Financial support for small and medium-sized enterprises - Business and Enterprise Committee Contents

Examination of Witnesses (Questions 100-119)


16 DECEMBER 2008

  Q100  Mike Weir: In their evidence to us, the Clydesdale says, "We empower our managers to make local decisions enabling our managers to react to local conditions and individual business circumstances", and Lloyds TSB made a similar comment, and you have both talked about the local approach here today. Can you tell me to what level a local manager, say, in my town of Breakon can make a decision and how do you define "local" because, in my experience, the local business manager might be based in, say, Aberdeen or Edinburgh which have a very different economy from the local economy in Breakon, so, how much can they do and how do you define "local"?

  Mr Maltby: Our local management teams can have the discretion for up to £500,000 lending which actually covers 90% of the lend we do to small and medium businesses. That local management team would be comprised of some relationship managers, and I mentioned earlier that they have an average of 20 years' experience. Depending upon their experience, they would have the discretion for between £100,000 and £250,000 and their manager, the senior manager who is also local, would be up to £500,000 and, on average, there would be something around seven to 10 managers per senior manager. As to your second point about how local, we do have local facilities and it is true that Lloyds TSB today does not have a significant presence in the Scottish market, something around about 5%, but in terms of the major towns where we are able to provide that support, we want to provide it locally.

  Q101  Mike Weir: But, if you are talking about seven to 10 managers, they are not going to be in towns, smallish towns or even largish towns, but you are talking about probably the four cities. Is that not the situation?

  Mr Maltby: Those seven to 10 managers are not all grouped together. The reason why there are seven to 10 per senior manager is that they are able to support the local communities in each area. We have the benefit of having the largest branch network in the UK and most of our managers are located in our branches.

  Q102  Mike Weir: So, to get this clear then, the manager in the branch would have the discretion for up to, you said, £100,000?

  Mr Maltby: For £100,000 to £250,000, depending upon experience.

  Q103  Mike Weir: And then it would be kicked upstairs to the next—

  Mr Maltby: But that upstairs would still be a local senior manager. In some parts of the country, that is further away, but our time to give a decision is the same in Scotland as it would be in London.

  Q104  Mike Weir: I would be interested to know how you define "local" in Scottish terms, however. Perhaps you could write to us on that.

  Mr Maltby: I can write to you on that.

  Ms Peacock: Our average loan to an SME customer is about £170,000. Those decisions would be made in our local business centres and 90% of our credit decisions are made locally. Where they are not made locally, they are not made at head office, but they are still made within the region in the vast majority of cases.

  Q105  Mike Weir: But again how do you define a "local" business centre? I represent Angus, a largely rural area with small towns, and I doubt whether there is a local business centre in Angus. There may be in Dundee or there may be in Aberdeen. How many do you have in Scotland and what sort of area do they cover?

  Ms Peacock: We have 77 business centres across England, Wales and Scotland and we have about 34 in Scotland, and, for example, we would have a centre in Dundee, we would have a centre in Aberdeen.

  Q106  Mr Hoyle: Just on that exact point about business centres, what you have said, if I take it right, is that you have 72, is it?

  Ms Peacock: No, 77.

  Q107  Mr Hoyle: And 30-something in Scotland with a small population.

  Ms Peacock: Yes.

  Q108  Mr Hoyle: If we take the north-west region which is bigger than Scotland and bigger than Wales, with a population of around seven million, how many business centres have you got in the north-west region?

  Ms Peacock: Chairman, I would have to come back with the exact number, but we have approximately about 30 in Yorkshire Bank territory which would cover the North East and the North West. Remember, we are a small bank, we have about 2% of the UK market and in the last four years we have actually doubled the number of centres and we have actually doubled the size of our small business centres.

  Mr Hoyle: The point I am trying to make is that a local business centre sounds good, but the reality is that, with a seven million population, I do not think you have very many business centres and, compared to the population of Scotland, we have got a much better footprint, and that is all I would say. Your argument would be, "Well, we have more customers there in the North West", but I will leave it at that, Chairman.

