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CORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 90-i House of COMMONS MINUTES OF EVIDENCE TAKEN BEFORE BUSINESS & ENTERPRISE committee
Tuesday 16 December 2008 MR DAVID FROST, MR ANDREW CAVE and MR MICHAEL IZZA MR STEVE COOPER, MR JOHN MALTBY, MS LYNNE PEACOCK and MR PETER IBBETSON Evidence heard in Public Questions 1 - 131
USE OF THE TRANSCRIPT
Oral Evidence Taken before the Business & Enterprise Committee on Tuesday 16 December 2008 Members present Peter Luff, in the Chair Mr Adrian Bailey Roger Berry Mr Brian Binley Mr Michael Clapham Mr Lindsay Hoyle Miss Julie Kirkbride Anne Moffat Mr Mike Weir ________________
Examination of Witnesses
Witnesses: Mr David Frost, Director General, British Chambers of Commerce, Mr Andrew Cave, Head of Policy, Federation of Small Businesses and Mr Michael Izza, Chief Executive, Institute of Chartered Accountants in England and Wales, gave evidence. Q1 Chairman: Good morning. Thank you very much indeed for coming before this Committee today to give us evidence ahead of our session later this morning with a representative groups of the banks. Can I begin, as I always do, by asking you to introduce yourselves for the record. Mr Frost: David Frost, Director General of the British Chambers of Commerce. Mr Cave: Andrew Cave, Head of Policy at the Federation of Small Businesses. Mr Izza: Michael Izza, Chief Executive of the Institute of Chartered Accountants in England and Wales. Q2 Mr Binley: I want to ask a general background question. It has been suggested that the banks are being stretched and pulled in two very distinct ways. On the one hand they have got the problems of libor, around 3.3 still, I think; at least three of them have 12% to pay back to government each year for the injection of liquidity; and they have got the whole fixed saver scenario, where people are still being paid 5% and 6% on those fixed term accounts; and so they have got a lot of money they have to pay in that direction, and yet they are expected to pass on base rate cuts in full and cut rates generally on lending. Do you think that those conflicting areas of activity are hindering the banks, or do you think they are handle-able and should be handled more effectively than they seem to be at the moment? Mr Frost: It is a very difficult issue for the banks-clearly being pulled in a number of different ways and a number of different tasks that they have to balance. My own view would be that it is not a question of "can it be managed" it has to be manageable, because if we are to get through this we need an efficient and effective banking sector working with business. Mr Cave: Clearly everybody is in a very difficult position at the moment and the position you have described the banks in is not dissimilar to the position that small businesses find themselves in, being pinched at every quarter. I do not think that those problems are the core reason why lending is not what it should be; I think it is a lack of confidence. There is the money there and I think it is the confidence that we need to see return. Mr Izza: I would just add to the point Andrew and David have made that I see the problem slightly differently because I think, on the one hand, banks are being asked to rebuild their capital position and that is something they are being asked to do through regulation. That is causing the banks to de-leverage, which means they have less capacity to mount. On the other hand, the Government are asking them to lend more and to make more available. Both of those aims are perfectly laudable, however they are not exactly easy to reconcile. I think that pressure to rebuild the capital base is actually a very real one. Q3 Mr Binley: I agree with that. We have a situation where the banks are facing sizeable difficulties from those conflicting pressures, and we need to bear that in mind when we move on to ask the next question I have in mind. The banks say their lending has not decreased, yet government and business organisations say that access to credit is getting harder not easier. Can you tell me what is going on? Mr Frost: It is a very difficult picture and it is an emerging picture. We are carrying out research at the moment over Christmas and into the New Year to get a real fix. All I can say is that we have a substantial amount of evidence on an almost daily basis arriving in our offices from businesses which are facing a more difficult relationship with the banks. Let me start by saying, if we are to get through what is clearly a very, very difficult economic time at the end of it we will require a cohort, a substantial group of businesses who are in a fit state to drive us forward and drive us out of this. The British Chambers of Commerce, whilst we represent from the very largest to the very smallest, at our heart are medium-sized, often family owned businesses, businesses of some very real substance, frequently exposed to global competition, frequently involved in international trade. These will be the businesses that will have to get us out of this mess that we are in now. If we do not find a way of supporting what are at the heart good quality businesses over the next two to three years, then I personally find it very difficult to contemplate how we can get out of this. What we have seen is substantial job losses; unemployment is expected to rise very substantially in 2009; it is the private sector which has taken the hit from that; we are seeing a lot of money factoring capacity; we have seen a huge increase in the number of public sector jobs over the last eight years which is now unsustainable; and we have seen the financial service sector and business service sector being hit. If we are to come out of this, as I say, we will need these good quality businesses which rely on, and have relied on often for generations, good relationships with their banks. So we have to make this relationship work; we have to make it better. Clearly from the evidence that we have coming through it is not all that it should be. Q4 Mr Binley: Let me hit you with: how would you make it better? Mr Frost: I do not think there are any simple solutions. What I would say at this stage is there are three messages that are coming through to us: firstly, the cost of money is going up - businesses are being charged for things they were not being charged for in the past, for example, arrangement fees; secondly, when it comes to future loans or investment they are being asked for a much great level of personal guarantees, which frequently they are not prepared to do; and, thirdly, it is taking a lot longer to get deals cleared, and therefore when an opportunity comes up for a business to perhaps buy the stock, the assets have gone down and it needs a quick decision and it is not easy to do that. If we can get that relationship to work, if we can have an understanding, then I think that will happen. I have to say, I am encouraged on a number of fronts by this Government's establishment of the Small Business Finance Forum; I am encouraged by the stream of announcements that are now coming out from the banks that you are making clear pledges to support business. To be quite honest, it is going to take a lot of time and a lot of effort to make this happen officially. Mr Cave: Going back to your original question about the inconsistencies between what the banks are saying and what small business and the Government are saying, if you look at the data that the Government have collected I think there is a slight question mark over that data; I think it probably needs fine-tuning, and that is something that the banks pointed out during the last meeting. One thing I would say is, from the last Finance Forum, where the data was shared, there was no data there that spotted an increase in the cost of finance - that was not available. At the same time, to run along with that, the FSB set up its Bankwatch programme which uses polling but also the collection of case studies from around the country. On 1st December our data revealed that 30% of small businesses have seen an increase in the cost of finance. We will wait and see what the data that the Government collects says and see how that fits together in the New Year. It is clear from that, and from the case studies, that that is the case. In terms of your second question of how to fix it, I would go back to the point about confidence. A lot of what we are hearing from the banks at the moment is very good. There are some very interesting ideas and measures coming forward, but at the moment it is words; that is not a criticism of the banks, it is just a simple fact that they, like us and everyone else, are looking for solutions but until there is that confidence at grass roots level you are still going to have these behavioural inconsistencies between what you are told by bank chiefs here today and what is actually happening on the ground. That is why I think the one single measure that is extremely useful is the Government's proposal for the Small Business Finance Scheme or rather, as we would prefer to see, something on a much larger scale that has been proposed elsewhere, which will in the short-term get things moving, oil the clogs and get confidence back into the system. Mr Izza: In the evidence that we submitted to this Committee we provided you with some figures that said 30% of businesses were finding it more difficult to access capital than a year ago. I do not know how that squares precisely with the data from the banks. I do not know whether on a sector basis they are lending more to particular sectors and whether other sectors are being starved of capital. That is something I think we should wait to hear the banks explain. In terms of: what would I do; what are the solutions? I think a number of things have happened recently that are very positive in this direction, but small and medium-size enterprises have to help themselves as well. They need to get their working capital under control, and traditionally this is a sector of the economy which is not great at that. I welcome a number of the proposals that were in the pre-Budget Report; we need to see those come through, but some of them have the potential to help. I think it is very important that if banks are going to treat small and medium size businesses in the best possible way, those small and medium size businesses need to be as well prepared as they possibly can be to take evidence to the banks of their future viability, presenting business plans, cash flows and taking professional advice where possible. Mr Binley: Finally, when the Minister was questioned he intimated that he was monitoring the relationship between SMEs and the banks. In terms of lending he was monitoring the whole of that process. When pushed for figures he was unable to give figures. This is one of the problems, is it not, that we just do not have the facts. Would one of your messages be: we really need some quick, real and meaningful information? Chairman: I am actually going to leave that question to one side because Adrian Bailey is going to ask that later on. Miss Kirkbride: I just want to go back and probably Mr Izza would be the best person to answer this because I think all on this committee do very much blame the banks for a lot of the trouble that we are in today, but we are in this trouble and now we need them to get us out of this trouble by lending more. What you were saying earlier is of course one of the principal reasons why they are not lending more, because they are caught in a cleft stick of having to rebuild their capital bases whist at the same time being beaten over the head by the rest of us to lend more money for very, very important reasons to businesses. I just wonder what your observations are on the Government's rescue of the banks and how it was structured. For example, Brian mentioned that although it is very welcome from the taxpayers' point of view-a 12% interest rate-is that really realistic when the Fed is asking 5% in America for its return on capital for the injections put into the banks? Q5 Chairman: This is the preference shares. Mr Izza: Chairman, I am not here as apologist for banks but I do understand that the business environment we are in today has changed markedly from a year go, it has changed markedly from three months ago, and banks are re-pricing risk: businesses that perhaps are seeing a decline in their trading activity, or perhaps have seen asset prices and values fall, are going to be looked at differently by banks seeking to lend. On your specific question, I think that the recapitalisation of the banks was not necessarily in the first instance to promote lending, it was to bring stability back to the market because there was a massive crisis of confidence. It actually succeeded in doing that but one of the characteristics of this crisis is that we are moving through different phases. We started with sub prime loans; we moved through into liquidity problems; then the commercial paper market dried up; we potentially have got a going concern issue; and as we look forward into 2009 there are some other icebergs that are sitting there that, unless we are careful about it, we are going to encounter. I think that the Government's rescue plan was appropriate for what was intended to do, but perhaps we need another solution and other actions now to deal with the specific issues. Q6 Miss Kirkbride: Just out of interest, what are the icebergs? Mr Izza: One of them might be that we understand in the next 18 to 24 months there is £200 billion of private equity, senior debt, and mezzanine financing that is going to have to be replaced or renegotiated. There is not enough capacity in the system to do that at the moment. That is a problem for another day. Q7 Mr Hoyle: Mr Cave suggested that somewhere else there were better suggestions. The trouble is it is where we are at, and he has got to put his partisan views to one side and look at the situation as it is. I think you are hinting at the Party you are a member of, but let us look at the situation now. It is about liquidity; it is about inter-bank lending, which is taking place; but it is about bringing other monies into the market. Are big businesses part of the problem where they are just not paying their bills and demanding that small businesses wait but also, if you want to be paid early, they have to be discounted? Is this not one of the problems? Mr Cave: I would like to answer that in two sections. First of all, it is an extraordinary suggestion that I am partisan in some way. If you actually look at the way this process has evolved, the Federation of Small Businesses came forward with a proposal for a £1 billion survival fund for small businesses which was, we were delighted, adopted in the pre-Budget Report; and, from meetings we have had with officials, is likely to be implemented in remarkably similar ways to the ways we proposed. When we proposed that billion pound fund we were pretty much laughed at by everybody for it being excessive. Things are moving very fast, and I think we have since seen, yes, a proposal has come forward from the Conservatives which