Lord Wilson of Sedgefield
Main Page: Lord Wilson of Sedgefield (Labour - Life peer)Small Businesses: Access to Banking
Lord Wilson of Sedgefield Excerpts
Lord in Waiting/Government Whip (Lord Wilson of Sedgefield) (Lab)
My Lords, I am grateful to the noble Lord, Lord Sharkey, for securing this debate and for his thoughtful and comprehensive contribution on the future of the SME sector. I am also grateful to the right reverend Prelate for his contribution. I look forward to receiving a copy of the report that he mentioned. I also thank the noble Baroness, Lady Kramer, and the noble Lord, Lord Altrincham, for their contributions. As everyone agrees, the SME sector is of critical importance to the UK economy. I am also grateful to have received interest from beyond this Room from Allica Bank and Creative UK.
SMEs account for the vast majority of all businesses and the majority of overall business turnover and employment. SMEs remain the backbone of our economy and the key to our prosperity. They drive the UK’s growth and employment. The Government are committed to supporting their access to the finance and services that they need. This is why provision was made in the Autumn Budget to support the British Business Bank to invest over £1 billion across 2024-25 and 2025-26, to enhance access to finance for small businesses. This includes over £250 million each year for small business loan programmes, including start-up loans and the growth guarantee scheme.
The Government also announced in December last year a new business growth service to make it easier and quicker for SMEs to find government advice and support, all under one roof. Last month, we published a call for evidence on SME finance. This work will feed into the small business strategy, which is due to be published later this year.
I should add that the Government’s call for evidence on SME finance also highlights the important issue of the underserved, including the role of community development finance initiatives in the UK in helping minority groups to access finance. It would be good to understand more clearly what sits behind the headlines and what is driving the financing gap for the underserved.
The Government are also taking steps, however. The British Business Bank’s Community ENABLE fund, which has already been mentioned and was launched in November, aims to increase the availability of funding to social impact sector lenders and the smaller businesses they serve in local communities across the UK. The initiative is expected to provide a significant boost to the sector, supporting up to £150 million of lending over the next two years.
The noble Lord, Lord Sharkey, highlighted in detail the lack of demand from SMEs for credit, as outlined in the Government’s recent call for evidence on SME finance. This underscores the importance of government efforts beyond the vital schemes of the British Business Bank. The Government’s planned business growth service to strengthen SME advice and support is an important intervention in this space. It complements other schemes such as Help to Grow: Management, which provides SMEs with the skills needed to manage finances and innovate effectively.
The noble Lord, Lord Sharkey, also raised the issue of signposting a business declined for credit to an online platform to help match them with alternative credit. This refers to a 2016 government initiative known as the bank referral scheme. We recognise that the scheme is not working quite as intended; that is why the Government will consult on the scheme later this year.
Stepping back from the detail of individual policies, I recognise the acute macroeconomic uncertainties currently facing businesses across the UK and globally. This uncertainty has intensified in recent weeks as a result of global tariff policies, causing anxiety for small businesses around whether they can continue to access the finance they need. The Government have taken decisive action here by unveiling significant measures, including increasing UK Export Finance’s ability to provide financing support to British exporters by £20 billion.
The Government recognise the value of the British Business Bank and the vital work that it carries out to support SMEs. The growth guarantee scheme supports smaller businesses as they invest and grow by providing a government guarantee of 70% to lenders for loans of up to £2 million. The guarantee reduces the risk to the lender, making financing more accessible where credit would either be declined or available at a prohibitive cost. It supports a wide range of finance including term loans, overdrafts, asset finance, invoice financing and asset-based lending. The future shape of the growth guarantee scheme will be determined at the spending review, which is due to conclude in late June.
Recognising the critical importance of access to banking services and concerns around debanking, the Government laid a statutory instrument earlier this week to strengthen how customers, including SMEs, are treated when a bank decides to close a customer’s account. The FCA has undertaken research looking at the drivers and rationale for debanking; it found no evidence of this being politically motivated.
The Treasury’s call for evidence on this topic revealed that there were still a number of deficiencies in the current rules. This includes customers not having enough time to make alternative banking provision in cases of bank account closure or not understanding the reasons for their provider’s decision. The new rules will give customers more time to challenge decisions they disagree with and find a new bank if their account is closed. Specifically, the new rules extend the minimum notice period before bank accounts can be closed to 90 days, which is higher than the protections in other jurisdictions—including in the EU. Additionally, we have mandated that providers offer a sufficient explanation for account closures and outline the process for lodging complaints.