  Q109  Roger Berry: There are a number of problems that SMEs could be, and are, facing. One is access to finance on acceptable terms and the other is obviously the need for business support and so on, but to what extent do you think the problem facing the SME sector is the problem facing much of the economy, which is a lack of demand for what they produce or, alternatively, the expectation or the uncertainty about the future and that that is the basic problem they face, which means it is not your fault at all? Sorry, forget the last comment!

  Mr Ibbetson: I was about to agree with the last point!

  Q110  Roger Berry: But you get my point, that the small businesses that I know are not complaining to me, I have to say, about their financial arrangements. They complain to me because there is not enough footfall at the moment and, if it is holding up at the moment, their expectation, having read the newspapers, is that in the near future it is going to get worse and that is their problem, but you are the experts on SMEs, so is that your perception as well?

  Mr Ibbetson: I think one of the most important things, when I am trying to put myself in the shoes of an SME, is actually they do not think about their banking first thing in the morning. The first thing in the morning that they think about is are they making a sale and are they going to get the money in from that sale, so a pitfall which it is easy to drop into is thinking, as a banker, that the SME is behavioural, but that is not the case absolutely and they think about running their business. All the ones I am speaking to at the moment are saying, "Yes, sales are down", and, if you look at the latest Federation survey, they have said that something like 60% of their members said that sales were down, so they are the big issues that they are facing, that the sales are down, the debtors are not paying as promptly as they paid before, so they are the issues. It would be glib of me to say that no, this is not the banks' fault. We are part of the solution, but it is the economy that is driving the problems that they are facing.

  Q111  Mike Weir: We heard in the last session about the concerns raised by the Institute of Chartered Accountants of England and Wales regarding qualifications on accounts as a result of the banks refusing to guarantee credit lines into the future and the concerns of getting into a vicious circle where businesses will begin to fail because they are effectively getting qualified accounts. Do you have any comments to make on that? Do you think it is a real problem?

  Ms Peacock: If I may, it is not a problem that we have faced. However, should we face that problem, then a way of solving that problem is for us to agree the facilities based on draft accounts. That enables the accounts to be signed off and then, once the accounts are signed off, you can confirm the facilities based on the full set of accounts, so, if we know that these things are issues, then, provided the business is a good business and is solvent, there are ways to solve that particular problem, and I really do believe that.

  Mr Ibbetson: I think it is becoming a bit of a problem, yes, and it is something we need to watch. I do not think it is a problem for the banks per se because I think we know our customers well enough that, if they are getting a comment on accounts, we can understand that, so it is not an issue for the banks, as such. I think progressively it will become an issue for credit reference agencies whose way of looking at the credit standing is more predictive than through a manual assessment.

  Q112  Mike Weir: Mr Izza made a very good point that, even in the banking sector, suppliers may look at it, and he quoted the example of Rumours(?) which has effectively gone under because they could not get stock anymore. Ms Peacock and others gave an example of how it could perhaps be tackled and would you go along with that? Is that something you would be prepared to do to ensure that this did not happen by looking at the draft accounts and making sure there was not a qualification due to the bank's lending practices?

  Mr Ibbetson: I think that is quite a fair way of looking at it, to be honest, and I do not think it is an issue for the banks. In the way we assess the applications, it is not an issue for us, but I do think that there is something that needs to be looked at to the extent that it will not impact adversely on trade credit, and that may be by the banks working with the accountants. As a bank, we have come out and said, "Once you have your overdraft, you have it for 12 months". We have made that commitment ourselves and that should help the situation. In many ways, it is no different than it has been in the past.

