House of COMMONS









Tuesday 2 June 2009



Evidence heard in Public Questions 1 - 92





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W B Gurney & Sons LLP, Hope House, 45 Great Peter Street, London, SW1P 3LT

Telephone Number: 020 7233 1935


Oral Evidence

Taken before the Business and Enterprise Committee

on Tuesday 2 June 2009

Members present

Peter Luff, in the Chair

Mr Adrian Bailey

Roger Berry

Mr Michael Clapham

Mr Lindsay Hoyle

Lembit Őpik

Mr Anthony Wright


Memoranda submitted by Federation of Small Businesses and CBI


Examination of Witnesses

Witnesses: Mr Andrew Cave, Head of Policy, Federation of Small Businesses, Professor Russell Griggs, Chair of the CBI's SME Council, CBI, and Mr Phil Orford, Chief Executive, Forum for Private Businesses, gave evidence.

Q1 Chairman: Gentlemen, how nice to get back to the real world and the real economy and try and deal with those problems for a change. Can I thank you very much for agreeing to come before the Committee on this important one-off evidence session specifically on the Enterprise Finance Guarantee Scheme and, inevitably, we will touch on other issues as well in that context. We will have about an hour with you and then move on to three of the high street banks we had in before Christmas. We are grateful to you for coming. I think you have all supplied written memoranda. Can I begin, as I always begin, by asking you to introduce yourselves for the record I think alphabetically by first names? Mr Cave.

Mr Cave: Andrew Cave; I am the Head of Policy at the Federation of Small Businesses.

Mr Orford: Good morning. I am Phil Orford, Chief Executive of the Forum for Private Businesses.

Professor Griggs: I am Russell Griggs; I am Chairman of the CBI's SME Council.

Q2 Chairman: You are all very welcome. As I explained to you briefly privately, I am going to ask some questions and my colleagues are going to ask some questions. It is very likely there will be a degree of consensus among you on the answers to many of these issues, so you do not all need to answer every question, you will have to work out for yourselves who is the best person to go first on each one, but if you do feel there is a difference or something someone else has missed out that you want to add to, please feel free to do so. It is very important to get all your views. I suppose the most important opening question from me is what difference has the Enterprise Financial Guarantee Scheme made? How important is it in the great scheme of things? I think the Committee were struck by the evidence we had a few weeks ago from Baroness Vadera, where I think she made rather more modest claims for the scheme than some of the earlier claims that appeared to have been made for it. How much lending has the EFGS generated that would not otherwise have occurred?

Professor Griggs: I think, in the great mill of things - £55 billion is the lending pot to companies with under £1 million turnover - £1 billion is quite a small one, but I think it was important, at a time when companies were feeling anxious and extremely concerned, that there was something extra out there that they could go for. This was never - and I think that has been one of the challenges of it - something that was available to everybody, so it was never there to replace all lending, but at a time of anxiety I think you need some leverage in there to help people along, and I think it did that. There are over 3,000 applications in for it now, large sums of money, and we will use the £1 billion by the end of this year, so I think it did its task in stimulating a little more positivity in the market place, which then allowed the banks to do other things.

Q3 Chairman: Would you like to say a word or two?

Mr Orford: Yes, I would agree with that, on the whole. Clearly, as Russell has pointed out, the overall pot is small compared to the £120-odd billion that covers both small and medium businesses. There were some issues, I suppose, early on, and this money was targeted primarily at the riskier end of the market, and we also need to take account of that. On the whole, I think, as we look at it now, it has been successful with the current level of lending. As I have said (and we will probably move on to this later), that is not to say there were not problems with it earlier on but, on the whole, the scheme now seems to be working well and lending is getting into a lot of businesses who perhaps ordinarily would not have had it.

Mr Cave: Again, I would agree. At the earliest stages of planning the EFG and what it turned into, we never saw it as a solution to every problem that small businesses faced. It is a very useful tool in the box, and I think that has been demonstrated, and we are only really starting to see the benefits of it now. It was slow to take off, but we are seeing, we are told, £30 million a week being loaned to small businesses that would not have been loaned otherwise; so just on those terms it is certainly a success.