is very, very similar to what the Government have proposed but actually involves more money. A billion pounds is great, it gets the oil in the cogs working, but it is likely only to last for a matter of two months we are told by the banks. Q8 Mr Hoyle: But it can be reviewed, can it not? Mr Cave: It can be reviewed. We would like to see it reviewed and expanded. That is what I am referring to there. When it comes to late payments, yes, this is a big problem. One of the reasons why so many of our members are looking for help from the banks is because they are waiting for payment. This is a very difficult issue to tackle-other countries have tried it and failed, but there are a couple of things we would like to see proposed from the outset; that the Companies Act is actually enforced as it was first intended-it has never been fully enforced; and also Companies House, which is essentially a filing agency at the moment, be turned into a proper enforcement agency. Companies have to register their payment terms with Companies House, but in recent years that has fallen slightly to the wayside for some companies. We would like to see that much more in evidence. We would like to see Companies House have the proper resources to actually enforce that, and for Companies House to be able to name and shame those companies that are not playing by the rules because essentially this is antisocial behaviour and it leads to job losses. It is something we feel very strongly about. Q9 Mr Hoyle: ASBOs for companies. That is a new line but I quite like it. Anything that will work-I will take ASBOs! The second part being that of course the Government, quite rightly, has insisted that government departments wherever possible pay between ten and 15 days; and they have requested the same of local authorities; but I have heard of evidence that says local authorities are dragging people out for 90 days. Is this true? Mr Cave: We have heard that that is the case. We have also seen evidence where a local authority will send a letter to a small business that has already provided a service saying, "We will pay up within a certain time if you meet this criteria relating to something else". That particular letter was then withdrawn after an outcry and a bit of attention from the local media. I will be honest with you, it is a bit early to tell. We are still talking to our organisation on the ground. It is very positive that local authorities have taken this step, and police forces around the country, but I think it is early in the New Year when we will see the results. Q10 Mr Hoyle: The NHS and everybody else? Mr Cave: Exactly. Mr Frost: The question goes to the heart of the matter. Businesses rarely go bust because of lack of orders; they go bust because of lack of cash. At the moment what is happening is they are caught in the crossfire. You talk about the relationships with the banks but, on the other hand, we now have issues with credit insurance; and then, of course, you have this whole issue about payment terms both with customers and suppliers. Everybody is putting the screw on and the poor guys who are caught in the middle are these small businesses. If we do not resolve this and, as I say, cash becomes king at the moment, then you are going to see a wave of unnecessary closures during the next 12 months. Q11 Mr Clapham: Is there not another side to this though? We heard, for example, Mr Frost say quite clearly that the way out of this mess is to get the small and medium size enterprises really working; and that, of course, means engagement with the banks; it means a responsibility on part of the banks to respond in a way that is going to facilitate that, and yet that is not happening. Does it not suggest that the banks really do not understand the small and medium size enterprises? Mr Cave: That is a very interesting question and it is one that we are asking and are having conversations with our own members and with the banks about. I was having a conversation with someone in the corridor about this - there is a problem at the moment that there is fear on both sides of the divide. Branch managers are scared of making the wrong decision and, from our part, a lot of the small business owners are scared about going and talking to their bank managers; they just want to get on with their business and hope that everything will be okay. It is human nature that if you think there may be a problem there will be. We are always advising our members to go and talk to their banks and to their accountants at the earliest possible time to avoid problems. Equally, there are the behavioural inconsistencies that need to be ironed out in the banks so that branch managers have the confidence from their line managers to make the right call. That is an issue. With regard to the second point to your question-is there a lack of understanding on the part of the banks as to what is a viable business and how to lend to businesses-a lot of our elder members and elder businesses they do say that, because they remember a time when there were more branch managers and there was a better relationship on a personal level. I think those personal relationships made a big difference, because you had that trust and a much better understanding, rather than relying solely on a business model which does not always reveal everything. It is interesting-the current crisis has shone a light on a problem in that area. Mr Frost: I would be pretty worried if banks did not understand small businesses. We really would have a problem. I have no evidence that they do not, but I think there are two issues that come out of it. Many businesses have not experienced the economic times we have now in their lifetime. The point was made earlier, when they do get into difficulties or start getting into difficulties it is important that they are taking proper advice, and not just rushing to the bank and saying, "Help I can't pay the wages on Friday", because I think I know what the response to that would be. I think the second thing is there is evidence of banks making certain sectors no-go areas. I think, for example, anything to do with property and development, from the evidence we have, appears to be off-limits at the moment. Those of us who have been around a bit-and this is my third recession-would know that even in difficult times there are companies that do very, very well indeed. There are companies that are able to take advantage of opportunity. I think therefore that the banks need perhaps to be cognisant that not every business in certain sectors is essentially a no-hoper-there are opportunities. Q12 Mr Clapham: I hear what you say but let me give you an example. I will not name the company but I went down to see one of my small and medium size enterprises, a printer, who prints the forms that the banks use, and yet the business was rolling in but the credit was not and that was causing a real difficulty. That suggests to me that there is a lack of understanding somewhere. We come to the statistics that Mr Izza referred to that 30% of small and medium size enterprises are finding it difficult. That suggests that there is a misunderstanding somewhere; and if there is a misunderstanding has that occurred before the crises; was there a disengagement with small and medium size enterprises before the crisis came about leading to a greater misunderstanding in the crisis? Mr Izza: Chairman, all I can add to what has been said already before is that the evidence we have is entirely anecdotal; but there is frustration among the small and medium size entrepreneurs that they are not able to build a relationship with people because they do not stay around long enough; and because banks rely on automated credit-scoring systems to evaluate whether or not a loan can be made that does not necessarily allow for human intervention when someone really does understand that this business has prospects. Q13 Mr Clapham: Just turning to the situation as it is at present. We have heard, for example, Mr Frost give three points where he thinks the banks could be much more responsive to the current situation. Are you satisfied with the measures that have been put in place by the banks to actually deal with small and medium size enterprise, or are there other things that they could do? If there are other things that they could do, what should they be doing? Mr Cave: If you look at the measures that have been announced over the last few weeks there are some very interesting things there. Obviously the price fix that was announced by RBS was very welcome, and we would like to see others move towards that. The other interesting thing that RBS have proposed is what they call the "grey beards", the mentoring service, which very much deals with the point you have raised. We have not discussed this in as much detail with RBS as I would like, and it would be interesting to see why they have taken that decision and whether that is a decision that should be looked at by the other banks as well. If you look at behaviour, we had the Statement of Principles that were approved last week which we were supportive of, but we did have concerns about that and we had those concerns adopted. In particular was the issue of switching bank accounts. Our survey data from last year reveals that 45% of businesses have trouble switching their banks. If you have got a problem with your bank it is an open marketplace and you should be able to go and move across but it proves very difficult for them. As of last week, there is a commitment with the switching of bank accounts that if you wish to switch the process should take no more than five days, and hopefully this will become legally binding. We are moving in the right direction, so I think progress is being made. Mr Izza: We would also very much welcome the moves made in recent weeks, particularly by RBS and Lloyds TSB; but at the moment it is too early to call whether or not that has actually produced a change in behaviour, and whether or not it will actually percolate through. The direction of travel, certainly as far as those two banks is concerned, is very promising. Q14 Roger Berry: Do you not think, although welcome, that these are incredibly modest measures given the scale of the problems? The switching of bank accounts in five days, does the crisis not require something a bit stronger as a response than these measures? Mr Cave: Yes, you are right, it does. Q15 Roger Berry: I am sitting here thinking there is a degree of unreality about the whole of this discussion so far. Mr Cave: You have got things moving on two tracks really. You have got things that have to solve the immediate problem, and you have also got the point that a light has been shone on the problem in relationships between small business customers and banks. We need to deal with that, but that is more of a medium-term thing. Sorting the medium-term issues out now will hopefully avoid this problem happening n the future. In terms of the short-term changes, yes, none of this is going to scratch the surface of it; but that is where I would come back to the issue of confidence. The recapitalisation process of banks has not been felt yet. We are not going to see changes as we would like to see them until the early to middle part of next year I would think. When you talk about the immediate problems that is where you do need Government intervention in the form that we are now seeing to actually get things moving. Q16 Chairman: Is there any particular difference of patterns small businesses are experiencing between loan funding and overdraft funding? It is overdrafts they want at present to get them through working capital situations rather than loans. Mr Cave: We have anecdotal information on that, but we do not have any detailed survey data on the differences between the two. Q17 Mr Weir: You talked about the cost of finance and that businesses were suffering; but it is not so much in many cases, certainly from businesses that have approached me, that the cost is rising but that it is not falling in line with interest rate cuts. When interest rates are being cut the banks are actually just putting up their cut of the interest rate, so the interest rate charged by the business is exactly the same as it was previously. Is that something you are finding and, if so, what is the point of the Bank of England slashing interest rates if it has no benefit to their business whatsoever? Mr Frost: I think it is having some benefit and feeding through, but clearly it is not falling at the rate that business would expect it to. As regards the other aspects of the cost of money, as I have said, the issue is charges being introduced, arrangement fees for, say, £5,000 which last year would have had no fee attached to them. Q18 Mr Weir: Moving on to the Institute of Chartered Accountants, obviously you have raised concerns, Mr Izza, regarding the fact that many accounts may be in effect qualified because the banks are not prepared to guarantee credit lines in the future. Can you tell us a little more about this and the effect that may have on businesses getting into a vicious circle where they will be undermined because of the banks refusing to guarantee credit for any length of time? Mr Izza: When the directors of a company prepare a set of financial statements they have to prepare those financial statements on the basis that the company is a going concern; so they look into the foreseeable future and they see there is nothing that might cause the company, for example, to go into administration or liquidation. Taking into account all the factors, they will then prepare that set of accounts and the auditors will then look at it and decide whether or not they agree with the assessment that the directors have made. This year end we had an extraordinary set of circumstances. Normally when this exercise is being done it is the particular circumstances of the company that are first and foremost. At the moment, when people look at whether or not their business prospects are good, they are looking at the environment they are in, and that is actually a major factor. Being able to assess whether or not a bank is going to lend when a facility comes up for renewal in six, nine or 12 months, they just do not know now. We understand from conversations that are taking places that banks, perhaps understandably, are very reticent to give a commitment six, nine or 12 months out because of the uncertainty surrounding the whole position. If that is the case, if the auditors agree with the assessment that the directors have made, they would issue a modified audit report. That would say that the directors have disclosed in the financial statements that there are potential issues and we agree, and we draw your attention to paragraph 22. If they do not agree with the directors' assessment they issue a qualified audit report which says that the auditors have serious concerns about the company's ability to continue. Historically, there have always been a number of modified and qualified audit reports issued but we are talking in a normal year of that being a very low percentage-certainly less than 5%. This year end we