Examination of Witnesses (Questions 80
- 92)
TUESDAY 2 JUNE 2009
MR STEVE
COOPER, MR
STEPHEN PEGGE,
AND MR
PETER IBBETSON
Q80 Chairman: You do not need to
add anything if you agree with that answer.
Mr Ibbetson: I agree with that.
I think it is very, very important in the context of the confidence
to prove to the outside world we are emphatically open for business.
Here is a scheme which is Government guaranteed for those businesses
that are in difficulty, and we really are open. That is what it
said.
Q81 Mr Clapham: Just looking at the
problems, and I hear what you say about the training—all
three of you explained how the training schemes were run for the
people who were actually dealing with businesses and explaining
the scheme—but are you happy that the Government got it
about right between the announcement and the implementation, or
do you feel it could have been done more speedily?
Mr Ibbetson: I think they got
it about right, if I am honest. Personally, I spent Christmas
Day and Boxing Day negotiating it with Government (I am sure the
other guys did as well), so there was a lot of work put in in
a very short timeframe to get this thing on the streets as fast
as we could. I think we got it about right.
Mr Cooper: I totally agree.
Mr Pegge: Yes.
Q82 Mr Clapham: So the three of you
agree they got it about right. There has been a criticism that
perhaps the lack of skilled civil servants, to some degree, was
a constraint on the Department in rolling the scheme out. Did
you find that? In your discussions with civil servants did you
find that they were up to speed; that the skills were there?
Mr Ibbetson: I think that would
be a fair criticism if the banks had not been involved from the
outset in trying to define the skills, but we were. The dialogues
with BERR were open from the outset and I think it is unreasonable
to expect BERR to know every industry that they ever deal with,
and I think it is right that they refer to the experts in that
industry when they are looking at that industry, and that is what
they did on this occasion.
Mr Pegge: I think BERR, the Bank
of England and many of the other authorities involved—the
Treasury and so on—have all reinforced their resources since
the autumn with extra skills in this area. I think that has been
necessary and helpful but, I have to say, my experience of BERR
is that they have always had a remit to look at SMEs and access
to finance, so there was, probably, a good baseline for that already.
However, it was unprecedented circumstances and, clearly, people
were working incredibly hard under a lot of pressure initially,
until those extra resources came through.
Mr Cooper: From my experience,
I have spent quite a time over the last 12 months with several
civil service divisions, and I have been impressed, actually,
by the level of passion and commitment. I think the skills set
and knowledge has been of varying quality and my experience of
the Enterprise Directorate within BERR is that they are top of
the tree. I have been pleasantly surprised by how knowledgeable
they are of the sector. Clearly, the close relationship with the
banking community has helped, I think, to facilitate that, but
they are, I think, pretty good.
Chairman: I am not sure some people would
approve of passion in civil servants, but apart from that that
is very encouraging!
Q83 Mr Clapham: So we are saying
the template was there but that was reinforced for the betterment
by virtue of the fact that there was a dialogue with the banks?
Mr Cooper: And the representative
bodies, the CBI—the community has played a part here, and
I think that has been very powerful.
Q84 Mr Clapham: We have heard from
both sides—people that represent small business and yourselves,
the banks—talking about the dialogue and the better working
with small business. Does this mean that for the future we are
going to see, perhaps, a different way and a way that is going
to be based more on dialogue with small business than has previously
been the case and was the case before the recession? Are we likely
to come out of the recession with a much better understanding
of how banks work together with small business?
Mr Ibbetson: I think there is
pretty clear evidence (I will speak for NatWest and Royal Bank)
that we are now getting out in front of the businesses in the
high street; we have put business managers back into the branches.
Those sorts of initiatives are happening now; we have put out
400 specialist relationship managers—these are the really
experienced managers. To give you an example of that, in Northamptonshire
we have 11 of these that sit with the managers; between those
11 they have got 328 years' experience in banking. Those people
are sitting down, day-in, day-out, with businesses and I think
it is pretty clear that will continue even as we come out of the
downturn.