Q4 Chairman: I remember one banker I talked to said that the corporate sector in general faced a tsunami of financing difficulties during the course of this year, and this scheme is only a rounding error in the great scheme of things in comparison. That is a rather colourful description, but does it have an element of truth in it?

Professor Griggs: I think so in exact terms, in terms of finance, but I do not think you can underestimate, as we have all said, the psychological impact that this has on people. I think Phil is right: if you are out there and you are feeling anxious and you are looking for money, having something else that you can talk to your bank about is always useful. So, yes, in real terms, very small, but psychologically, I think, quite important.

Q5 Chairman: The one particular aspect of the scheme which interests me is the ability to convert overdrafts to loans. For many small businesses overdrafts are actually rather more important than loans as part of their financing package. How important has that aspect of the scheme been?

Mr Cave: I think it has been very important. Overdrafts are always more expensive than loans. It allows a small business to have that much more control over overheads. We have seen, amongst our members, it being taken up, and if you look at the statistics from the BBA, it is quite clear that loans are preferred to overdrafts at the moment, both in terms of demand and availability; so I think it has been a very good thing that the EFG has had that component part within it.

Professor Griggs: I think there was a drift, if I can put it that way, over perhaps the last five to ten years of overdrafts starting to take in things that they perhaps should not. So an overdraft did not just cover working capital, it started to cover just general investments in business, and I think what the EFG has done is to start to section out the borrowing that companies have. I am a great believer that there are the bits for working capital and there are the bits to develop the business, and I think over the last ten years those areas have become grey and, I agree with Andrew, I think this has helped those start to move back again.

Q6 Chairman: If it has had this unintentional, but obviously beneficial, consequence of helping companies organise their finances more appropriately, why were they inappropriate in the first place? Had the banks been lending money inappropriately, or were companies making wrong commercial decisions in a world in which credit is very freely available?

Mr Orford: Businesses, obviously, need a mix of different types of finance to support their business, whether it is equity investment, debtor finance, whether asset finance or liquidity through overdrafts, and I think it is probably fair to say - I agree with Russell - that perhaps, over a period of time, there was more reliance on the short-term liquidity as opposed to long-term loans, although the BBA figures that Andrew refers to demonstrate that there is four or five times the number of loans in place compared to overdrafts in terms of volume: some 40 compared to £10 billion.

Q7 Mr Clapham: On the question of overdrafts, overdrafts are very important to small businesses, and obviously they give that opportunity of adjustment. I have just been dealing with a number of small businesses who have been to see me about overdraft facilities. In one particular case it was Lloyd's Bank, where a business had extended and was doing quite well but then found that their overdraft had been cut. Consequently, even though they had taken on extra staff, there was a clear record of viability, but they were suffering because at the end of each month, because of the cut-back in the overdraft, they were finding that, after paying the wages bill, they were getting letters constantly from the bank saying the money had got to be up front. The understanding we have got from the banks is that they would sit down and discuss this issue, which tends to suggest maybe they are looking again at the overdraft aspect rather than just concentrating on small businesses going over to loans. Does that kind of approach come over to you?

Professor Griggs: I think there is a general thing that is starting to happen again within the relationship between banks and businesses. I think that good, old-fashioned relationship in banking is beginning to return to where it was. We have been encouraging all our members, and especially the members of our council, to talk to the banks. We have been encouraging more dialogue. I think, perhaps, too often in the past, in the very competitive market as it was prior to the situation we were in just now, there was much more that was carried on through perhaps the non-verbal media, if I can call it that. I think we are going back now to banks and businesses sitting down and having much better discussions, if I can call it that. I think we have to remember that on all sides businesses' risk profiles change and banks' risk profiles change, and so we are having different types of discussions, I would guess, than we were having a year ago.

Mr Orford: On that point, one of the positives that came out of the launch of the EFG was that the banks immediately started to push down communications to branch level, which created a dialogue with people who were looking for additional lending, and that process in itself has helped businesses review their overall lending packages with the support of EFG.