could be talking about double digits, and we are concerned recipients of these financial statements might conclude, incorrectly, that this company was in trouble and take action there, which is unfortunate. Q19 Mr Weir: It almost seems a Kafkaesque situation, because presumably in the case of most small businesses the main people looking at these to decide whether they are creditworthy would be the banks themselves who are causing the problem by refusing to guarantee the credit line. What is the point of it all? Surely if a small business is going to a bank looking for credit and presenting their accounts which are qualified, due to the fact that the bank would not give the guarantee in the first instance, it just seems slightly mad to an outsider? Mr Izza: There is a certain amount of circularity about it, as you say. It is not just the banks; it is investors; it is potential investors; it is landlords; it is suppliers; and it is customers. They all use the statements and they all might draw the wrong inference if they have not been educated. Q20 Mr Weir: What is the way out of this circularity then? Mr Izza: We have been seeking to raise the profile of this issue so it does not become a train crash, so that people actually understand what these statements mean. There have been a number of articles positioned in the media. We have been speaking to the Secretary of State at BERR to make sure that the Government understand this problem and are able to take whatever actions they see fit. It is principally one of education. Q21 Mr Weir: Presumably the landlord, investor, whatever, would be seeking the advice of his or her accountant on this company before putting an investment into it. Is the first line of defence not with the profession itself, to be able to explain these qualifications to any potential investor? Mr Izza: I would very much hope so, but we do not want to leave any stone unturned. Q22 Mr Weir: Is this a real problem? Do you think that sound companies may be undermined if there is a misunderstanding of these modified audit certificates in their accounts? Mr Izza: I think there is a real problem. We have seen it in recent weeks, that as soon as a concern, for example, was raised about Woolworth's all sorts of suppliers to Woolworth's turned off the credit and started asking for cash on delivery. All through the supply chain this could percolate down and have a significant effect from large, to medium, to small, to micro. Q23 Chairman: On this matter we talked about this privately a couple of weeks ago and it caused me great concern. I would just like to know from the representatives of the small business sector here whether they share the concerns expressed by the accountants on this matter. Mr Frost: Yes, we do have some concerns. Mr Cave: We are certainly very concerned by the figures that have been announced, yes. This goes back very much to what we were saying earlier that we are concerned our members need to make sure that they are getting everything sorted now, talking to their accountants and getting things resolved. Yes, it is a matter of concern. Q24 Chairman: The only action we are able to do in this Committee is talk about it and highlight the issue, but I think the CBI has called on the Financial Reporting Council to produce new guidance on this matter. Is there something the Council could do? Mr Izza: There are a couple of things. First of all, the Financial Reporting Council produced this guidance in November, which is very good guidance for any director of any company. That explains the issue for them. They are also at the moment looking at issuing further guidance before the year end for auditors. I would say that they understand the issue, but it is about making sure that the £4.7 million small and medium size enterprises in this country have an awareness of it. Q25 Chairman: Is there any other regulatory action which could be taken to help draw attention to this issue or deal with it? Mr Izza: In our view, no. Q26 Mr Bailey: I want to explore the impact of the pre-Budget Report and the measures in them. First of all, do you think the measures will help quickly enough? Andrew, earlier you mentioned the £1 billion fund and that this was likely to be used within two months - presumably that at least is being utilised? Mr Cave: It is not being utilised at the moment because they are still working up the details. We need this to happen now. It needs to have happened a month ago. We would like to see it in place and available through the banks for the 1st January. I suspect is going to be more like the middle of January. That is something clearly we are very keen to welcome. In addition, there is also the £25 million that is going to be made available through RDA funds. Again, that is a very small sum of money when you consider the issues, but it is clearly welcome. In terms of the impact it is too early to tell-we will have to see. The spreading of payments and the situation with HMRC is something we very much welcome and will give some breathing space to members; and also the changes to offsetting are particularly welcome. Mr Frost: The question was broadly about the measures in the PBR. I think there were a number of good measures in there, including the small business package which is clearly a bit hazy at the moment, let alone whether the guarantee scheme is going to work, but we think that has the potential to really help business. I think the HMRC clearly shows an understanding of the need to work with business. I think they first showed that during the floods of last year, and we place great store on that. A deferral of the increase of small firms' rate of corporation tax was a good move. The negatives from our point of view were the proposals to introduce NIC contributions, which is a very retrograde step because it will harm the ability of firms who desire to increase employment, which is exactly what we do need to do. We thought the rate relief on empty property could have gone far, far further than it did. Broadly, there were some good measures to help small business. Mr Izza: Chairman, could I just add, the temporary reduction in the VAT rate, while welcome, we think is going to have a relatively modest impact. At a macro level I do not think a 2.5% change in purchase price, when there are so many other discounts going on in the high street, is going to modify behaviour. I think the burden on small and medium size businesses of implementing it was not particularly well understood. I do not know whether all the Committee are aware of this but HMRC issued 70 pages of guidance to advise on the rate changes and how to deal with them. If you own a small company and there might be two, three, four or five of you this is a major administrative burden. I think potentially that was problematic. We very much welcome the introduction of flexible payment schemes for tax by HMRC; and when that was introduced in the foot and mouth crisis that actually kept some farmers alive. So we should not forget that, and that could be very valuable. It was also announced that there was a proposal to carry back loss relief for any losses incurred in this year. Again, I think that is very welcome but there are some details of that scheme that we would still like to see; and we would like to see that as widely available as it could possibly be. One thing that we have been lobbying on for well over a year now is the income shifting rules, which affects many, many small and medium-sized businesses. We were glad to see that that was deferred in the PBR as well. Mr Bailey: There does seem to me to be a certain contradiction in approach here. I certainly could see, with an individual purchasing decision where you have discounted goods, 2.5% is neither here nor there. However, in macroeconomic terms it does release £12.5 billion of purchasing power. It does not just relate to one purchase; it relates to a huge range of purchases that people make every day. My instinct would say that would make a difference, although it is probably too early to say. What is your assessment so far? Chairman: We are actually looking at the impact on liquidity of small and medium size businesses. Q27 Mr Bailey: Actually we are talking about the pre-Budget Report and its impact on small businesses. I would like to have some assessment. Have you got any early indications? Mr Cave: Our early indications are that it costs our members on average £2,500 to implement because they have had to change a lot of price lists. We were inundated with emails and phone calls from members who said, "This is absolutely absurd. Why are they doing this?" You do have to reduce it. I am here to speak on behalf of members and they take these things on a case by case basis, and they do not see the benefits compared to the costs. They have endured more of a cost with this measure than they will see in benefit. Maybe in the long-term, but we are talking about short-term issues here. Cash flow is the issue at the moment. Q28 Mr Bailey: Different companies seem to have implemented it in different ways, some with more burdens than others. Mr Izza: Chairman, I accept your macro point entirely, and I do think there is validity to it. Let us not lose sight again of this administrative burden and the potential for problems when people do VAT returns et cetera, because VAT is a very complicated tax. HMRC now need to approach all the changes that have been made with a light touch, because otherwise that will be the next problem that occurs in this area. Mr Frost: Finally, one of our constituent chambers carried out a survey of its members immediately after the announcement and 80% of businesses that replied said that the cost of implementing the changes would outweigh any benefits. Q29 Roger Berry: I recognise there are costs with people changing their price tariffs, but £12.5 billion in an indirect tax cut benefits consumers and businesses. Let us be quite clear about this. £12.5 billion goes into the system, it is not simply that consumers get the benefit; in normal market conditions part of that would immediately improve the cash position of businesses, would it not? Or would you prefer that tax to be stopped now and for the £12.5 billion to be taken back? Would that be good for small business - to reverse the policy? Mr Izza: I entirely accept the point you are making. At a macro level it has an impact. If you were to try and segment where that has an impact on the economy, it may well be that this has a disproportionate impact in favour of large enterprises rather than medium and small; because large enterprises have the resource to change prices and deal with it quickly. If you are in a small company with two or three people it is a major task. Roger Berry: I accept that. Mr Hoyle: I think we are in great danger of losing sight. Everybody accepts that £12.5 billion being put into the economy is so important. It is the quickest way to get money into the market and moving around, there is no quicker way. If you changed the tax codes it would take so much longer, and the fact is that would be a burden on business as well. Whatever you do is still a burden on business, so let us face up to that fact as well. The other thing to remember is that it does make a difference, whether somebody is buying a CD and it knocks 20p off, I agree with you, it does not make that much; but, on the one hand, you are saying, "There are already discounts taking place on the high street" so therefore people are already altering the price of goods to begin with, but this is an extra 2.5% that is not being given by the company but is being given by the Government. I think we have to remember that. On the one hand, they are already discounted; this is a further discount that can help. Let us look at it the other way. Mr Cave, you represent small businesses: builders-builders who are building extensions to houses - three-man bands really do benefit if they can knock 12.5% off a £75,000 house extension, so it really does make a difference. Let us get away from the CD mentality and chocolate bars-small businesses can benefit that way. Also, what we need to stimulate is the other part of businesses, and that is the car market. If you take 2.5% off a car it really does make a difference. What we have to do is be careful we do not just condemn but we actually see the benefits as well. The fact is that we have £12.5 billion immediately into the market that does help everybody. Chairman: We are not the Treasury Committee and we are not looking at the macro impacts of £12.5 billion. We are looking at the impact on the small and medium-sized businesses, so I want to focus any questions that are asked very much on that. Mr Hoyle: Finally, the £12.5 billion that is into the market helps small businesses because that is money that was not there previously. Q30 Mr Clapham: I want a word on the RDAs, because the RDAs have had an input into the PBR and are also making a £110 million package available. How important do you see the RDAs in actually facilitating a revival of the SMEs? Mr Cave: Potentially very important. We were very encouraged by One NorthEast and the measures they brought forward before the PRB, and they have also stepped up to the plate and said that they will go to the European Investment Bank and buy money themselves. That is something that is practised in mainland Europe and we, as the FSB, have been encouraging RDAs around the country to do that here. We would like to see that happen more. We do have some serious question marks over the actual delivery of it though; because the RDA network differs around the country-some are exceptionally good and quick off the mark, as I have just mentioned, and others less so. This is an opportunity actually for them all to raise their game, and we would like to see that. We want to see their delivery mechanisms and their contact with small businesses improving. Mr Frost: Can I turn that on its head. I think the response to this is that for the first time the RDAs and the whole business support structure has got the opportunity to prove itself. If it cannot show added value over the next two years then essentially why do they exist? Q31 Mr Binley: It is interesting to see supporters of the Government party telling you what you have to believe. Quite frankly, I thought that was quite interesting! The VAT fitting has a cost to it, and the cost to it comes just as we are emerging out of recession and just at a time when SMEs are going to need all the help they can get to achieve that growth we all want to see - be it in two years' time or whenever. Are you fearful of that at this stage, or are you just focussing on the short-term cash flow problems? Mr Cave: I will be perfectly honest with you, we are focussing on the short-term at the moment because that is what we have got to solve. There is built into this concern for the future. I come here because we were asked to give evidence, and I can only give evidence on what our members are feeling now. The problem with that VAT change is that it is a cost at a time when markets are contracting. Therefore it is impossible and too early to measure the possible