  Q113  Mike Weir: I accept that, but we were told that the banks use a sort of score card system to assess risk. You have all told us that the reason that interest rates are going up above base is because of their assessment of risk. Surely, any bank looking at a set of accounts with a qualification will say, "Well, there's a risk involved here. Is that going to affect it?" You may know your customer, but what if your customer decides to switch banks, for example? Surely, there is a problem there. You seem to get into a circle of difficulty with what should be a relatively simple solution.

  Mr Ibbetson: I do not accept that. I do not think that is right because I think, even if customers are switching banks, if there is a qualification on the accounts, we will have a conversation with the customer. We have face-to-face relationships and we can iron out those queries. I think it becomes an issue where there is a relationship which is not face-to-face and a dialogue cannot be had, and I do not think that is within the banking sector, I think it is the trade credit sector where the issue is.

  Mr Cooper: The financial accounts are just one element of how we assess risk. Actually, for the vast majority of smaller businesses, the financial accounts are somewhat historic and we are more interested in actually the trading performance of the business going forward, so, as to Peter's point, it is actually very much about understanding the nature of the business and that is the beauty of having locally based relationships. I think the other point in terms of the information bit to which you refer, actually that is far more based towards the behaviour of the bank account which is far more realistic in terms of actually understanding the actual nature and position that business is in, so it is a combination of those things and I would stress and urge no knee-jerk reactions by anybody to a qualification on a set of financial statements, including the accountancy practice, because I do not think within Barclays, and I am not seeing it elsewhere in the market, that anyone, any bank has changed their stance towards guaranteeing or not guaranteeing facilities for the next six, 12 or 18 months, whatever the period of time is.

  Q114  Mike Weir: Given that, if a customer came to you and said, "Look, because of this, I'm having difficulty with a supplier", is there anything the bank can do, for example, contact that supplier and say, "Look, their credit line is okay here", or anything like that? Is there action the bank can take to deal with this problem which clearly seems to be exercising the accounting profession? I get the impression from you all that you think this is rather a storm in a teacup as far as the accountants are concerned and it has been blown a bit out of proportion, but is there anything you can do to avoid it becoming a problem?

  Mr Cooper: I am not dismissing it, let us be clear on that. I think there are measures that can be done so that, if any of our customers ask us for a reference for a supplier of theirs in terms of whether they are good for money or not, we would be prepared to give that based on the actual nature of their position. I would encourage all businesses to help their credit status by actually paying their people and their suppliers on time, and we encourage it with all our suppliers to make sure that they pay their suppliers on time, so I think there are a number of measures that can be made, but it is really about understanding the nature of the business and a blanket qualification should not be necessary in very many cases.

  Q115  Mike Weir: But you must accept that in a recession where, with all the best will in the world, businesses do fail, then for anybody looking at it, they are going to be assessing the risk in the same way as banks, any supplier is going to be looking at that and considering that to be a greater risk to their own business.

  Mr Cooper: Sure, everyone is slightly more cautious in an economic downturn, as they should be, so I think it is a combination of, again as I said earlier, accountant, bank and customer talking together.

  Q116  Mike Weir: But do you accept that the accountants say that there is danger that companies may be undermined by this?

  Mr Cooper: I accept there is a danger, but I also accept there is an opportunity and a responsibility to work around that as much as we possibly can.

  Q117  Chairman: The reason this is so urgent in my mind is that we are coming up to the year end. There is the calendar year end coming up and then the financial year end next year and, if a significant number of businesses are undermined by this for the reason, I think, that the accountants gave, that suppliers, for example, are no longer prepared to supply to them, which would be devastating, there could be a very urgent and rapid effect. Also, I am concerned that I have seen in the financial sector a lot of tendency for people to follow new and arbitrary rules and whole categories of lending, whole financial structures, are something ruled out, so I can just see suppliers and so on, saying, "Hey, we won't deal with anyone with a modified account", so I am rather encouraged by what Lynne Peacock was telling us, that there is no need for any client of your bank to have a modified account because you will talk to the accountants and say, "No, it's not a problem". Basically, what you have all said today, all four of your, about your policies towards the SME sector is that you are very anxious to keep lines of credit going, so surely a proper dialogue between relationship managers probably and the accountant firm in question could avoid modification at all. Is that right?