Q8 Chairman: We are going to be looking at some of those communications issues later on. One last question from me before I hand on to Roger Berry. We were up in the North West 12 days ago looking at the Automotive Assistance Programme, another specific aspect of the Government's package to help businesses. We have had a lot of concerns expressed about the gap between the schemes. The AAP could apply for a large company, the EFGS stopped at a £25 million threshold, and there is a group of medium-sized businesses there who do not actually have access to the special help, who are excluded from it. Others have said that the £25 million threshold for the EFGS is too high, it should actually be lower, to target, more appropriately, the smaller businesses who are in trouble. What is your view on the £25 million threshold?

Mr Cave: We expressed concern when it was announced. Initially, when the FSB put the proposal forward for what became the EFG, we wanted the threshold to be much lower to target small businesses, and so when it was put at £25 million we were concerned, but if you actually look at the average loan that is coming out of the EFG now, it is relatively small and it is the small micro-businesses that are being targeted for this money; so we are far less concerned about that now.

Q9 Chairman: That does suggest that the smaller micro-businesses are getting the benefit, but is there a problem with the slightly larger businesses, and I look to Mr Orford in particular?

Professor Griggs: The answer to that question is, yes, but when we had a discussion around the formation of all these schemes, and especially the EFG, you get to a level of financing when it becomes more complicated, when you are beyond a million and you start to grow, but I can remember having a discussion at the Small Business Finance Forum about the more complex nature of lending to businesses over five or 10 million, but I think where we came to (and Andrew is right, we had a discussion about it) was that we are SMEs and we should leave it at 25 million. I think Andrew is also right that, if you look at the loans that have gone out, 1,000 have gone to companies with under £1 million turnover and only 30 have gone to companies with over £1 million turnover; so I think it has got to where it wants to be. Are there issues for medium-sized companies? Yes, but I think they go way beyond banking. I think we then get into a conversation about equity and all sorts of things. So I do not think particularly the EFG has benefited or disbenefited - if I could put it in that way - the medium size.

Mr Orford: From an Automotive Assistance Programme perspective, I think the level is too high. We have actual examples of companies who are unable to access EFG, for a number of reasons, who are in the automotive sector, who do not qualify for that scheme because of the high level of turnover. At 25 million, let us be honest, it is addressing the larger end of the automotive sector where the supply chain obviously has greater numbers at the SME end of the scale.

Q10 Chairman: I get a sense that the majority will be piecemeal, the kind where there will be targeted responses from government to deal with particular issues, and I think Baroness Vadera really represented a series of targeted initiatives to address the particular problems and did not really try to claim they were a comprehensive solution to the problems of finance in the business sector. I think that probably is the right way to characterise them, it is not?

Mr Orford: Yes, we would like to see them all under review to see where these gaps can be filled.

Q11 Chairman: To see whether other gaps need to be filled?

Mr Orford: Yes.

Chairman: That is very helpful. Thank you. Roger Berry.

Q12 Roger Berry: Do you think that the scheme is distributing funds to businesses at about the right rate, which was the phrase that Baroness Vadera used when she gave evidence to the Committee?

Mr Orford: "Rate" in terms of volume or charges?

Q13 Roger Berry: I would like to hear about both, since you kindly offered.

Mr Orford: The level of lending by the scheme at the moment is running at a level that will probably just about use up the fund. Whether that is by design or for other reasons remains to be seen. In terms of charging, I think there is an acceptable additional guarantee charge there of 2%. Obviously, it was discounted initially for businesses that applied early on. I think businesses who are searching for this sort of finance have to accept that it is going to be slightly more expensive because it has a riskier profile. Overall - I think it goes back to some of the initial answers - the 1.3 billion, in the grand scheme of things, is not a huge pot, but given that it is targeted, we are hopeful that it will be sufficient, but also, I think, again it should be kept under review for certainly approaching the end of this current 1.3 billion tranche, March next year.