benefits of that; but, I agree with you, there is a cost associated further down the line and that is something to be worried about. Q32 Miss Kirkbride: It is interesting to see, Chairman, how the Government party squawked when you had the temerity to suggest that this was not a wholly good idea. If you had £12.5 billion to spend what would have liked to have spent it on, or would you have liked to have seen it saved? Mr Frost: There is a wider issue here. I think if there is going to be a substantial increase in public expenditure then it is absolutely vital that that money gets through to stimulate business. Therefore, we see programmes of road building, we see programmes of house building, we see programmes of school building and hospital building that are really going to boost the construction centre-that is one sector of the economy that is being hit very hard indeed. Our concern is that we will see an increase in the number of public sector employees at the expense of capital expenditure. Chairman: I observe a lot of small businesses saying they are getting a substantial reduction in orders from the pubic sector at present, particularly from local authorities. Q33 Mr Bailey: Coming back to the question I was going to ask 15 minutes ago and to a certain extent Andrew anticipated that: how far do you think the views of SMEs were taken into consideration in the measures in the pre-Budget Report? Mr Cave: I think to a large extent they were taken into account. One thing that we have welcomed and we have been pleasantly surprised about is the willingness of Government and the opposition parties and government ministries to actually listen to the concerns of small businesses and what is happening on the ground; and we have been inundated with requests for information and data on that. That was fed into the PBR and as a consequences that is why we welcome a lot of the measures that have been adopted. The other thing I would say-and this relates back to a conversation Mr Hoyle and I had last time we were here relating to procurement and the Glover Review-we very much welcome a lot of what is in that Glover Review. It is measures like that-linking what David has just been saying about infrastructure spending-which make it possible to connect infrastructure spending and the money there with the small business community, so that we can benefit from procurement contracts. Mr Frost: I have been highly encouraged by the dialogue that has taken place between the Government and ourselves on behalf of businesses; a real feeling that the Government does want to listen to what the issues are affecting business and how they can find solutions; whether that be a small business, a finance forum which I think is in its early stages clearly seeking to look at the data it should be monitoring about bringing the banks and business together; and I think it is even things like the launch of the Better Payment Practice code last week. I do sense a desire to get through and get the understanding of business. Mr Izza: Chairman, I would agree. I think there is a much better dialogue going on with business today than there certainly was 12 months ago. Q34 Mr Bailey: Could I just refocus slightly. The measure available, the £1 billion for export credit, in theory at least that, combined with the depreciation of the pound, you would expect to help a lot of businesses that are export-focussed. Is it too early to assess any positive benefits that have come from that? How do you feel about it-either working or going to work? Mr Frost: In essence it is a good move; I think it is too early yet to monitor its effectiveness. What is absolutely clear is that this credit crunch, credit crisis, is not purely a UK issue. I have been speaking to many businesses who have products and goods they want to sell abroad and, in essence, the customers want to buy but there is no money there. By feeding money through ECGD and keeping that up should help but we will monitor it in 2009. Mr Cave: I would agree. Mr Izza: That is export credit guarantee. There is a major problem in the UK with credit cover. Chairman: We will do that in a moment. That is our last serious of questions on credit insurance. Q35 Mr Hoyle: I am pleased that Mr Cave has touched on procurement, one of the big issues where I think Government can make a real difference having that money for small, medium and large businesses. Does he share my concern that we have local authorities up and down this country that sat on huge balances, which is one thing, as we found out with all the money that was invested in Iceland and elsewhere that could be spent on schemes; but, more importantly, they actually sat on 106 monies which does not belong to them but was given by developers that is meant to be for social housing, community centres and recreation grounds. Could that make a difference? Does he not agree with me that local authorities have got their part to play as well? Mr Cave: Yes. Q36 Mr Bailey: Again, this has been touched on-the European Investment Fund. One of the panel mentioned RDAs and in effect trying to access it. What differences do you think it is going to make, and what steps are being taken to utilise it? Mr Cave: In theory it should make a big difference. There is a lot of money there that can be channelled primarily through the banks. Whilst we of the FSB have explored other ways of accessing that money, it should primarily come through banks; that is the fastest route. We are concerned that the behavioural inconsistencies that I keep referring back to, which are so important at the moment, are having an impact here as well. I was talking to a member yesterday who had been to his bank and sought funding, particularly looking EIB funding which his bank deals in and he was told, "Actually, we couldn't offer it at a rate that would be any different from a standard loan you'd get from your existing bank". There is something not quite right there, because the whole point of EIB money is that it should be offered at preferential rates. There are problems in the system. We want to see EIB money flowing as far as possible. We are encouraged that banks and more banks are looking to sign up to it but they need to explain how it works to their own members of staff for it to actually get to our members. Mr Izza: Chairman, if I could just add, speed is of the essence here because at the moment there are only three banks in the UK that offer EIB funding. Although there are many more interested they need to act quickly because they have to train their staff and become familiar with the scheme. If that takes six months then they will have lost the moment. Chairman: To be fair, the Department have told us in their written evidence that they are looking for clarification on some aspects of the way this would work. There is a board meeting of the EIB today to provide some clarification on the use of the monies and how they can be deployed. Q37 Mr Bailey: Would it be a fair summary of your comments to say that the Government needs to talk to the banks to ensure that they are stepping up to the plate on this? The money is there, they need to have the schemes for training and the facilities, and to understand it themselves for it to benefit. Mr Cave: From what I see and hear, it has been laid out. The banks have shown that they want to take part in this; it is additional money to the system. I think the point has been made, and we just need to get that out into the market ASAP. Chairman: I think we will hear what the banks say about the way the EIB money works. It is not as straightforward as we may assume, but we will find out in our next evidence session. We will turn to credit insurance. Q38 Roger Berry: There are countless reports of the companies finding it increasingly difficult to get their insurance. How serious is the problem? Mr Izza: I think this is a serious problem and it is growing in severity. We understand that credit insurance is being withdrawn for whole sectors of the market. Insurers are deciding that a sector is one for which they no longer wish to carry the risk, and that is very problematic because it is being done with very little notice. For a medium-sized business which is suddenly faced with the prospect of always having had this cover and it now being withdrawn, it completely changes the relationship then that you have with your customers, so it is a serious issue. If you are looking for solutions, perhaps the solution is that the insurer should be guaranteeing to keep them in place for six months, because businesses just cannot respond to things being withdrawn at 24-hours' notice. Q39 Roger Berry: So you would make it a legal requirement that insurance companies would, against their wishes, be required to maintain insurance cover for six months. Mr Izza: Whether it is a legal requirement or whether it is part of a code of conduct I do not really care, but getting the cover to the businesses that need it I think is the important thing. Q40 Roger Berry: Is there anything else government can do, apart from trying to encourage that and facilitate that, to address this credit insurance problem? Mr Cave: I do not think I have anything to add beyond what has been said on that. Mr Frost: No. Q41 Chairman: I would like to get from you a sense of the urgency you attach to this issue. We are having a very quiet and gentle discussion, but I met a manufacturer in my constituency on Thursday of last week who faces desperate difficulties because of this issue - a perfectly viable business. The credit insurers have decided that that type of structure of company they just will not insure any more, for no good reason, and it could be the end of the business. I just want to get a sense of the urgency attached to this issue. Mr Frost: I think the point is, Chairman, that it is an issue but it is only one part of the jigsaw, one part of the issues facing that business. As I said earlier, there are difficulties clearly with the relationships with the banks for many of these businesses-different on the credit insurance. Of course they are then being squeezed by both customers and suppliers and the cash is just draining out of the business. It is an important aspect. As I say, we at the moment are surveying exactly what is happening. Q42 Chairman: For each business its own particular challenge will be different. This particular business has a strong cash flow, it has no other problems. Its only problem is the loss of credit insurance. How widespread is that problem? Mr Frost: I cannot give you a response on the actual scale but it is a significant issue. Q43 Roger Berry: Should the Government step in and provide this facility? No doubt for a premium. Mr Frost: My understanding is the Government is examining this. If it is of a growing scale and magnitude then I think the Government will have a role. Someone will have to act as a guarantor, yes. Mr Izza: I would be more inclined to look to the market for solutions but if the market cannot find solutions, well, perhaps it is a legitimate thing for the Government to look at in these difficult times. Roger Berry: That seems a wonderful summary of where we are at the moment. The market has failed us in many areas quite significantly and we are left to pick up the pieces. Mr Binley: Except many might say regulation has failed, quite frankly. Q44 Chairman: We have run to the end of the questions we wanted to ask you and we have a little bit of time in hand. Is there anything you feel that you have not said at sufficient length or anything that you would like to qualify or add to the discussion? Mr Cave: There is one thing I would like to emphasise. We find ourselves in exceptional circumstances. We need quick actions to get cash flow moving and to get access to finance moving. The Government has responded to this. The £1 billion found that was in the PBR is a brilliant step in the right direction, but it needs to be available soon-not at the end of January, as we he have heard, it needs to be sooner. I would say, in response to what was said earlier, let us put party politics to one side and accept the fact that the principles around that £1 billion fund are good, but it is not enough, so let us broaden it out, and let us make sure that we help as many businesses, viable businesses, as possible. Anything we can do to put pressure on the Government to press for that would be wonderful. Q45 Roger Berry: I entirely agree with all of that. From your point of view, what is the obstacle to accessing this £1 billion a little more quickly? I am staggered at what seems to be the snail's pace of a lot of this, given the nature of the problem. From your point of view, though, why January? Why have things not happened already? Mr Cave: It has been a real education in how slowly government ministries and party organisations roll compared to businesses on the frontline. With the greatest will in the world-and certainly the officials we have spoken to about this do want to get it moving quickly-there is the Christmas period, et cetera, et cetera, and it all adds to the delay. There is not as much realisation in Westminster about how it is impacting in real time with our members on the ground. In comparison, things move in slow motion. Mr Frost: The point I would like to make, Chairman, is that if we had been sitting here 12 months ago it would have been a very different economic environment and discussion that we would have been having. I do not think you can discuss the relationship between banks and business without overlaying it with what is happening in not only the UK economy but the global economy fund as well. There is a marked downturn. I do not want to appear an apologist for the banks, but certainly lending decisions are going to be looked at in a very different way now from what they were 12 months ago. If we are to get through all of this, it is absolutely crucial that we maintain the good quality businesses, the businesses that have a good track record and that have potential, and then not let go. If that does not happen, then I just cannot see us getting out of this very fast. Mr Izza: Wherever you sit in UK plc today, whether it is at the large end or the micro end, the key issue is one of confidence. The solution is not in the hands of any one particular group - I mean, the Government, the banks, the insurers. Everybody has a role to play in bringing this back. But one group which I think does have an important role is the media. The media can often talk down the prospects of British business, and, as David said earlier on, British business is not a basket case across the board. There are some businesses that will do very well in the forthcoming year and it will be those who are the engines of growth for the future. Mr Hoyle: Would it be fair to say-and you have summed up quite well-that it is good that the Government has taken action. There may be more that needs to be done but it is a lot better than doing nothing. Chairman: That is a rather partisan observation from Mr Hoyle. No one is suggesting doing nothing. We are all discussing what is the right thing to do. On that note, I conclude the session.
