Madam Deputy Speaker (Dame )
We now come to the Select Committee statement. The Chair of the
Treasury Committee, the hon. Member for West Worcestershire (Dame
), will speak for up to 10
minutes, during which time no interventions may be taken. At the
conclusion of her statement, I will call Members to ask questions
on the subject of the statement. I emphasise that we want brief
questions, not speeches, and that those questions should be
directed to the Committee Chair, not the relevant Minister.
11.42am
Dame (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
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.
(Selby and Ainsty) (Lab)
I am also a member of the Treasury Committee, and I thank the
Chair for all her hard work on this report.
On the overall question of the confidence of SMEs in their
ability to access finance, the report raises some interesting
figures. There was a £95 billion finance gap in large high street
bank lending to SMEs between 2015 and 2022, alongside the softer
pressures of SMEs fearing rejection in lending and the lack of
trust in the lenders themselves. Will the Chair please provide an
assessment of how she feels that appetite looks across the rest
of this year and beyond? What tools are at our disposal to deal
with the inherent caution in the SME lending market?
Dame
I thank my excellent colleague for his question. He is absolutely
right that the inquiry received evidence on what I would describe
as financial apathy. Small businesses sometimes choose not to
borrow, choose not to grow, In fact, only 5% of small businesses
that seek lending would even consider shopping around to find
another provider if they were rejected by their main bank.
There is work to do to encourage and guide SMEs, and the British
Business Bank has a very important role. It is not well enough
known, which is probably holding back the growth of many
excellent small businesses. I am so proud that our Committee has
been able to champion this.
(Glenrothes) (SNP)
I am grateful to the Chair of the Treasury Committee for making
this statement today. She will be aware that one of the main
reasons why a lot of small businesses have to rely on bank
funding is because bigger businesses do not pay their bills on
time, and all too often do not pay their bills at all. A lot of
small businesses in my constituency, particularly in
construction-related work, tell me that they sometimes have to
wait six months or more to get paid. That increases the risk
factor for a bank, because it is much more likely that the small
business will fail. Has the Committee looked at the problem, or
does it intend to do so, where small businesses, particularly in
the construction sector, are not paid for their work?
Dame
The hon. Gentleman makes an excellent point that everyone in this
House will recognise as a challenge. Getting paid by bigger
businesses is a bane of the lives of many small business owners.
I know there has been a lot of work in the Department for
Business and Trade, and the Government need to lead by example by
promptly paying for services. The Committee heard evidence that
small businesses continue to be frustrated by this.
Madam Deputy Speaker (Dame )
I thank the Chair of the Treasury Committee for her statement and
for answering questions.