  Mr Cooper: Yes.

  Ms Peacock: Yes.

  Chairman: Well, that is very helpful and thank you. I am encouraged that you will take that back and work on that because I do think it is an important issue.

  Q118  Mr Bailey: Just to pick up a point I was exploring earlier with Mr Cooper, although this is really relevant to all members here, in terms of dealing with "high-risk" customers, I think it was Mr Cooper who mentioned the Small Business Scheme and we heard earlier from the business representatives that it was great, they wanted it, but it was not moving fast enough to actually address the urgent problems that businesses were facing, so basically how are you co-operating with it?

  Mr Cooper: We have had several meetings with the Government and HMT on this and I have been encouraged by how open they have been to ideas and suggestions, but there really was not anything other than simply a very high-level ideal framework announced with the PBR around this, so that has been largely sort of understood now in terms of what the business needs actually are. Clearly, people like the Federation of Small Businesses fed input into that as well. The legal arrangements are now being drawn up and we expect to be able to use this, and quite aggressively using this, from very early in January, probably the second week, but it is days away now.

  Mr Maltby: We are in a very similar position and I think that I would echo the experience we had earlier this year where the Small Firms Loan Guarantee Scheme was simplified. There had been some feedback problems from businesses and banks that this was a complex facility to administer and it was simplified, and our lending on that scheme has increased by some 40% since that was done, so we are having the same conversations or having similar conversations with Steve and the rest of the banks and we want to use, and draw on, these facilities, including the EIB Scheme on which we are in active dialogue and we want to be in a position to draw on that early in the new year as well to increase our ability to support this important sector to us.

  Ms Peacock: We are in a very slightly different position because, being relatively small, for reasons that one can quite understand, we are not always at these discussions. Where we are at these discussions, we welcome it. We welcome the initiatives that come out and actually look to take part in them. Commenting on one particular initiative, for example, if you look at the Debt Guarantee Scheme, we were the first bank outside of the large eight banks to raise guaranteed funds under that particular scheme and we did that actually in the last couple of working weeks, so we are not always there, but we understand why we are not there and I do not think we believe that we are being deliberately excluded, but some of these things are being done very quickly and it is not always possible to have every single bank around the table.

  Mr Ibbetson: I have to say, I think the Small Business Finance Scheme is a classic example where, working together, we can get a solution. I have no reason to assume the other banks did not have bilaterals, but, from my own perspective, for about six weeks prior to the PBR, I had bilateral meetings with HMT and with DBERR, setting out what I believed the scheme should be, what I believed the issues would be and why we needed a resolution to the liquidity problems that were coming up. HMT and DBERR listened. I had similar conversations with the Federation and the Federation were putting in a number of £1 billion, which they thought was the number, and, if I am honest, I thought it was £2 billion, but I think £1 billion is a good starting point, so here was a case where we did collectively try and identify what the problem would be and come up with a solution for it, so it was announced at the PBR and we are now working, I think, fairly quickly to get it launched. I would agree with everybody around the table, that the sooner we have this scheme up and running, the better, and I think the beginning of January is when it will lend, but we are working very closely with the officials now to get it out on the table and operational.

  Q119  Mr Bailey: Again, there does seem to me to be a danger in it, that actually it misses the target, ie, it becomes a source of finance for businesses that maybe are not in the high-risk category.

  Mr Ibbetson: I do not agree with that at all. The whole structure of this facility is to address situations where SMEs have cashflow challenges. These are classically cases where debtors are not paying on time and the security now is not enough to justify continued lending, so it justifies an intervention from government in exactly those cases, so I passionately believe that that scheme will provide an awful lot of resolution to some of the cashflow problems SMEs will have.

  Mr Bailey: That is very reassuring.

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