Draft Small and Medium Sized Business (Credit Information) Regulations 2015 Draft Small and Medium Sized Business (Finance Platforms) Regulations 2015

Rob Marris Excerpts

Thursday 5th November 2015 General Committees

[Rob Marris (Wolverhampton South West) (Lab)]

It is a pleasure to serve under your chairmanship for the first time, Mr Nuttall. I thank the Minister for his usual lucid explanation. I shall, as I often do, depart from convention and ask him some questions first, so that he has time to ponder the answers, before I make some general remarks about the two sets of regulations.

The Breedon taskforce of 2012 stated that the Government have a role to play in encouraging lending

“through the disclosure of data that sits within public bodies.”

First, I wonder what the Government have done in the intervening three years to play their role. Secondly, the taskforce also recommended that the British Bankers Association, with which I met recently, should

“explore greater credit data sharing”.

Will the Minister give some indication of what greater data sharing banks have done with non-bank providers? I appreciate that he is not answerable for the banks. They are independent institutions—apart from two of them, to which we will return—but he may have some information that would assist the Committee.

Thirdly, what have the Government done to encourage RBS and Lloyds bank, which are basically owned by taxpayers, although in declining proportions, to lend, particularly to SMEs?

Fourthly, the explanatory notes to the credit information regulations indicate:

“The provision of credit data on companies is not a regulated activity”.

If that continues to be the case after these technical regulations are passed—I think it will, although I appreciate there will be designation—will the Minister explain why?

Fifthly, it is up to CRAs, as I understand it, to apply to be designated under the credit information regulations. Will the Minister explain to the Committee the Government’s thinking on why that will not be compulsory? There may be a good reason, but it is not clear to me.

Sixthly, the explanatory notes to the credit information regulations state at paragraph 10.3, under the details about the impact of the regulations:

“The Bank of England will benefit from receiving an increased depth of credit information as a result of the regulations.”

Some of us feel that we suffer from information overload, particularly when we look at our emails, so will the Minister tell us why the Bank of England needs that even greater depth of credit information?

My seventh question—I assure you, Mr Nuttall, that I have only nine, or perhaps 10—is about paragraph 7.1 of the explanatory notes to the finance platforms regulations, which states:

“A proportion of the SMEs that are rejected by the largest UK lenders are viable businesses, and are rejected simply because they do not meet the risk profiles of the largest banks.”

Will the Minister give some indication of what proportion of SMEs are rejected? Those explanatory notes also say, in paragraph 9.2, that an implementation guide will produced. Will he indicate the date by which that guide will be produced and published, as it will help lenders?

I have two more questions. I note—the Minister may correct me on this—that Handelsbanken is not on the list of designated banks that he read out. If he is at liberty to do so—I appreciate that he may not be—will he indicate why that sound, upcoming bank, which does a lot of lending to SMEs, is not designated? Of course, perhaps I misheard the list.

My final question is somewhat rhetorical. Regulation 2 of the draft finance platform regulations is about interpretation. I may have missed this, but as far as I can see the regulations do not define what a finance platform is. Will the Minister tell us where that definition is? It seems to me an awkward phrase. It is one that seems to be generally accepted, as it is being used in the draft regulations but is not defined in them, but for those of us who are not finance anoraks it is a new expression.

The Opposition are likely to support the draft regulations. I hope we will get some information from the Minister pursuant to my questions, but the regulations are helpful and, as he adverted to in his remarks, have multiple safeguards. Labour supports business, and SMEs in particular. They are the drivers of growth, especially, very often, in employment. For that reason, for example, I met the Institute of Directors this week to get its take on various things, not specifically on these regulations.

Both sets of regulations will help SMEs access borrowing so that they can invest and expand, which we all want. According to the helpful table produced by the Library, however, in recent months the problem has not been lending to SMEs, which has grown in the past three months, but a shrink in lending to large businesses—for these purposes, SMEs are businesses with a turnover of less than £25 million a year and large businesses those with a yearly turnover of more than that. Large business lending is suffering, whereas SME lending is growing. It is not growing as fast as many of us would wish, and we hope the regulations will encourage more growth, but that is the recent trend.

In its response to the consultation on the SIs, Experian supported them—unsurprisingly, given its commercial imperative—and said they would be a “market-changing enhancement” and would result in “significant improvements in finance providers’ ability to assess risk, consider affordability and lend responsibly.” Experian also said that the assistance the regulations would give to SMEs would

“support market growth and stability”.

Will the Minister explain the apparently hands-off approach to Lloyds bank and RBS? The Government have had significant leverage over those banks through United Kingdom Financial Investments, but have not used it on lending to SMEs or certain of the unusual practices of those banks, so will he say why? Had that leverage been used in the past five and a half years, it would have helped the SME sector, which we are keen to support, as are the Government. Indeed, that leverage could have been used more than it was under Mr Brown and the last Labour Government.

As I have said, the Opposition are likely to support the regulations, but a little more clarity from the Minister would help to inform the debate.