Examination of Witnesses
Witnesses: Mr Steve Cooper, Managing Director, Local Business, Barclays Bank, Mr John Maltby, Managing Director, Commercial Banking, Lloyds TSB, Ms Lynne Peacock, Chief Executive Officer, Clydesdale Bank, and Mr Peter Ibbetson, Chairman, RBS Small Businesses, Royal Bank of Scotland, gave evidence. Q46 Chairman: Lady, gentlemen, welcome to this evidence session on finance for small- and medium-sized businesses. We are having a very sombre session this morning, which I think it is appropriate in the circumstances, but we are looking forward to what you have to say. Could I begin by asking you to introduce yourselves so that we all know who you are. Mr Cooper: Steve Cooper. I am the Managing Director for Local Business in Barclays. Mr Maltby: I am John Maltby, Managing Director of Commercial Banking at Lloyds TSB. Ms Peacock: I am Lynne Peacock. I am Chief Executive, Clydesdale Bank, which also incorporates Yorkshire Bank. Mr Ibbetson: I am Peter Ibbetson. I am Chairman of Small Businesses for Royal Bank and Nat West. Q47 Chairman: I should say two things from the Chair. First of all, the fact that you four are here does not mean that there is particular significance in that. We would like to have had all the banks represented but we could not do that, and so we have chosen a representative group. No blame or shame or credit attaches to being here; it is just a selected group. I should also declare the fact that I have just completed an Industry and Parliament Trust with the Royal Bank of Scotland. That is not a financial declaration but it does mean that I know the bank rather better than I do the other three. Perhaps I could begin by asking each of you one question. You are under attack quite often for not lending enough sums of money to small businesses. We have heard a very measured, I think, description of the situation from representatives of those small businesses in our last session. What are the constraints you are under when deciding how much you can lend? I am thinking of things like capital requirements, Basle, preference shares. What are the issues that constrain your lending ability? Mr Cooper: First of all, in the knowledge that we are in a very difficult trading environment-we speak to thousands of small businesses every day and it is very tough out there-in terms of lending to small businesses or lending to the market in general, I think there is a little misunderstanding in general as to what some of the challenges are. Yes, banks are being asked and have agreed to increase their capital ratios quite significantly, and are doing that, and at the same time trying to lend more money to the overall market to provide needs there. I think in the mortgage market there are some issues around supply. There were 300 providers of mortgages 18 months ago and now there are less than one dozen. In the SME market, my view is that at the smaller end there is not a supply issue around access to finance. For larger businesses, and I am talking typically of business that have a staff of 250 people or more, there is an issue. On that basis, certainly from Barclays' point of view, I have no issues around capital constraints in terms of lending to smaller firms. To the larger SMEs, I think there is in the market a degree of capital issues. Half of the credit to the larger SMEs has historically been provided by foreign banks, equity markets, hedge funds, et cetera. They are not there any more. One of the previous panel members referred to £200 billion worth of loans or debts to larger companies which is due for repayment in the next 12 months. Not only is that due for refinancing but, equally, for people who are looking to get access to that money, those participants are no longer there. There are those challenges facing the overall sector. Mr Maltby: At Lloyds TSB we do not have a constraint on our lending to small and medium businesses; indeed, we have grown our lending this year some 18% to that sector. We do see the points that you make, that there are increased capital requirements. Those come from Basle and they also come from the recapitalisation. That has not affected our ability to lend to this sector. Probably the biggest thing that affects how much our lending will grow will be the quality of opportunities that are put in front of us. In a recessionary environment, not all businesses are in the same viable position that they might have been in in more benign environment, so we see that as more of a constraint in terms of the credit quality rather than the availability of capital in this sector. Ms Peacock: Chairman, without repeating the points, Clydesdale and Yorkshire only lend in the SME sector. We are a much smaller bank, this is the only sector within business in which we operate. In our financial year ended 30 September, our lending in the business area increased by about 20%, so we are not seeing a reduction. However, I think there are some factors since then that are maybe causing this perception. First, the market has become very difficult. We are still approving nine out of ten credit applications, but the number, particularly in the property sector rather than in the SME sector per se, has declined. I do think we have seen some reduction in demand-not as much as within the mortgage market, but certainly, in our experience, some of the smaller banks, the foreign banks that were around, are not around, so maybe that is what is causing some of the feedback that the Committee is receiving. Mr Ibbetson: The question of capital was raised in the last session as well. There is a balance. We do have to balance the allocation of capital and where we apply that capital. I agree with Steve: we do not have a constraint at the SME level. The pressure, if we see pressure, would be much higher up the tree than at the SME level. I do not believe there is a constraint per se from the banks. I do agree with the other comments: we have seen exits from market, so the Icelandic banks are no longer there, and there is quite a gap that they have left. There are issues on asset financing: the residual values of assets have declined, so there are constraints there. I think the only real constraint we see is in businesses coming through the door of the quality that we would like. We have not in any way changed our principles in lending: our bar is exactly where it has been, but virtually every SME by definition at the moment is facing difficulties and the quality of the client coming through the door is declining. Q48 Chairman: I want to understand what I have been told, before I hand over to Brian Binley. You are saying that there are some very real constraints on the ability of banks to lend coming from Basle, increased capital requirements, 12% insurance rates on preference shares, requirements to rebuild capital in addition to Basle as a result of the way that capitalisation has been conducted, but those constraints are not going to impact on SME lending because ...? Why? Mr Ibbetson: The portfolio we have as a bank, lending to all kinds of sectors at all kinds of levels, is very, very big. The SME sector is a portion of that but it is not an enormous portion of that, to the extent that we can continue supporting that sector. As a commercial perspective, as a bank, it is an important sector for us. There are 4.7 million businesses across the country and we have about 1.2 million of those. It is an important sector for us which we can continue to support. Chairman: I am in danger of treading on Brian Binley's territory a bit too much, so I think I will hand over to him. Q49 Mr Binley: We have already said and the Chairman has heavily intimated that the banks need to raise extra capital and are facing a riskier economic background. There is no doubt about that. How do you balance the need to maintain lending to support the economy? How do you balance that? What would you want the Government to do to help you do that more effectively? Ms Peacock: From our perspective, we are constantly trying to balance the needs of our small business customers, our personal borrowers, and of course our savers. We have, for example, ten times the number of savings accounts than we do borrowers. It is a constant balance. We have tried to grow our lending prudently. We have had to raise extra capital. We have done that from within our group, but within the difficulties of the market it is something that we believe we can balance. As far as the initiatives are concerned, I think they are all helpful. My personal view is that there is not one single initiative that is suddenly going to transform the situation. There are a number of things that are all helping. I think one of the things that would help is that we cease to receive more bad news from around the globe and we see a gradual return of confidence. Mr Maltby: We do welcome the initiatives that have been brought to bear, we do welcome the attention that has been brought to bear onto this sector. It is an important sector for us as an organisation and clearly for our customers. I think that there are a couple of areas where we would like to see further work and further initiative. One is in the area of prompt payments, and I think that is something that was touched on in the previous session. We do think that that is an issue that is increasing the challenges on working capital of small businesses. The second is about confidence-again, something that I know was touched on in the previous session. There are good businesses out there that are doing well, there are good businesses that are having a challenge and are having a tough time, and I think it is important that all parts of the market - the banks, accountants regulators, other parts of government, and the development agencies - work together to support that. I have seen encouraging signs over the past few weeks. That is something that would underpin confidence and I think that is going to be very helpful. Mr Cooper: They are very good points. There is another area where I would like to see some more work done. Some businesses are really struggling, and it may or may not be due to lack of cash. Quite often it is due to their business model not working in today's environment. A typical example I would give is of a restaurant that is empty. Whether you double or triple or quadruple the funds that restaurant has, that on its own is not necessarily going to make more people eat in that restaurant. I think businesses need help to understand what they need to do to make their restaurant more attractive to the consumer on the high street, whether that be reviewing why they are going to the restaurant next door or what the customers want. I think that is a combination of help from banks, advisers, accountants, and I think both public and private sector have a role to play in that in terms of helping the business community to think that way and to take on board the advice and the support they need to do that. Finance is one element of that, but it is not the only element. Mr Ibbetson: There are two main things I would mention here. One is liquidity and the other is investment. We are not seeing an awful lot of investment, by a long straw, at the moment. We would like to see that. Q50 Mr Binley: Does that mean more encouragement for savers? Is that what you are saying? Mr Ibbetson: No, I am talking about investment in the refrigeration units which will grow the business and those sorts of things. That is very, very quiet at the moment. Liquidity is the key issue. Today SMEs wake up in the morning and worry about their liquidity far more than they worry about their investment. Immediately we need to focus on the liquidity side. I think as banks we are doing that, we understand that. We are working closely with the businesses doing that. I think government understands that as well. The Small Firm Finance scheme that was introduced will help, but, as John has said, it is wider than that; it is trying to get the debtors to pay on time and it is all of those issues. It is addressing that liquidity piece that is the important thing. One other comment I would make is that only one in three SMEs do borrow. The other two-thirds do not have bank lending, they run in credit most of the time, and a big need that they have at the moment is the advice. Many have not been through a recessionary time before. We should not ignore those businesses and we do need to provide advice to those as well. Q51 Mr Binley: Absolutely. I would like to move on to ask my second question, and you will have heard me asking a similar question earlier on. The banks say that lending has not decreased, yet the Government and business organisations say that access to credit has got harder. From your perspective, what is happening here? Mr Ibbetson: Year on year we are lending more to the SME market, so lending has not decreased and it has increased. Q52 Mr Binley: Are you talking there up to, let us say, a period three months ago and not taking into account the last three months, which have been pretty hectic? Or are you saying up to this present time? Mr Ibbetson: Up to this present time, year on year, our lending has grown. It is fair to say it is slow but it has grown year on year. We are seeing the other providers exiting the market, so I think it is right to say that access to finance, access to support has declined One of the big frustrations we have is the applications that we are getting are much lower than we have seen in volume before, so we are about 15% down on applications year-on-year, but we are about 40% down in volume year-on-year, so even those coming to us for support are asking of less. Ms Peacock: We are seeing a difference between the property sector, where I think things are incredibly subdued, and general trading businesses. We are seeing a difference as well between our existing customer activity and new applications. New credit applications are probably down by about one-third, whereas we have not seen much of a change in activity amongst our existing customers-who we keep very closely to. Q53 Mr Binley: You are telling us that small businesses are not coming to you for help and in fact that has dropped down rather than increased. Is that what you are telling me? Mr Maltby: Maybe I could make a distinction. I think there is a distinction between businesses coming for help in terms of new investment-and that was a point Peter had made earlier-and those organisations that need support in terms of working capital, for all the reasons we have talked about, including extended payment ---- Q54 Mr Binley: A one-off cash-flow hit and that sort of problem. Mr Maltby: Yes. We have seen that increase. In fact our overdraft volumes have increased 10% this year. We have also increased overdraft limits for existing customers. We are seeing a shift in the requirements for small businesses away from investment, particularly in sectors like property, through to working capital, which is what we believe we would expect in a recession. Q55 Mr Binley: That is where the difference comes between loan and using their bank account overdraft facilities. Mr Maltby: It is. One of the other major shifts and one of the measures that we use is the utilisation of their overdraft. A small business may have a £10,000 overdraft but how much of that