Mr Pegge: I do not think relationship
banking ever disappeared. I think it was in its infancy in the
last recession, in the early-1990s, but since then it was there,
but it is certainly true to say, I think, in the boom times, there
was, on both sides—on the business side as well as the bank
side—a tendency sometimes to just look at banking as a transactional
thing; to provide finance, perhaps, without a long-term view for
building relationships. I think on both sides people now realise
the value of relationship banking, and so I think that is important
for the longer term.
Q85 Mr Clapham: That is good to hear.
Mr Cooper: I would add to that.
I do not think it was ever "lost" but I think the relationship
was put under strain at the early outset of the economic downturn.
A shock to the system is sometimes a good wake up call. Similar
to the other banks, we have spent a lot of time making sure we
get our people to spend more time with their customers understanding
their customers' needs more and better, and certainly our research
from our customer base is showing that is starting to work; they
are saying that we understand their needs more and their satisfaction
level with us is improving.
Q86 Chairman: Did you recognise the
description from, I think it was, the CBI in the last session
that there was too much contact by email but now people are talking
face-to-face again? Do you recognise the comment behind that observation?
Mr Ibbetson: To be honest, I did
not really recognise that. I understand what he was saying, and
I think there is a generic tendency for people to converse by
email. I am not sure that is necessarily a bad thing—
Q87 Chairman: The perception was
that the banks—and perceptions, as we know in politics,
are very painful, and can often be real—were no longer quite
as engaged in this relationship process, and you have to do more
to explain. I openly declare, I was impressed with what I saw,
when I was attached to the Royal Bank of Scotland, between relationship
managers and the business community in Liverpool when I came and
saw your office there. I was impressed by that. You have to do
more to explain that rather than just relying on people understanding
it.
Mr Pegge: I think there is scope
for face-to-face, email and telephone—whatever methods of
contact are required. One of the things that we have done much
more—and kicked off this year—is we have done 90 of
120 customer seminars around the country, but we have involved
not just the businesses and the banks but, also, Business Link
and representative groups, like the FSB. So, on a local level,
they are actually building up networks. I think one of the roles
of a bank relationship manager is to help put a business in contact
with other businesses and other forms of support, and probably
we were not doing enough of that. That has been something that
we will need to continue to do.
Chairman: My observation—and I
pass on to Tony Wright with this—is that in the old days
we MPs used to know bank managers; we had a reverse relationship
with them. Banks have become very anonymous to us, as Members
of Parliament now; we do not have contacts at branch level, typically.
(That is not true of Lloyds; I have had direct contact from my
Lloyds' branches). So that anonymity has become, perhaps, a problem
of perception on our side as well. I just pass that thought on.
Q88 Mr Wright: I go on to the same
questions I asked the previous witnesses in respect of the loan
guarantees. Do you think they are the best method of addressing
the problems that businesses have had in accessing finance? Do
you consider that the other government schemes have worked quite
well?
Mr Pegge: They have a role but
it is around that sort of 10% of lending cases, at the moment.
Most of the time it should be necessary; we should be able to
lend without any requirement for taxpayer guarantees behind it.
I think the other areas of support that government provides, and
they are important, are in terms of advice, guidance and help
around information to help them comply with regulations, advice
on managing their businesses, getting paid on time, and so on.
That is just as important, I think, as the money to make sure
that businesses are robust enough to be creditworthy and to be
successful.
Q89 Mr Wright: Do you consider this
is one of the solutions to the particular problem, not the panacea?
Mr Pegge: It is not the whole
story, but it is an important little part of it.
Mr Ibbetson: I agree with Stephen;
the advice and the networking will be a benefit that comes out
of the work that is being done now. I think that will be quite
long-lasting and it will be a real benefit. When an intervention
is needed I think the guarantee route is the right route. One
of the initial problems that we had with the Enterprise Finance
Guarantee was the perception, which was fuelled largely by the
media, that this was free government grant money, which was the
genesis of some of the early, difficult conversations we had.