--- Later in debate ---

[Mr Gauke]

I thank the right hon. Member for Enfield North and the hon. Member for Wolverhampton South West not only for their questions but for their support for the draft regulations. We have had a productive discussion, and I hope to respond to their questions. Before I do, let me reiterate that, together, the draft regulations will generate a significant change in competition in the market for SME finance ,which could improve not only the amount of finance available to SMEs but the cost and quality of services offered to small firms.

As I set out in my opening remarks, there is a large body of evidence that there are market failures in the SME lending market. The draft regulations will help to remove the barriers to entry identified in that evidence; increase competition in a highly concentrated market that is dominated by the four largest banks; and remove information market failures that prevent SMEs from seeking finance and prevent alternative finance providers and challenger banks from knowing of each other’s existence.

I stress, particularly in the context of the first point raised by the right hon. Member for Enfield North, that the regulations are about providing opportunities to businesses seeking finance, so that they do not just go to one place, get rejected and give up, but choose to go to other providers. That is an important option available to businesses. Of course, it is ultimately for businesses to determine how much they wish to borrow, but the way of protecting businesses from over-borrowing is not to have a position whereby they cannot access finance at all. That is an important point.

The shake-up of the lending market for SMEs will improve the ability of our small and medium-sized businesses, which are so vital to UK growth, jobs and opportunity, to access the finance they need to grow, expand and continue to have a significant positive impact on the UK and its economy.

In light of some of the questions that have been asked, it might be helpful if I provide a little more information. The hon. Member for Wolverhampton South West raised a point about overall credit conditions. On an annual basis, the growth rate of net lending to SMEs continues to ease. It was 0.6% in June 2015, up from minus 2.8% in June 2014. Across all SMEs, 67% of applications in the 18 months to quarter 1 of 2015 were successful. That is up from 59% in the same period to quarter 1 of 2014. For small businesses, successful credit applications fell slightly in quarter 2, but the trend over the past few years has been improving.

It also might be helpful for the Committee to have a bit of information about SME finance application rejection rates. The rate for new money is 35%. For new money for first-time borrowers, it is 45%. For renewals it is 2%, with an overall rejection rate of 24%. To break it down in another way, loans are at 33% and overdrafts are at 18%. It would be difficult to provide information on rejections on the basis of the loan application not meeting the bank’s risk criteria. I can understand why the hon. Member for Wolverhampton South West asked that question—I am not sure I can provide that information, but I hope what I have said is helpful to him.

On the provision of data through public bodies, I would argue that the UK is a best practice example throughout Europe of data sharing by CRAs. A register remains an option that can be considered if the current system and the regulations are not effective, but our proposals are part of our desire to ensure that data are properly shared.

A question was asked about the purpose of the Bank of England accessing the data, and whether that would constitute overload. That access should give the Bank of England a much fuller understanding of the regional and sectoral allocation of credit, of the type of small and medium-sized businesses that are getting credit and of the risk profiles of different small and medium-sized businesses. We believe that that access will be helpful to the Bank of England.

On encouraging RBS and Lloyds bank to lend to SMEs, the regulations do just that. They apply to both RBS and Lloyds, which will share the data through the CRAs. That is how the UK system works.

[Rob Marris]

Will the Minister say what the Government and their predecessors have been doing for the past five and a half years, before these regulations to get RBS and Lloyds to lend to SMEs?

[Mr Gauke]

The best way of ensuring that our banking sector, including RBS and Lloyds, is in a position to lend to SMEs has been to look at the overall situation of the economy and to ensure, for example, that we have had lower interest rates than we might otherwise have had, and that we have not had to increase interest rates prematurely. That has been part of ensuring that we have good lending conditions. We have had policies such as funding for lending, which was designed to help banks across the piece. We must remember that although RBS and Lloyds are publicly owned, operational decisions are not made by Ministers. That has never been the Government’s approach.

The challenge for banks in recent years has been that we needed them to ensure that their balance sheets were restored and that, to some extent, they moved on from a period of risky lending to ensure that they were more secure, while at the same time ensuring that a flow of finance was available to SMEs in particular. The Government have sought to maintain that balance throughout the past five and a half years but, in truth, there was never an option of simply telling RBS and Lloyds to lend merrily without due regard to the risks. I am not saying that the hon. Member for Wolverhampton South West is suggesting that.

[Rob Marris]

The Minister is right, that is not what I am suggesting. He mentions interest rates, which the Bank of England sets. It sets the tone for the whole market and does so independently. We have had low interest rates since before the coalition Government came in, and the Bank of England’s interest rate has not changed.

On operational stuff, the Minister must distinguish between strategy and tactics. It is right for a major shareholder, such as the Government in those banks, to set the tone not of individual lending decisions—yea or nay—to an SME, but of the risk matrix used by the institution. On a strategic level, the Government could influence that as a shareholder, but they have apparently abdicated responsibility and failed so to do, thereby hurting SMEs.