is drawn down? We have seen that that has increased. The overdraft utilisation in our business has increased from some 55% to now nearly 60% over the period, but that still means that on average our customers have 40% of their overdraft that they have not yet drawn down, and one of the things that we have committed to in our recent charter was not to remove those facilities. Q56 Mr Binley: Thank you. Do you have anything to add? Mr Cooper: I think a couple of measures may help. With 20% market share, we are seeing, through bank accounts, businesses paying in about 6% less year-on-year, so that is a good barometer that businesses are generating about 6% less cash than a year ago. To put it into context, that is the biggest contraction we have seen in about 20 years, so it is pretty tough. That means that the number of businesses-and we are still seeing plenty of businesses looking to expand and grow-is down year-on-year in terms of that type of investment. People are holding back. I spoke to a manufacturing company in the North yesterday. They are expanding and they want to buy their factory but they have decided to wait a year to see what happens to the price. It may go down. They are seeing what happens in the future with interest rates. They may go down. They are looking at opportunity in terms of exchange rates and what may happen there in terms of their exporting capability. A number of people are just being cautious in terms of what may happen going forward. We are seeing a little bit of new investment slowdown-it is still happening, just not as much as previously-and there is some stress around the working capital requirements, where businesses are collecting cash less quickly and so do need finance for that. The businesses that are more marginal in terms of their viability are now being stretched, and they are the ones which are struggling in terms of their access to finance to tide them over. In reality, what they need to consider is: "Is my business model correct for today's environment." Q57 Mr Weir: You mention that businesses are not coming to the same extent for investment, but we get complaints from small businesses that when they do go to the bank the cost of getting credit or loan finance is increasing. I have had businesses coming to me saying that, whilst it is not increasing, they are not getting the benefit of falling interest rates. When the Bank of England has dropped the interest rate, all that has happened is that the commercial banks have put up their cut, if you like, so the overall interest rate is exactly the same when they come for a new loan. (a) can you comment on that and (b) if that is the case what is the point in the Bank of England slashing interest rates if the benefit is not getting through to business? Mr Cooper: First of all-and I think it is fairly similar with other banks-80% of our business customers are borrowing linked to base rate and they get the full change in base rate passed on immediately. That is contractual in our arrangements with them, so, whether it is up or down, they get the immediate benefit of a base rate change immediately. For the 20% of customers who do not get that, they have chosen themselves to have a fixed rate, and they have chosen that to give them certainty of finance costs. Q58 Mr Weir: I had a constituent who had base plus 2.5%. They went for a new loan when the base had fallen by 1.5%, but, instead of getting base plus 2.5%, they were quoted base plus 4%; that is, a 7% interest rate was exactly the same. Mr Cooper: Yes. Q59 Mr Weir: The effect, when they applied for a new loan for new investment in equipment, was that they were getting no benefit from the drop in interest rates. How is that fair? Mr Cooper: It is good banking practice, good regulatory practice to price for risk: the higher the risk, the lower the rate; the lower the risk, the lower the rate. We have seen in Barclays that for about 15% of our customers the risk profile has deteriorated and for some of those customers there has been an increase in the interest rate. Equally, another 15% have seen a reduction. The vast majority have seen no change at all in terms of bank spread or bank margin, and they have received the full benefit from the base rate reductions. The vast majority of small businesses are seeing real reductions in interest rates. Q60 Mr Weir: Surely, what you are saying is the risk has increased. Surely, in a recession, for the vast majority of small businesses the risk will have increased, therefore the vast majority coming for new loans will find that they are having to pay more to get these loans. Is that not the truth of the matter? Mr Cooper: For a small number of businesses the risk is increasing. For the vast majority it is not, or not changing materially to reflect in a change in the interest rates on whatever their borrowing is. I go back to the stats we are seeing: the vast majority of our customers are seeing a real reduction in their interest rates. Q61 Mr Hoyle: What Mr Cooper says is interesting. If I have got it right, the majority of your customers have benefited from not only the cut in base rate but what they are paying over and above base. Mr Cooper: The margin they are paying over and above base is broadly unchanged over the past 12 months. Q62 Mr Hoyle: So they have not gained anything? Mr Cooper: They have gained in ------ Q63 Mr Hoyle: I know base rate but it is what you are charging above base rate. Mr Cooper: It is broadly unchanged. For some customers it has gone up marginally; for some customers it has gone down marginally-depending on their risk profile. The vast majority have seen no material change in the margin they are paying over ---- Q64 Mr Hoyle: So it is business as usual, with no benefit. Mr Cooper: The benefit is coming from overall rates in the market. They are receiving benefit from falling base rates. Q65 Mr Hoyle: You are saying that some have had above base rate increased, but those that have seen that increase are those you see where they are most at risk. Mr Cooper: Yes, but that is a very small number. Q66 Mr Hoyle: Presumably they need the most help. What we are saying is that those who need the most help get the least help, but get the extra charges. Is that right? Mr Cooper: No, I do not accept that. What they are doing ---- Q67 Mr Hoyle: I did not think you would accept it, but .... Mr Cooper: Risk has to be priced appropriately. Our shareholders would be concerned if we did not do that, as clearly would our savers be concerned as well. We are trying to make sure that we pass a rate to any customer, in their agreement, which is both appropriate for the risk and they are able to afford --- Q68 Mr Hoyle: In their agreement? But we all know they have no choice: it is take it or leave it, because nobody else is going to take them on. In fairness, it is like playing Russian roulette with a bullet in every chamber, is it not? Mr Cooper: There is choice. It is a competitive market. Q69 Mr Hoyle: The other big concern we hear about-and I have to say we hear a lot about tit but never get a lot of proof-is that if overdraft facilities get too high you try to capitalise that. I do not know whether that is the case. I would like you to comment on that. The other is that you try to force people into factoring, which is a very expensive way for doing business. Is that the case? Mr Maltby: First, I think that we do not force customers into factoring. For some customers it can be a preferable source of finance because, as a facility, it grows with the size of their business. Indeed, the cost of factoring today is not a huge amount different from the cost of overdraft for many customers. In terms of the facility itself, certainly from Lloyds TSB, as I mentioned earlier, our overdrafts have grown by 10% year-on-year-and it is, Chairman, up until the end of October this year, so we have seen those increases. I mentioned earlier that we have not seen any reduction-in fact we have seen an increase-in interest in having overdrafts and our ability to be able to service them. Q70 Mr Hoyle: Do the banks benefit from people factoring? Is it good business or bad business for you? Mr Maltby: It is a different line of business. It does open up an opportunity potentially ---- Q71 Mr Hoyle: It is good or bad profit? Mr Maltby: It is broadly the same profit as an overdraft loan. It does mean that sometimes when somebody uses factoring it can increase the amount of working capital that we can provide because that factoring is secured on the debtor book whereas most overdrafts are unsecured. Q72 Mr Hoyle: Only for a period, and then you take it off and you take it off the next set of invoices. Mr Maltby: Effectively, it is a revolving facility that is secured on the debtor book which moves and evolves as debtors ---- Q73 Mr Hoyle: It is only as good as the factoring people behind it who are willing to chase the debt. Mr Maltby: Indeed. Indeed. Q74 Mr Bailey: I would like to tease out this issue about risk and loan rates. I suppose this is specifically directed at Mr Cooper. You said that it was a very small number, effectively, which had their rates of interest increased or not reduced in line with the reduction in bank basic rate. Given the current climate, the impression that I am getting is that there are far more companies at risk-and certainly I am getting reports from manufacturers that there are. Is your decision related to the change in the macro economic climate, or the specific business models that you have had to live with for this particular company throughout your business relationship with them? Mr Cooper: I think that is a good question. First of all, I want to stress that any change in base rate does get passed on to the borrower. In the cost ----- Q75 Mr Bailey: It would be compensated for by an increase in the surcharge, if you like. Mr Cooper: In part, for some, yes. Q76 Mr Hoyle: So it is a myth. Mr Cooper: How risk is priced is based on, one, the industry that business is in-so there is a macro element on that. The other element is: What is the business model on that particular business? As someone on the earlier panel said, within any industry-and we have no blanket policies in place for any sector-there are good businesses and there are bad businesses. The primary weighting on this is that where there is a bad business model we work as hard as we can with that business, so that they are encouraged to adapt their business model. In some cases, a loan may be more appropriate. If a business has been trading with losses and is sitting on an overdraft facility which is now really solid, actually there is financial benefit to that business in transferring it to a loan: (a) it is cheaper and (b) that loss gets repaid over time. Mr Bailey: I have a follow-up question and there are two angles to this, particularly relevant to the current climate. First of all, on the basis of your experience, is the Government action to stimulate consumer spending (the so-called fiscal stimulus) helping to improve, if you like, the viability of those businesses? Second, where there is still risk and a danger of businesses going under, how do you think government can engage in reducing that risk in order to prevent businesses from going under? Chairman: That ties in with some of the questions other colleagues want to ask later on. Can we see if those questions are addressed by colleagues and come back if they have not been answer satisfactorily? Q77 Mr Bailey: At least the second question is perhaps not so wide. Mr Cooper: I think the Finance Forum is a good initiative. We welcome the debate we have had there. The Small Business Support Fund is a good initiative. We have worked hard with government, as have colleagues here, to help shape that and it is very nearly ready to go. Plus the European Investment Bank, we have had talks about that. So I think there are some good things happening. Mr Bailey: Okay. I am going to come on to those later. Q78 Chairman: Could I just say that I am finding this all rather surreal. We do have a whole string of anecdotes about problems that companies are experiencing. The Institute of Chartered Accountants gave us a detailed list of anecdotes-I know they are anecdotes-about problems all from the West Midlands. Three of us are from the West Midlands and they are from the West Midlands examples. A solicitors' practice found a leading high street bank withdrawing its overdraft and offering no further advances. A manufacturing company which employs 110 people has been asked by a leading bank to pay off its £75,000 overdraft and it will close as a result. This is an extraordinary one: a leading bank wants to renegotiate an existing loan to a charity with a very strong asset base from base plus 1.5% to LIBOR plus 3.5%, and charge four times more on arrangement fee. For a company supplying homeware, the bank reduced the overdraft by one-third and refused to reassign a personal guarantee on the departure from the board of the guarantor. As a direct result, the company called in receivers. These are the anecdotes that are coming up from the real world, and yet you are telling us statistically it is all splendid. I really would like to see more sight of those statistics and how many companies are having falling interest rates and loans, how many are having increased interest rates, how many are having increased negotiation fees at the small and medium-sized level. There is a disconnect here between the anecdotes we are getting from the real world and what you are telling us. I find this really difficult to understand. Mr Ibbetson: I hear the same anecdotes. I spend quite a bit of time going round and speaking to businesses. I have a fair degree of experience in business-I have recently been invited back into banking having spent five years at the coal face as a director of businesses-so I understand the issues that are being addressed there. I categorise into three the situations we are seeing a lot of the time. There are some very good businesses which are not suffering, which are not having any problems, and we are addressing those very easily as business as usual. They are not a problem. There are some at the other end of the scale where there clearly are problems, and those businesses, even in a very good economic cycle, would not survive, and that is part of the business. There is a whole raft of businesses in the middle. Those in the middle are the ones that are having problems with their debtors, are having cash flow problems, have not been here before, do lack the expertise, and these are the ones it is difficult to work with a lot of the time. I hear the anecdotes on pricing. We have heard the point about base rate. Every time base rate goes down, of the 1.1 million SMEs that we have below £1 million turnover, virtually every one will see that base rate reduction straight away. The pushback that says, "Yes, but you have only just compensated it by increasing the margins," is not the case. We do price for rise. As a relative: against the reduction that we have seen in base rate, the risk that we have seen in margin has been a small percentage of that. Businesses are getting the vast majority of the base rate reductions passed down to them. I hear the anecdotes. The issues that we face, I think, are the