It is not; it is right that when a business borrows money it should
repay it. I think the best way to deliver that is by way of government
guarantees.
Mr Cooper: I think the EFG has
met a root-cause of problems of access to finance, but it is very
much around debt finance; debt is not a substitute for long-term
capital. There are small businesses out there who need capital
to recapitalise themselves; they need help in terms of changing
their business models to be more relevant. So EFG does not meet
that need, and I think further things need to be done to support
businesses around education and so forth. Like Lloyds and RBS,
no doubt, we have held a significant number of seminars for small
businesses to support a change in terms of: "What do I need
help with?" We can give them some advice and some support;
we want them to tell us what they want help with as well, and
we have helped out 12,000 SMEs this year, but in terms of meeting
that need I think EFG has gone a long way to meeting that.
Q90 Mr Wright: You mentioned capital.
The banks have put money into the Capital for Enterprise Fund,
for instance—£25 million, as I understand—with
£50 million from the Government. Did the banks do this on
the basis that they are going to get a return on their investment,
or did they consider it was just something that was required to
back up the Government's investment?
Mr Pegge: For us it was a combination
of the positive impact that that should have; where actually it
would not be helpful for a business to borrow money and have to
service a debt but where they really need risk capital, which
does not require that but where there is a potential return on
the outside, it is useful to have that additional source of funding
available. Yes, we would also be hopeful. I think these co-investment
funds, where you have got private capital going in alongside government
funding, do work quite well because the decision should be commercial,
and we would expect and hope that those would give us a return
as well.
Mr Ibbetson: I agree with that;
it is a commercial decision and we would expect to get a return
on it. That is the right way to put that investment in, notwithstanding
the Government's majority shareholding. That is the basis on which
it went in. The bigger picture about the Capital for Enterprise
Fund is what it does and what experience we get out of that, and
the consultation is now starting about whether we need a wider
fund to replace what used to be the 3i fund and the ICFC funds.
The "learnings" we get out of this fund will inform
that debate, and I think that is the most important part about
this fund.
Mr Cooper: I would agree, particularly
with the last point. The equity markets for small businesses in
the UK are very, very immature—very undeveloped—and
have not been particularly successful in other markets either.
So I think the "learns" we get out will be very important
in terms of how we can take this forward.
Q91 Mr Wright: Bearing in mind the
Capital for Enterprise Fund is a shared fund with the Government
and yourselves, why was it that the banks went in to share rather
than backing what could have been a promising business opportunity
for the bank and, obviously, for the business? It would have been
far better for the bank to have invested 100% in that.
Mr Ibbetson: We have been there,
done that, in years gone past, with the 3i's and ICFC, and, as
Steve said, this is a very immature market. The experiences that
the banks had previously when they looked at that low end of equity
support were not an economic success, so it is probably better
to look at the creation of a fund which is managed by arms-length,
independent fund managers. It is better to look at it in that
way, and that gives the opportunity of a more economic return.
I think that is why we went into it in that way rather than creating
our own fund. We all have our own equity funds but predominantly
the equity funds in the UK focus on businesses looking for investment
of £25 million-plus; it is the bottom end of that scale that
we are looking to address with these funds. Actually, for very
small amounts of equity one of the best sources of fund is Business
Angels—private investors who put in their time as well as
their money. There is an awareness campaign that I spoke at the
launch of last week to try and encourage both businesses to think
of looking for finance from private investors and private investors
to get involved in that. The recent research that we have done
across Europe shows that there is an average 22% return by those
private investors in managing that, and I think they can do that
individually because they are hands-on involved and have the ability
to manage their investment, manage the risk that they are taking
and get a better return by putting management skills in as well
as the finance.
Mr Cooper: I would agree. I think
the interesting figure is the 22% return, which is an average
so some of the returns will be much higher than that and some
of them could also be lower—big losses. So it is really
about having the expertise, the skills set and the time to spend
with that small business in terms of helping them to grow with
support.
