SME Finance
Debate between Thérèse Coffey and Harriett Baldwin
Dame Harriett Baldwin (West Worcestershire) (Con)
Thank you, Madam Deputy Speaker, for granting this wonderful opportunity to present the report that the Treasury Committee published yesterday on access to finance for small and medium-sized businesses.
As every Member will know, small and medium-sized enterprises form the backbone of the UK economy. All of us in our constituencies will be aware of amazing small and medium-sized businesses. In fact, 99% of the businesses in this country are small and medium-sized, which gives us an idea of how important they are. Well over half of our constituents who are employed work for SMEs. Access to finance for small and medium-sized businesses, which the Committee has been looking at, is therefore a really important issue. I want to highlight some of the points raised in our report. This is an opportunity not only for Members to hear those points but, I hope, for the Minister to take them on board.
No one can deny that, with the pandemic and the energy price crisis, the past five years have been an absolutely torrid time for everyone. SMEs have often been at the forefront and have experienced the brunt of those crises, but without the huge resources that larger businesses have to be able to cope. Through those crises, the Government took extraordinary steps to provide support in terms of access to finance for small and medium-sized businesses, but we are now in a different environment. In fact, all the evidence and data published this week show that small and medium-sized businesses are beginning to feel much greater confidence—we are seeing some real improvement there. Nevertheless, issues remain from that difficult time and also more structurally following financial regulation measures set up since the banking crash in 2008.
I want to flag up a few of the points that we made in our report. The first concerns the Business Banking Resolution Service, which was set up after the banking crisis and was designed to provide access to resolution, mediation and outcomes for businesses that were too large to access the Financial Ombudsman Service but had nevertheless been treated pretty badly during the financial crisis. I think it fair to say that the Committee formed the view that the Business Banking Resolution Service had not been a success. It is owned and run by the banks, which raises questions about conflicts of interests in the first place, or certainly the perception of a conflict of interests. Moreover, it has spent about £40 million during its lifetime and has awarded only £2 million worth of compensation, because it drew the access criteria so tightly that very few businesses were able to qualify. As a result, there were very unsatisfactory outcomes for businesses that used the resolution service because they could not access the Financial Ombudsman Service, and the Committee agrees that it should close as planned. We look to the Government to come up with a consultation on a new mechanism by the end of this calendar year.
Secondly, there is a Government initiative called the British Business Bank. The Committee thought highly of what it heard in evidence from BBB, and welcomed the announcement in the Budget that the covid recovery loan scheme had been rebranded as the growth guarantee scheme. We expect that to be an important source of credit to help small businesses to grow when they would otherwise have struggled. However, we noted that very few small businesses even knew about this organisation, and we have tried to publicise it through the report. We urge the Government to assess the effectiveness of BBB every year, because we think it has an important role to play and it is pretty successful where it is known about, but it is not widely known about.
Thirdly, we were greatly concerned by what we heard in the evidence about something that sounds very niche but is actually very important. It is known in the trade as Basel 3.1. After the financial crisis a committee set up in Basel, the Swiss city where the central bank of central banks is located, came up with some proposals which were then known as Basel III. The Prudential Regulation Authority—part of the alphabet soup of financial regulation that was set up after the crash—is currently consulting on a tightening of the criteria for lending to small and medium-sized businesses. At present there is a discount factor relating to the risk to banks’ balance sheets from lending to such businesses, but the PRA wants to tighten that arrangement considerably.
The Committee is concerned because, according to the evidence that we heard, such a move could withdraw about £44 billion of lending to businesses from the UK economy. We therefore urge the PRA not to proceed, particularly because we also heard evidence that the proposal would not be implemented in the United States or in the European Union. In fact, for many years when we were members of the EU we did not implement what the Basel Committee was recommending. The committee then issued a statement expressing concern and saying that we were in violation of its recommendations. That shows that it is perfectly possible not to implement them: all you will get is a reprimand. We have therefore concluded that the support factor for small and medium-sized businesses should not be changed at this stage in the economic cycle.
A fourth issue that came up in the evidence we received, and which has really shocked the Committee, is the extent to which banks are simply closing the bank accounts of businesses across the country. I expect that every Member of this House will have had a piece of casework that involved one of the businesses in their constituency being told that its bank account was closing, with absolutely no reason or notice given by the bank. We asked the banks about this issue, and they confessed that they had closed over 140,000 business bank accounts during the course of 2023. Obviously, there can be perfectly good reasons for doing that: there will be businesses that do not reply to any questions from their banks, and there will be businesses that are suspected of money laundering or that have actually been found to have done so. However, we also found that banks can use phrases such as “risk appetite” or “reputational risk” to close the bank accounts of organisations and businesses that we would think are a perfectly fair part of the fabric of this country. For example, amusement arcades and pawnbrokers can struggle to get access to a bank account.
Perhaps most alarmingly, we heard in one of our evidence sessions with banks that even someone in the defence sector can have their bank account closed or struggle to open one. This is often to do with the share- holders of banks wanting to observe the environmental, social and governance rules. We all think that such rules are good, but they can lead to some unintended and inadvertent consequences, whereby defence companies are effectively debanked and cannot get access to a bank account in this country. I am sure that all Members present will recognise that the defence of this country is a foundation for ESG compliance, and should not, therefore, lead to people struggling to get a bank account. We urgently request that the Treasury introduce the legislation on debanking that it has promised, and we look forward to that happening before the end of July. It is something that we are keen to see.