On physical banking presence, which has been mentioned, especially for rural areas, I recognise the importance of banks, or equivalent banking services, being readily available on the high street for SMEs and the concern about the loss of relationship banking in the digital age. That is why the Government are actively supporting the rollout of banking hubs, with a commitment that at least 350 will be established by the end of this Parliament; about 140 have already been opened. These hubs will enhance access to banking services, including in underserved areas, ensuring SMEs can continue to contribute to our economy. The process for requesting a hub is an independent one, carried out by LINK, when a cash service closes or there is a community request to examine if a hub is warranted.
According to the FCA’s 2022 Financial Lives Survey, in the 12 months to May of that year, just 33% of adults with a day-to-day account carried out banking activities face to face in a branch, down from 63% in 2017. In respect to what the right reverend Prelate said about rural areas, we obviously recognise the importance of access to banking, the challenge with rural areas and the importance of the Post Office, and 99% of the UK population lives within three miles of a Post Office. I cannot say anything more about what will be happening in the spending review in relation to the Post Office, but for access to cash the FCA rules state that 95% of people must be within three miles of a cash facility in rural areas.
A number of issues were raised about whether the UK’s regulatory regime is appropriately calibrated to support the real economy and financial stability. Looking carefully at the impacts of regulation is important and consistent with both the FCA and PRA being given secondary objectives designed to ensure that the impact of regulation on the UK’s growth and competitiveness is carefully considered. We must also be careful not to overlook why regulation was strengthened in the UK and globally following the financial crisis and the importance of ensuring that banks are adequately capitalised.
To answer some of the questions from the noble Lord, Lord Altrincham, the banking sector is critical to delivering a number of priorities for economic growth. That is why the Chancellor has asked for a new approach to regulation that supports growth, instead of excessive focusing on risk, and why we are codesigning the first ever financial services growth strategy with industry. This Government’s plan for change will raise living standards across the UK, putting more money in people’s pockets.
On capital regimes, supporting UK economic growth and competitiveness was a central consideration for the PRA, part of the Bank of England, in finalising its Basel 3.1 package. Basel 3.1 is about the capital framework in the UK. The PRA’s final package included a new SME lending adjustment to ensure that capital requirements for lending to SMEs would not go up as a result of Basel 3.1. This was a material improvement to the PRA’s original proposals, which inadvertently would have increased capital requirements for banks’ SME lending. To the specific question about thresholds protecting bank deposits here in the UK and the importance of protecting SME deposit customers, noble Lords will be pleased to hear, as the noble Lord, Lord Sharkey, has already pointed out, that the Bank of England is currently consulting on raising that limit, which currently protects £85,000 of bank deposits, to £110,000.
A question was also raised about the shift in the provision of credit in the UK’s financial system away from traditional, large banks and whether this was a risk to the UK’s financial stability. I would be keen to stress the importance of competition and diversity of credit here in the UK and the value of credit being provided by smaller and specialist banks. These provide much needed finance for the real economy. Challenger and specialist banks now provide 60% of gross lending to SMEs in the UK. This increase in competition and diversity of finance offers benefits in reducing reliance on a small number of lenders. This may improve the resilience of the system to continue to support the economy in times of stress.
The FPC is very focused on the role of non-banks in the financial system and wider economy, with the sector becoming an increasing focus in its publications. The non-bank sector provides 56% of the total £1.4 trillion stock of corporate debt and has accounted for the entire increase in stock of funding to the real economy since 2007.
It would be remiss to close this debate without acknowledging past failings in the treatment of SME business customers by their banks. This includes but is not limited to historical interest rate hedging products. Understandably, these episodes affect trust and caused anger following the financial crisis. Therefore, the FOS now has jurisdiction over 99% of business banking disputes, creating a much wider safety net for businesses. This is and remains a genuinely important step in ensuring the protection of SMEs. More widely, the Treasury and FCA continue to monitor the adequacy of the regulatory perimeter for business finance. In this, we aim to balance protecting SMEs with the risk of increasing the cost of accessing finance as a result of extending regulation too widely.
This has been a really good debate, and SMEs are seen by the Government as one of the driving forces of the economy going forward.