ones in those grey areas. We have not changed the basis on which we look at credit. Our bar has stayed the same; the businesses' bars have reduced. It is not in our interest as banks not to support businesses. If there is one thing I would like to see in two years' time, it would be still to have all the businesses we have still operating very successfully. We are there absolutely to support them. but we have to be honest and we have to address the risks properly. I suspect that many of the anecdotes that you see relate to those businesses where they do not like the honest responses that we are trying to give. Q79 Chairman: Can we see some statistics to back up the claims you have made? You have made some very specific numerical claims there, Mr Ibbetson. That would be helpful. We will explore afterwards how we could take that forward. Mr Ibbetson: Yes. Q80 Mr Weir: Could you give us some indication of the percentage that have suffered an increase in the rate above base as a result of this? I would be very interested in that. There is certainly information coming back from the small businesses in my constituency, many of whom will not allow us to name them publicly for fear of what the banks might do, so we are in a vicious circle here, that they are suffering higher increases above base from the banks when they go back for further finance. These are not businesses, as far as I can see, in the struggling category. I am very interested and I would like to see some figures on this. Mr Ibbetson: We are required as part of the Government support to track the figures. We provide those things to the Bank of England, so certainly they are tracked. I would like to make one other point: the vast, vast majority of our SMEs are base-rate linked, our funding is LIBOR based, and there is a mismatch between base rate and LIBOR of about 130 bases points at the moment. We have committed that we will not pass that funding cost on to the SMEs. We take that ourselves, which ensures that the SMEs do get the full base rate reductions. Q81 Mr Clapham: I think you were in the previous session and you would have heard that question about the banks failing to understand SMEs. Given the situation, and in this particular crisis we see that perhaps the freedom of the business development chap who is down at the coal face is somewhat restricted, is it that which is causing the misunderstanding? Ms Peacock: We are in a slightly different position because we are a relatively small bank, Clydesdale and Yorkshire, rather than a very large bank. We operate a local model. 90% of our credit decisions are made by people in our business centres rather than anywhere at head office and that has not changed through the last six to nine months as conditions have deteriorated, so there is certainly no pressure, if you like, from upon high, from where we sit, to influence those local decisions. The other point I would make - and it maybe comes back to a point around supporting businesses and working closely with them - is that one of the things we track very closely is the number of businesses that are, if you like, talking with our people in a bit more of an intensive care mode, where that business might be entering difficulties. Currently, and the number has not changed-I cannot say that it will not change going forward-with about 75% of businesses that are, if you like, with our intensive care team, we manage to work with them to restore them back to health. That may change going forward. It has not changed thus far, and it has not changed for us over the last few years. Mr Maltby: We have a similar model to Clydesdale. 90% of our decisions are done locally in the same business environment as our customers sit, and we have a very experienced relationship management force of 1,400 people around the UK. On average, they have 21 years' experience with the bank, and their average age is 42. These are people who have spent their career working with small businesses in their local communities. I do think that we as an organisation do spend our time understanding small businesses and want to provide the support to them. Mr Cooper: We have similar demographics and so forth. One of the things we also do is that when we recruit new relationship managers we get customers involved in the recruitment process: "Would you be happy to work with this person?" As part of induction and ongoing training, our relationship managers spend at least one day a year with a business customer. I have an example of someone who was in a sandwich shop yesterday. He was in there buttering bread at 5.00 am and then cleaning all the equipment afterwards, ordering stock, paying the banking and so forth. We try to get as much experience in there as possible, but we also randomly sample 2,000 or 3,000 customers a month: "Tell us about your relationship manager." We take that feedback and we apply it. If someone needs training because they are not doing a good job, we learn from that. Our people are paid partly based on what their customers tell us about them. Q82 Mr Clapham: Obviously something has happened. There has been a change in the way in which you balance risk. How has that come about? When I look, for example, at how Barclays work, you work with the expert at the centre, who then has a relationship with the business relations manager on the ground, and between them they make the decision. Is it such because you have to be more cautious that the decision is more with the central expert than it is with the guy who is working with his businesses and knows about businesses? Is that the reason for the change? Mr Cooper: I would say it is not. We use a combination of top down from the centre and bottom up from the ground and we find that very useful. Perhaps I might give you an example. If you were an accountancy practice, for example, there would be a good relationship on the ground with the relationship manager who will see that business for what is happening on the ground, but that relationship manager may have little idea as to what accountancy practices across the country are experiencing and, therefore, that is why we have that combination of approach. We have also found that quite useful with the customer. With an accountancy practice, for example, in general terms accountants may be collecting their debtors in, say, every 30 days. Our customer on the ground may be on 50 days, in which case we are able to say to the customer, "Look, your peer group is collecting their cash quicker than you are. You might want to take some action to address that." We have found that very powerful. Mr Ibbetson: Over my time in SME banking, I have seen both models of lending directly at the frontline and more centralised lending. I have to say that I honestly do not think it matters. The analogy I always draw is that when an SME flicks the switch they want the light to go on. They are not too worried about what the wiring is behind, as long as the light goes on properly. The important thing is that we take the localness, we take the understanding of credit, we do all the right things, and then get the right answers. An advantage of having the centralised credit function is consistency. I think at the moment that is very important-it gives expertise and I think that is very important-but we must not lose sight of the localness and we work really hard on that. A challenge we have at the moment is making sure that we have our most experienced relationship managers sitting alongside those SMEs that are finding life most challenging. Q83 Mr Clapham: If the challenge then is to make the localness much more pertinent, how do we go about doing that? Mr Ibbetson: I think we do it quite well. We have 4,000 frontline relationship managers out there with the businesses. They liaise very tightly with their credit colleagues. I think we do it quite well. I have to say, speaking to the SMEs that I have been speaking to, I very, very rarely get a complaint to say that because the decisions are made centrally it is the wrong decision. The clever thing is flicking the switch and making the light come on. That is what we have to focus on. Different models have different dynamics, but it is addressing the SME and delivering to them what they want which is the important perspective. Q84 Chairman: Mr Cooper, just remind me, is your bank the one that wrote around to all its customers rather crudely telling them about the new terms and conditions? Did you, rather uniquely, not take the tailored approach that other banks took? Am I right in saying that? Mr Cooper: That has been misrepresented. We did not write to all our customers: we wrote to a small number changing their overdraft rates. Some went up, some went down. Q85 Mr Hoyle: How many is a small number. Mr Cooper: 15% went up, 15% also went down. Q86 Mr Hoyle: I am not being funny, but how many customers is 15%? Mr Cooper: It is round about 80,000 customers. A small number. Q87 Mr Hoyle: So it is 160,000 that you have sent letters to. Mr Cooper: Correct. Individual letters, most of which were followed up by a phone conversation, so it was not a standard circular-though it may have been presented as such. Q88 Chairman: Even so, it is quite a deterioration in the nature of the relationship that you would expect between a big bank and its customers to have. You did not cover yourself in glory with that episode. Mr Cooper: We spoke to most of the customers we could on a face-by-face basis. Most of our customers have actually responded fairly positively to that. Clearly those who received a reduction in rates were more positive than those others. Q89 Mr Hoyle: You keep telling us this: some go up, some go down. Did the majority go up or did the majority go down? Mr Cooper: The majority were unchanged. Q90 Mr Hoyle: I will try again. Did the majority go up or did the majority go down? Forget the unchanged because that is meaningless. What about did the majority go up or did the majority go down? I suspect the majority went up. Mr Cooper: That is not correct. The majority ----- Q91 Mr Hoyle: More people benefited. Mr Cooper: Correct. Q92 Mr Hoyle: Than went up? Mr Cooper: Correct. Mr Hoyle: That is fine. Q93 Chairman: We are giving you a very easy time, I am very conscious of that. You may not feel like it, but it feels like it from this side of the table. The trouble is, one of the reasons we are in this mess-one of them, it is not the only reason-is that the banks made so many mis-judgments in the past. How can we trust you to get the right answers now? You are saying you are doing all the right things now, but the history of the last few years is that you did not cover yourselves in glory really, did you? Mr Maltby: One of the things that Lloyds TSB particularly was criticised for in the most benign times was being prudent on its lending policy. We believed that we had a through-the-cycle lending policy, which is why we have not had to change those lending policies and we can support our customers in the good times and the bad times. Q94 Chairman: You are saying you did not make mistakes in the SME sector, you made them elsewhere. Mr Maltby: I am saying that as an organisation Lloyds TSB was a more prudent lender across its group, and particularly the bit that I represent in terms of the SME sector. We have a book that has a relatively low impairment level. Q95 Chairman: I must ask your three colleagues whether they were imprudent lenders or not in turn. Do you think you were an imprudent lender in the past in the SME sector? Mr Cooper: I would not say necessarily imprudent in terms of the SME sector. I think the industry as a whole has lessons to learn from being, I guess, to a degree, too liberal around providing access to finance. And Barclays has had a part to play in that. Equally I think so has the consumer had a part to play in that as well. I think it is important that everyone learns lessons from this and that there is no knee-jerk reaction from one extreme to another but finely balanced through that. Ms Peacock: Chairman, I would not say that Clydesdale or Yorkshire have been an imprudent lender either in the business or personal sector. We did not get involved in some of the activities on the fringe of the market and, as a result, whilst we have not been immune from the wider factors in the economy and in the global markets, we have been trading through this as a bank relatively well. It really is not in our interest to lend a penny to anybody who we do not believe can pay us back. That is a philosophy we have had through this. Where we have been accused, we have been accused of turning down opportunities rather than taking them on board. Mr Ibbetson: It is an interesting question. I am reflecting on it. I do not think we have been imprudent in any way. Within the Nat West brand and the Royal Bank brand we have led the market for about 20 or 30 years and we have been hugely supportive of this sector. I was just reflecting back to: Was it different last time when we were in a recession and heading for the recession as against this time? It is different this time. I do not think we could be accused of being imprudent, but it is different this time. There are a lot of other factors there this time. It is far more global this time. We have issues like energy prices that have been hugely volatile and far, far more important this time. Things are different this time. I think we need to do this time as we did last time, which is to support the businesses and understand the businesses and stay close to them. The important thing to recognise is that it is not in our interests as banks to see SMEs fail. We want to be there, as we get through this recession, supporting those same businesses, and that is good commercial business for us. Q96 Chairman: I have one last question on this and that leads me nicely to it. Do you make money on your SME books? Do you make money out of this? It sounds to me like a loss-leader exercise for you now from what you are telling us. Mr Ibbetson: With great caution because I had a similar debate with the Competition Commission when they were reviewing the profitability of the SME sector, so I address it with great caution. Over the cycle of course, this is business that we want to do, but it is a cycle and there are downs and there are ups. Over the cycle, it is good business, it is important business for us, it is important for our portfolio and, if it were not, it would not be a sector that we would continue supporting. Ms Peacock: Chairman, as a bank, we made about £250 million post-tax profit in the last financial year. We only made that from two sources. We made that profit from individuals and we made it from the SME sector, so clearly in the cycle both sectors are profitable for banks and I think that is actually a healthy position to be in. It is in no one's interests for banks to be unprofitable. Mr Maltby: We have had relationships with our small and medium businesses for some time and we do make a profit, as an organisation, over that period. Q97 Chairman: There is nothing wrong with making a profit. It is all wonderful, what you are doing, lending at base when the LIBOR is higher than base, but I am just trying to establish whether you want to be philanthropes at present or actually still running businesses. Mr