I see that my 10 minutes are up. I thank everyone for their attention, and I hope my statement has provided food for thought for Members across the House.
Dr Thérèse Coffey (Suffolk Coastal) (Con)
I am on the Treasury Committee, and I commend my hon. Friend for her great chairmanship. She has already mentioned the need for transparency, and I am delighted that the Treasury will bring that forward, but I was particularly struck by how difficult it is to open accounts. Even for farmers, it can take multiple months. Most importantly of all, the PRA’s approach is going to choke the growth of many small businesses, and we need our small businesses to become much bigger for the prosperity of our country. Does my hon. Friend agree that the PRA really needs to understand the importance of this issue to ensure that the entire country prospers, which will only happen if small businesses prosper?
Dame Harriett Baldwin
I agree with my right hon. Friend. Inflation is the worst tax on our economy and important steps are being taken by the independent Bank of England to raise interest rates, to make sure that inflation gets back to its target zone. That all seems to be on track. Monetary policy has been tightened already, and we see that in the environment in which our small and medium-sized businesses are working. They have been squeezed by higher interest rates, and the evidence we received showed that the acceptance rate for credit has fallen from 80% to 50%, so it does not feel like the right time to be tightening access to finance for small and medium-sized businesses through a change in regulations. It particularly does not feel like the right time to be doing so unilaterally, when the EU and the US are not following the Basel 3.1 rules.
Oral Answers to Questions
Debate between Thérèse Coffey and Harriett Baldwin(3 years, 8 months ago)
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Dr Coffey
I have not yet responded to that letter—I understand that officials will be responding to the embassy —partly because, and some of the aspects of this have been raised, I wanted to explore some of what our policies—[Interruption.] The hon. Gentleman is trying to intervene and I am trying to give him an answer. [Interruption.] I think I have probably said enough as he does not want to hear the answer.
Harriett Baldwin (West Worcestershire) (Con) [V]
Covid-19: DWP Update
Debate between Thérèse Coffey and Harriett Baldwin(4 years, 6 months ago)
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Dr Coffey
We do not intend to end the five-week wait—that is where advances can help. The hon. Lady is right to point out the difficulties people have with telephony. We have turned that system around, so it should be more straightforward now that the DWP calls claimants rather than the other way around.
Harriett Baldwin (West Worcestershire) (Con) [V]
May I join colleagues in thanking DWP staff, particularly those in West Worcestershire who have worked so hard throughout this crisis? The Secretary of State has been asked a number of times about universal basic income and has resolutely rejected it. Can she confirm that a universal basic income would have to be paid universally —to everybody—including people like us?
Dr Coffey
My hon. Friend is absolutely right. We know that it is not a well-targeted system, and that is why we will continue to say that it is not the approach that this Government will take. May I also wish a belated happy birthday to my hon. Friend, who turned a significant age at the weekend?
Public Services (Social Enterprise and Social Value) Bill
Debate between Thérèse Coffey and Harriett Baldwin(14 years ago)
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Harriett Baldwin (West Worcestershire) (Con)
I am grateful for the opportunity to speak on this interesting private Member’s Bill, and it is an honour to follow the right hon. Member for Salford and Eccles (Hazel Blears) because she obviously knows such an enormous amount about this topic. I draw the House’s attention to my entry in the Register of Members’ Financial Interests. For the last couple of years, I have had the privilege of sitting on the board of the Social Investment Business—a social enterprise itself—which has been a fascinating place from which to observe some of the issues and challenges in the social enterprise sector.
The social enterprise sector is not widely known or acknowledged by the public. If we asked people in the street to define a social enterprise, I think that most people would look fairly blank, but the right hon. Lady gave us some excellent examples of social enterprises in her constituency, and most people will have heard of organisations such as Jamie Oliver’s Fifteen. It is a restaurant that runs on a commercial basis, but it helps young people who are struggling to get into employment by training them as chefs. People have also heard of organisations such as Cafédirect and The Big Issue—the latter being a social enterprise in which the commercial magazine helps homeless people to earn an income. However, social enterprise still has some work to do in engendering public knowledge, understanding and acceptance of what it does.
From the perch that I have occupied for the last couple of years, it has been fascinating to observe some of the issues and challenges for the social enterprise sector. In particular, I have chaired the investment committee, which has disbursed the money from the Futurebuilders fund, which was almost £200 million of Government funding that was designed to be used in loans to completely unbankable social enterprise organisations. If social enterprises were trying to win contracts from public sector organisations, the Futurebuilders money was designed to be the last resort. If organisations had already been to the banks, applied for grants and pursued all the other sources of potential funding, but still needed that last little bit of funding to make the project viable—the unbankable funds—the Futurebuilders fund could help.
The fund has now been fully disbursed and, for the last five or six years, it has been a portfolio of loans. I wonder whether hon. Members wish to guess what the annual default rate has been—in this very tough financial period—on that series of unbankable loans to social enterprises.
Harriett Baldwin
That is an extremely low rate, but in fact the annualised default rate has been just over 1%. The case has been proven that a portfolio approach can be taken to investment in such social enterprise organisations.
I am sorry that my hon. Friend the Member for Wycombe (Steve Baker) is no longer in his place, because he and I have enjoyed many lively debates on many different topics and I would have pointed out to him that we do have an arrangement in this country whereby the Government spend money on behalf of taxpayers—and that is an accepted fact. This Bill would helpfully draw to the attention of the procurer who spends public money the existence of social enterprises, which might offer an attractive alternative to the state building its own apparatus or to a private sector provider.