Professor Griggs: I think Phil is right. If I can go back to the numbers, a billion and 120 million is small. I think we are coming on to talk about communications later, but (one of the things I do not think was communicated) this was never meant to be a scheme for every small businesses and, even if everybody applied and even if everybody was acceptable, they would not all get it because we have a cap of 1.3, but the banks have got to make sensible commercial decisions on who gets it and who does not get it. So you could actually be turned down for it, not because your are not the right type of business, but just in terms of what the bank needs to do with the rest of the money. I think the volume has gone up, it has levelled off, and I think it is probably going through at about the right rate.

Q14 Roger Berry: You have referred to the possibility of money running out. Rationing is taking place because of the amount of money in the pot.

Professor Griggs: I do not think rationing. I think it is a pot of money that the banks use to make decisions, as Phil says, in areas where it allows them an alternative to what they have.

Mr Cave: I would not want to be drawn on whether the rate is right, because I think if you have got the structure right, that is what we need to make sure: that banks are making commercial decisions based on the right information and that viable businesses are able to access that funding. The rate will set itself. If the rate was too high, I would be a bit concerned, actually, because it may be that businesses that should not be accessing the funding are, which, in turn, will put them in trouble and the economy and the taxpayer. So I think it is more important to focus on the structure rather than the rate at which the money is being loaned.

Q15 Roger Berry: The department has recently said that the scheme is getting into community development finance institutions, and I think they have earmarked £20 million for them. Is that a good idea, or is it not?

Mr Orford: The only comment I would make is that it is interesting that that amount of money is being made available to a riskier section of the lending community. What is interesting about that point is that similar exceptions have not been done for riskier sectors of business and, in fact, businesses that might be even more risky than current EFG lending allows. So I think it is welcome, it will be welcome support in those areas, but again, using this as part of the ongoing review, we would like to see perhaps other sectors looked at for availability of similar amounts going forward.

Q16 Roger Berry: Can I ask a final, more general question. This is one of a number of supply side measures that the Government has introduced but, from a business point of view, do you think supply side measures are sufficient to deal with the problem or should things be happening on the demand side, which is typically what my constituents in business tell me: the problem is selling the stuff, the problem is not always accessing finance. What are your views on that?

Professor Griggs: There are two things on that. One of the challenges that we have at the moment is the demand for bank lending is falling, and falling quite dramatically, so there is a demand side issue. Whether that is real or whether that is just because a lot of businesses are not asking, because they do not think there is anything there, is very difficult to judge, but there is no doubt that one of the reasons that we are where we are with the scheme and a number of other schemes is that demand from business for credit has fallen and fallen quite substantially. I guess, on the demand side, whether there are things the Government can do to help demand, it comes back to the point Phil was making, again, you would be into targeted sectors looking at where you can go, and it then becomes quite difficult, and in the great mill of things how much can you afford to actually put into each of them and how much of a difference would it make?

Mr Cave: In answer to your question, yes, the demand side is hugely important, and for a lot of our members it is more important. I agree that you cannot pick particular sectors, but what you can do is focus much more attention on public procurement. We are pleased to see that the Government is doing that. We would like them to do it faster and we would like to see changes to public procurement rules localised, and that is where we see the main problem at the moment; but aside from the demand, the biggest problem we face at the moment is late payments. A report came out from the European Commission last month which said that one in four business closures is as a result of late payment. So if there is one other issue that needs to be tackled, it is that. That is one of the main reasons that our members are going---

Q17 Chairman: We want to come back to some of the other issues in a moment.

Mr Cave: ---to banks for finance in the first place.

Q18 Mr Bailey: I was interested in the response by Mr Orford to the question about the community development finance institutions. I hope I am not being unfair. I think you seemed a little cool on the initiative and described them as higher risk. That may or may not be so, I am not quite sure, but surely, in terms of the allocation of finance, would not the risk element be written into the terms of any loans?

Mr Orford: My understanding is that this is a specific amount, up to a specific amount of 20 million, that has been set aside for this area, which again, my understanding is, covers a slightly higher risk lending profile than the current EFG mechanisms. I would not say I was cool. Obviously any lending that you can get out there is very welcome. Perhaps just to clarify, my point was that it was interesting that that one was identified for specific targeting where perhaps other sectors were not, and we would like to see other sectors reviewed on that basis as well.

Q19 Mr Bailey: Are you implying that, in effect, such an institution would get a loan where others may not?