Chairman: I am going to ask a micro question
and Lembit can ask a macro question. We will take them together;
I will ask my question and Lembit will ask his by way of conclusion.
You heard me ask this of the last witnesses. The EFGS runs out
in March 2010. Should the Government think of replacing it with
something else or extending it, at this stage? Lembit?
Lembit Öpik: Understandably, banks
are more cautious about risk now, for very good reasons. What
can the Government do to help you as banks invest in new or lend
to new business growth?
Q92 Chairman: What is the future?
Mr Pegge: Shall I start with the
last question first? I think demand for finance is the big issue,
at the moment, but business confidence is still relatively low.
It has improved recently in some of the surveys—the CBI
survey that came out today suggests that—but, nevertheless,
businesses are not investing in capital equipment, so requirement
for finance is not so great. That, ultimately, will hold back
recovery. So one of the things that, I think, we can all do is
encourage businesses to see that banks are open for business;
that actually there are some good opportunities for small firms—it
is not doom and gloom everywhere—so that we start to get
back some of that confidence into the economy. On the question
of EFG, I do not think we should go straight back to the Small
Firms Loan Guarantee as it was; I think there were some helpful
changes that were made here—for instance, the extension
to slightly larger businesses, and it will be helpful, I think,
to keep that element of it—and, also, the ability to provide
finance to that wider range of sectors. I would hate to think
that there would not be any guarantee scheme there, but, equally,
it is a matter of priorities, is it not and, perhaps through a
process of consultation, looking at how we can target it on where
it is really needed.
Mr Cooper: I would agree. I think
EFG is working well, at the moment, and significant improvements
on that compared to the old scheme. In terms of what is needed
next, I think we need to take stock of where the economy is as
we turn into the second half of the year and into quarter one
next year. We very much look forward to helping to shape that
with BERR and my colleagues here, plus the representative bodies
and so forth. I am not sure whether EFG is the right solution
going forward, but there is certainly room for something going
forward. Again, whether it needs to be the same size of fund,
I think, remains to be seen. Interest around access to finance
is still an issue, but I think we are over the main part of that
hurdle. If you look at the latest surveys from the FSB, the FPB
and BERR's own survey, access to finance is no longer one of the
top ten issues—other things like late payments very much
are there, which actually is some of the root-cause behind the
need for finance in the first place. I think on the latest BERR
survey the percentage in terms of people struggling to get access
to finance is now back where it was at pre-economic downturn levels.
Key therefore, I think, is working with the community, representative
bodies, government and yourselves, around helping to resolve other
things, such as late payments, which is killing the small businessman,
which I think is very important.
Mr Ibbetson: At the macro level
I agree. At the micro level, in terms of the EFG, it depends where
the economy is at. If we have not exited from the downturn, clearly,
we need an extension of the EFG, but I think there have been many
elements of the EFG which are very good. The scheme has been broadened
to some of the sectors that were not included under the Small
Firms Loan Guarantee Scheme—that is good—and I think
we should look at growing EFG and seeing how we better cover that.
There are two specific areas that we need to look at and focus
on: it would be good if we could look at those sectors that are
still excluded from the EFG (in particular, I would refer to export
finance support; I think that will be important as we emerge from
the downturn); and then the second area, which I am not sure we
can cover within EFG, would be looking more dynamically at what
we can do for credit insurance, where I think we will have some
work to do.
Chairman: That has given us a clue as
to what issues the Committee might look at in the future. This
was intended to be a narrowly-focused inquiry on one particular
aspect of government policy, and I think it is quite clear, from
what you have said, and what the previous witnesses said, that
although it started, perhaps—what is the correct word—a
little slowly and falteringly, it has gained momentum and you
now think it is broadly doing what it should be doing. What is
in the box is what it says on the box. That is very encouraging.
Thank you very much indeed, gentlemen.
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