Maltby: No, it is something that we feel very strongly, that this is a sector that is important to us, as an organisation, and we recognise it through our cycle as, we believe, the gap between base and LIBOR is not going to remain at the level that it is always going forward, and we believe that, as we have relationships with our customers for a period of time, actually we will make a good and strong profit over that period. Mr Cooper: I think a similar story. I guess the one thing I would add is that it is a competitive market and increasingly so. Two years ago, only one in 20 small business multi-sourced financial needs and today it is one in five, so small businesses are getting very adept at actually looking around for their best needs and services at a very competitive price. Q98 Miss Kirkbride: Just on that, I think, in a way, the panel that we have here today are representative of the small business sector in their banks, possibly with the exception of Clydesdale and Royal, who perhaps have wider responsibilities and perhaps have been more responsible in the past. If we had your chief executives here, then we could actually lay claim to the responsibility perhaps. NatWest/RBS's aggressive takeover policy has not helped its balance sheet at the moment with the tax-frame narrowing to 58%, so clearly across your banks as a whole, including Barclays who, after all, have been bailed out by the Middle East, you have been irresponsible, but your sector, the bit that you are actually in charge of, the small businesses, are now suffering to some extent because of the irresponsibility of those at the top in your banks, I think is probably a fairer judgment to take. Listening to you, I am with the Chairman in that the anecdotal experience we have both in my own postbag and in stuff we have had to the Committee does not entirely fit with the picture that you have told us of today, so we are all struggling to work out what the difference is. Is the difference the fact that you are now claiming that, "Well, the world has changed because of what has happened and we now have to price the risk, and that really what we see in our anecdotes is the price of risk and not the fact that we have changed our overall lending policies, but we are just applying our previous policies, but with more risk attached". Is that what it is? Mr Ibbetson: Frankly, I would agree with that, yes, I would agree with that. Ms Peacock: Well, I am here representing our bank and I think that a number of things are happening. The conditions are getting tougher and we have always priced the risk and we continue to price the risk. We are always trying to balance the needs of all of our customers and we fix risk being on the receiving end of additional cost-funding. Last year, we absorbed quite a bit of that and one has to hope, going forward, that the relationship between base and LIBOR, like one of the other banks here has said this morning, one has to hope that that relationship gets back more to normal, whatever 'normal' is, situations. Q99 Miss Kirkbride: Just before you carry on, risk is likely to get worse, is it not, given what the predictions are for the economy, so is our predicament going to get worse for financing small businesses? Mr Maltby: One of the things which, I think, has become hopefully clear to the Committee is that, as banks, we are dependent upon the ongoing success of our small business customers. It is an important market for us all and it is something that we take a lot of time over. One of the things that we are doing to address the expectations that the economy is going to be challenging next year is that we are rolling out a series of 120 seminars, local seminars, so that each of our customers and prospective customers can come and meet with local experts, our own teams, to talk about how they can help themselves and how we can help them to prosper during these more challenging times, so I do not think it is just about the finance, but it is the point Steve made earlier, it is about what businesses can do themselves and how we can, along with other advisers, help them in identifying how they can change their business model and improve their prospects. 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 ten 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 ten 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 ten managers are not all grouped together. The reason why there are seven to ten 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. Q120 Chairman: I was not clear about the £1 billion and £2 billion. Were you saying you thought it was going to be £2 billion or you wished it was £2 billion? Mr Ibbetson: This question came up before, is £1 billion the right number, and I think Mr Hoyle recognised and challenged this to say, "Well, if £1 billion gets used, then there's an opportunity to refresh and have another billion". What the right number is, I do not think anybody knows, but it is very reassuring that there is £1 billion on the table as a first step and I think, if it all gets used, in many ways that would be good because that is helping SMEs and, if it all gets used, in a way that is bad because that is a demonstration of how difficult the environment is, but we want to see it used. Q121 Mr Bailey: Rather than take a whole lot of the Committee's time, is there anything that any of the other representatives would add to that? No, good. Can I just go on to the European Investment Fund. If you were in earlier, you would have heard the business representatives point out that there were some examples where the banks did not seem to understand it and indeed were not actually passing it on. Now, I think this is really only relevant to Barclays at this moment, but, first of all, what are you doing to help customers access these funds and, secondly, moving on to the others, is there any chance of other banks participating in this scheme? Mr Cooper: I am very clear what the European Investment Bank facilities relate to. I think there is a misunderstanding around that in the marketplace. We have been working with the European Investment Bank for about 14 years and we have had a good, long relationship with them and I think we have lent something like £3 billion through them over that period. First of all, we do not need European Investment Bank money for liquidity or capital. What the European Investment Bank is, because it is owned by European governments, is a triple A-rated bank and, therefore, it has one of best-rated agencies around and, therefore, is able to raise funds at a slightly beneficial cost to traditional banks, and actually the European Investment Bank dictates what they lend that money at to Barclays and other banks. We then work out the benefit of that cost versus our average source of funding, and we agree ---- Q122 Mr Bailey: I am sorry, I may have misrepresented it, but we are talking about the European Investment Fund which has been negotiated. Mr Cooper: By the European Investment Bank, yes, I am referring to that, so that benefit in cost or the price of that we pass on entirely to the customer. Now, what we have been working hard with the Government and with the European Investment Bank on is to relax its qualifying criteria which were pretty tough and they are now much more relaxed, dramatically more relaxed, I would say, and we are passing all our customers who request to borrow money from us to see that they actually pass the qualifying criteria. If the qualifying criteria are met, we pass all our borrowing requests through the EIB, so we are very pleased to announce that our first one was drawn this week for a family manufacturing business in Doncaster borrowing £200,000 to expand and they have received the entire benefit of the European Investment Bank funding by way of a cash-back upfront premium, which was a couple of thousand pounds, and they have used that to fund the valuation of their factory, so it is a nice story and we expect to turn that into hundreds of requests over the next few weeks. Q123 Mr Bailey: So that fund is already being used effectively? Mr Cooper: Correct. Q124 Mr Bailey: How well do you think businesses are aware of its potential? Mr Cooper: I think it is growing, so have done a lot of work to make sure all our 2,000 relationship managers understand it. As I say, even without the customers requesting it, every borrowing request we get we are putting through that facility, if it qualifies, regardless of whether the customers actually request it to be looked at from the EIB perspective. We are also working with the EIB to get the qualifying criteria relaxed even further and they are not the quickest in the world, but we hope to make good progress there. Q125 Mr Bailey: Would any of the other representatives like to comment on whether there is any chance of their participating? Mr Maltby: Yes, I can comment. Our expectation is that we will be drawing on these facilities early in the new year, hopefully as early as January. I think that the work that has been done to simplify the process and relax the criteria has been extremely helpful. What I would say, and it goes back, I think, to your original question, is that one of the important parts of any of these schemes is that not only customers understand what the opportunities are, but also our relationship management teams. I mentioned earlier that our small firms' loan guarantee lending had increased by 40% and one of the reasons for that is that we have actually gone on a very intensive training programme for our relationship managers, so we would intend to do the similar process when we are able to draw on the EIB scheme. Ms Peacock: We would draw on all schemes that we are able to draw on; it is as simple as that. Mr Ibbetson: Yes, we support the scheme. As, I think, the Chairman mentioned, there is a meeting today and we would hope for positive news out of that meeting today. Q126 Chairman: This is about risk-sharing, is it not? That is the issue on the table? Mr Ibbetson: I think it is the whole arrangement, whether it is risk-sharing or whatever it is. It is the whole arrangement about what the scheme will be, and we would hope to be part of that and, as Lloyds, join in the new year. Q127 Mr Bailey: What changes have the banks made as a result of participation in the Small Business Finance Forum? Mr Ibbetson: As a measure of my age, I guess, I was around the same table the last time it happened! It is very different this time. The co-operation between the Government, the banks and the representative bodies is much more co-ordinated this time, and I think that point was made in the last meeting. I have to say, I think it is a good networking meeting with positive actions coming out of it. It is an open meeting, it is a good dialogue, it is receiving input from the representative bodies, with solutions from the banks and co-operation from the Government, and I do think it is working. Q128 Roger Berry: Finally, credit insurance and the squeeze on credit insurance, do you think this is as serious a problem as some are saying and, if so, how should it be addressed? Mr Cooper: From my point of view, is it serious? I think it could become serious. I do not see it being serious at the moment. To put it into context, we have only had two examples where we have had to review with the customer the impact on their facilities as a result of that, so that is two out of close to a million customers which is a very small number at this moment in time. I do think that, if an insurer withdraws, you need to think, both as a bank and as a business customer, about why that insurance is being withdrawn. Is it right, therefore, that the business takes on the additional risk of the supply in fulfilling their obligations? I think that is a very serious thing to be looked at. I think the other thing too to help counteract that is that, if suppliers and businesses pay their businesses, customers and suppliers on time, the need for credit insurance is actually reduced somewhat, so at this moment in time I am not seeing it as a serious issue, but it is very much on the radar though. Mr Ibbetson: It is being talked about a lot now and I think it is becoming an issue. I think I agree, in a way, with Steve, that, if you had this dialogue three months ago, it would not have been an issue and now it does seem to be getting a little bit of momentum. It is going to have businesses looking much more carefully at whom they are dealing with, and that might have an impact on volumes of business, so I think it is becoming an issue. I have to say, I am not sure what the answer is to resolve it and it may be that another government intervention in due course is worthwhile. Q129 Chairman: Well, what are the looming problems which we worry about? What is the next problem facing the sector of banking for small and medium-sized businesses in general that we should be worrying about, as a committee? Mr Maltby: I think there is no one single issue. I think the issue of falling sales, the issue of cashflow from large companies that are maybe not paying smaller companies on time, these are real issues today and they are likely to continue and, if anything, likely to increase, so I think that the attention that has been brought through this Committee and, I think, through other initiatives across the political divide is important and it is important to actually focus on these issues now. Q130 Mr Hoyle: Mr Ibbetson, you touched on it, the problem of the energy companies and how that has been damaging businesses. I do not know if the banks have any experience of that because I know of a company where their energy bills have gone up 200% and I do not know whether that has been reflected. Also, is there some good news going to come from the banks next year, and do you want to share it with us now, or is there going to be bad news? Mr Maltby: If I can answer the first question on energy costs, we recently did a survey of businesses to find out what their issues were and, for Lloyds TSB customers, access to credit was sixth behind cashflow, falling income or falling sales, energy costs, fuel costs and there was one other, so I think it is a real issue and it is something where, for a small business, when you see falling sales, one of the things you want to do is actually manage your costs. Unfortunately, if one of your costs is energy, which in many cases it is, then actually they are not seeing those falls, they have not seen the benefits of the falls in some of the commodity prices, and that is actually causing real strain. Q131 Mr Hoyle: Do you think the actors in the cartel are too powerful? Mr Maltby: That is not something that I ---- Chairman: Sadly, the Government has squeezed my debate, this Committee's debate, this afternoon on the floor of the House on precisely this subject with three statements, but we will be debating these issues later this afternoon and I look forward to your contribution then. Gentlemen, is there anything you want to add by way of conclusion or shall we draw matters to an end there? You are happy. Well, thank you all. We will keep a watchful eye on you all, and not just you four, but the rest of your colleagues as well, I can assure you. Thank you very much indeed.
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