Mr Orford: No, I think it is purely the fact that they have been picked out for a very specific tranche of the money, whereas sectors of business have not.

Professor Griggs: I think, to support Phil's point, as you know, some months ago, during all the discussions pre Christmas, there was a view that perhaps the sector should have its own bank. I think, to speak to what Phil is talking about, they are different; they are not the same. I do not mean they are not the same, but they have different issues than the businesses that we standardly deal with, and that I think was highlighted by the fact that they approached the Government to see if they could have their own bank which recognised the special interests of that group. So I think I agree with Phil, it is a sector that has its challenges, but so do many others.

Q20 Mr Bailey: What others do you think should be singled out perhaps for special treatment?

Mr Orford: There are a number. I have already referred to the automotive sector and the gap there between EFG and the assistance programme. The construction industry, clearly, was one that was hit very badly at a very early stage. There are increasing reports of improvements and it would be nice if some of those sectors were considered as less risky than they were in the past.

Mr Cave: I would slightly differ on that. We would be certainly sceptical at picking specific sectors. I do not think that is necessarily what the EFG was designed for.

Professor Griggs: I think one of the big challenges of this recession has been that, while there have been sectors that have been hit, it is not uniform throughout the sector. If you go to some parts of the construction sector, there will be some parts that are still doing okay, similarly with parts of the retail sector. So it is an odd recession, and while the automotive sector has been hit hard, and construction, it has not been uniform across the sector.

Q21 Mr Clapham: Professor Griggs, you said a little earlier the money got to where it wanted to be. Given that the Government wanted to speed up this initiative, do you feel that it could have got there speedier had the scheme been implemented after better training, say, for Business Links and for bank employees? Would that have helped?

Professor Griggs: I think, like all these things, part of it is there is a desire by people in this House to want to get things out quickly to show that things are happening, and I think that sometimes does not always help the speed at which the programme follows on, if I can put it that way. I think, given that we had a banking sector that was coming out of turmoil within itself, us all, all the associations, were trying to help BERR to concoct a scheme that was going to work, and then, given that historically a lot of Business Links - I welcome Phil and Andrew's comments on this - do not get involved with the type of businesses that a lot of the EFG would go to, I think there were a lot of things to put together. In answer to your question, "Do I think it could have been done quicker?", I do not know, is the answer to that question, because you also have to remember that we are dealing with banks, which are complex bodies in their own right, and if I take my little knowledge in the south-west of Scotland where I live, if I go into my bank, I will come across the people from the retail side, the lady that does business comes round once a week. They would know about EFG, but it is not just training of bank personnel per se. Interestingly enough, this week, tomorrow, you will see something, I think, coming out which talks about more relationships between the banks and Business Links which, I think, will overcome a lot of what you are talking about. So we have addressed that, and, yes, there is something to do. Could it have been done quicker? Maybe.

Q22 Mr Clapham: What about you, Mr Cave, and Mr Orford as well? Do you think it could have been done quicker?

Mr Cave: I think we have no complaints about the speed at which it was rolled out. I think it is testament to the civil servants at BERR that they reacted as quickly as they did. In the past that is not something that we have seen from government ministries, so that should be noted, I think. Where it fell down was in the communication of it. I think the Government could have done much better in communicating it in a clear way at an earlier stage. There were also communications issues within the banks, and we have submitted case studies from members who experienced these behavioural inconsistencies, as we describe them. The banks will see that as a criticism of them. I do not actually; I think it was one of those things. The speed at which it was rolled out meant that there was always going to be a lag in the communications of it. We now see that that is being overcome. So I would agree with Russell: I think it rolled out very quickly, there were some initial problems that should be looked at in terms of communications with BERR and Business Links perhaps, but we can learn from those.

Mr Orford: Absolutely; I would agree. Given that PBR was late November, we had the two-week Christmas period. I think we all here know that civil servants within BERR were working very late and for long weekends as well to try and get this programme launched and, as Andrew says, credit to them. I think not only were there some initial communication issues, there were some things behind the scenes that had not been communicated early on - these are primarily related to the personal guarantees and the 13% limit put upon the banks due to EU state aid rules - and I think that created probably another four weeks of confusion in the sector as to what could and could not be done. It was only, I think, mid February when the issue of personal guarantees was clarified. So I think there were other confusing issues that addressed it.

