that we are not building in incentives to businesses not to grow? A good comparison is with one of the earlier drafts of the regulations for credit unions, which would have meant that at a certain stage in its development, a credit union would have been under a perverse incentive to turn away savers because the additional bureaucracy it would have incurred through having another £5,000 or £10,000 of deposits was simply disproportionate. I am pleased to say that those draft regulations have been amended to remove that danger, but I would appreciate if the Minister could clarify what steps are being built in to make sure that, as a company grows, it is not dragged down by the additional bureaucracy it is subject to, simply as a result of being more successful.

My second question is about how we make sure that we always keep ahead of the game. There is always a danger in anything that is seen to be lifting the burden of regulation, particularly on professional services businesses. The results of doing that with the big, big, big businesses 10 years ago were utterly catastrophic and we are still paying the cost. The difficulty is that when things go wrong with regulation, particularly of professional services businesses, often we do not see the warning signs until it is too late. By the time we are doing anything about it, the horse is not only out the door, it has usually disappeared to Panama or the Cayman Islands. If it turns out the regulations are creating loopholes and opportunities for misuse or abuse that were not supposed to be there, what are the Government able to do to ensure that those loopholes are closed before they are exploited to the potential detriment of a lot of businesses, residents and all of our nations?

I can understand why partners in small partnerships are concerned that the mistake, the negligence or the wrongdoing of one partner could lead to all the partners losing everything. That is the initial idea behind a partnership. It may not be appropriate in this context, but the fact is that a lot of my constituents, and a lot of constituents represented by all members of the Committee, lost everything because of the misconduct and negligence of a fairly small number of very senior people in the big accounting partnerships and in the big banking organisations. It would be wrong if we gave the impression that fellow partners in those organisations are somehow getting more protection than the small business owners that I know, who lost their businesses because a big firm of accountants were simply not looking after their interests properly. Is the Minister satisfied that, although we are protecting partners in limited liability partnerships from a disproportionate impact in cases where one of the partners gets it wrong, we are not creating a situation where the partners in a business are somehow better protected against mishaps than the shareholders, customers, service users and other small businesses that rely on their financial advisers for their own success?

I would be grateful for answers to those questions either now or later. We all wish the Minister’s colleague, the Minister for Small Business, Industry and Enterprise, every success in the discussions that she is having on the future of our steel industry. I am happy to wait for replies to my questions if the Minister is not in a position to reply this morning.