Q23 Mr Clapham: Mr Orford, you referred to the Automotive Programme earlier. One of the things that the Committee has heard, one of the complaints, is that there were not sufficient skilled people in the department backing the scheme. Is that what you feel as well, that perhaps skilled civil servants would have been helpful in ensuring that the programme rolled out in a better way?

Mr Orford: My quick answer has to be I do not know. We are certainly aware that there was quite a lot of recruitment going on. There was recruitment within the Treasury and within BERR to bring in external expertise to help facilitate these processes, but whether there was anything specifically in that sector, I do not know.

Mr Cave: I think we were going through completely unprecedented times, and it would have been very difficult to have civil servants in place with the skill-set to deal with what we faced last October. We had civil servants who were as shocked by everything as everyone outside as well, so it would be a bit unfair to suggest that they should have been in place.

Professor Griggs: I agree with Andrews. I think the very encouraging thing was that there was a lot of dialogue going on between civil servants, ourselves, the banks. So it was not as if we were trying to do this in some ivory tower; there was a lot of good quality dialogue going on to use all our expertise to make sure that we came out with something that worked.

Q24 Mr Clapham: Of course that dialogue would have been very helpful.

Professor Griggs: Yes.

Q25 Mr Clapham: Finally, are the initial problems over, or do you see other problems on the horizon that we ought to be preparing for?

Professor Griggs: Specifically with the EFG?

Q26 Mr Clapham: Yes.

Professor Griggs: I think, I agree with Phil, it would be a good time to go back and reflect and see what we have learned, but I think we have fixed most of the things that needed fixing in terms of the specific scheme, and it has gained its own momentum, if I can put it that way. The point that you made regarding Business Links and the banks will be resolved, I think, this week, and from then, given that we will learn from what we have done, I would interested in these two gentlemen's comments, but I am not sure what else we can do now.

Q27 Mr Clapham: Would it be fair to say you all feel the Government has done what it could do with regards to this particular scheme?

Mr Cave: With regards to the EFG, yes.

Mr Orford: I think there is still an on-going issue in relation to the assessment of viability. There is a lot placed upon the lender in terms of assessing viability of businesses, and the BERR criteria state that where there are good long-term prospects and where there are businesses specifically suffering due to the economic downturn, that should be criteria within the overall assessment of viability. Frankly, we do not see that. What we see is traditional short-term assessments made upon profit and loss accounts rather than perhaps more longer-term strategic aims. I accept that the banks are not in a position to look at businesses in a more strategic way, but to some degree, because of the inconsistencies within the viability assessment criteria, there is a little bit of a bank lottery out there in that it depends which bank you go to will dictate whether you might or might not be eligible for EFG, and that would depend upon the bank's appetite for it and their internal commitment. I am not talking necessarily here about the Big Four, but if you take the Big Four separate from the other 22, clearly you have got a difference there, and in that respect, as I say, I think there is a little bit of a lottery.

Mr Cave: I do agree with Phil. All I would say is that I think that is a slightly separate issue to the workings of the EFG. In itself the EFG is good. What we are talking about is the relationship between banks and small businesses, which there does need to be additional work on, and I agree with Phil on that, definitely.

Q28 Chairman: Before I hand on to Lembit, who is going to ask a bit more about the banks, I just want to push you a bit it on this: because when we took evidence before Christmas there was a lot of concern in the business community about the very extravagant claims being made by government for the effectiveness of interventions and the lack of delivery on the ground. Certainly the national newspapers, I think particularly The Sunday Times campaign, were running some pretty strident stuff about the shortcomings of these schemes. I have been critical of my colleagues on the Public Accounts Committee on many occasions for their criticisms of civil servants - quick to criticise, slow to praise - and I have heard what you have said about the constructive relationship enjoyed with BERR officials over the last few months. The fact remains, it did take four months from the announcement of the scheme in November to ironing out the difficulties in February, and in the teeth of a ferocious recession four months is an awfully long time. You could argue the recession began, let us say, in the middle of July. That is eight months from the beginning of the recession to sort out the difficulties with an important scheme. You have given a very clean bill of health to the department, which I am very happy to do - as a Conservative Chairman of a Labour-dominated committee I am always happy to be sure to do that - but do you not feel, with the benefit of hindsight, that perhaps at least some of the more ambitious claims made for the scheme in the early days might have been better delayed until the scheme was in place and up and running properly, as it now seems to be?

Mr Cave: I agree that the claims were misplaced, and we were concerned about this at the time. I recall having conversations with various people in the banks saying we are setting ourselves up for a fall here or, rather, the communications around it that the Government made; so I agree that that was perhaps not useful. In terms of the time lag, I can only go on how fast a government department acts and reacts in normal conditions, but there is also (and this is obviously something you would need to talk to the banks about) the speed at which it takes for the banks to put something like that in place. I think you need to bear that in mind as well. We would have loved for it to have been introduced earlier. We were told that that was the speed at which it was going to be delivered.

Q29 Chairman: It is better now. It was getting some quite critical briefings from the FSB back in January and February about the workings of the scheme, and quite a lot of concern was being expressed by your members. There was quite a lot of anger that it was not delivering what they were told it was going to deliver. That is one of the reasons this inquiry exists, because of the FSB's own evidence that it was not working as it ought to.

Mr Cave: I think you are completely right, and a lot of the case studies we submit here actually come from February, because you are looking at the scheme in its entirety since it was launched. When it was launched there were problems, there needed to be clarification, which came out on 19 February. So, yes (and I think we have all touched on this point), it should have been better communicated, both internally and externally, when it was launched, but those are hurdles which have since been overcome, in our view.

Professor Griggs: I think you have got to remember, we were working, as Andrew said earlier, in unusual times. We were not trying to just do the EFG, we were trying to do a number of other schemes at the same time as well. So there is complexity in doing that. I have to say, I think BERR coped very well with that. You also have to remember you are going down a long distribution chain to sell it. It is not just the Government standing up and saying, "We want to put this out tomorrow." You have then got to put it into the banking distribution chain; it has got to go down the distribution chain; it has got to be communicated. All that, with any product that the bank was launching itself, would take time. So I agree with Andrew, there were a lot of communication difficulties at the beginning, but in terms of how long it took, I think these folks worked awfully hard to do it as quickly as they could.

Chairman: That is fine.

Q30 Mr Clapham: One final question, Chairman. Do you feel that the new relationship that we are seeing develop between the banks and small businesses is such that it is going to stimulate, for example, once we get beyond the recession, an enduring relationship carrying on, because one of the things that we have known previously is that small businesses always had a real difficulty with the banks, and ensuring that they get the kind of finance packets that they really require?

Mr Cave: I think there is a lot more that still needs to be done. You are right in identifying the EFG as a way of kick-starting that relationship again, along with EIB money as well, but we need other initiatives and we need to be much more concerted in our efforts to work with the banks to re-establish the kind of dialogue that you are talking about; so there is more work to be done in that area.

Mr Orford: I would agree. We are on the record some time ago, saying that part of the problem with the banks assessing and understanding the viability of businesses was their lack of understanding of risk within those individual businesses, and that is because to some extent the relationship management structure had broken down. So, again, anything that can help stimulate a closer management relationship with their customers would be fantastic.

Professor Griggs: I would agree with that, but I would add a caveat by saying I think both parties are going to have a new sense of realism, if I can put it that way, or do we want to go back to the situations that we had pre the recession and the banking crisis where products were probably being priced too cheaply and were being charged too little? Therefore, I think there is a realism, a balance perhaps, if that is the right word, as to how we go about the type of creditors and how we might have to pay for it which has to be re-understood between the banks and business; but I think one good thing that has come out of this is that we are starting to talk to each other again and are not using emails and these other things now that we use. In all seriousness, I know we all laugh about it, but it had got to that, and I think the use of the good old human voice and meeting and talking to people is something. If that is all that comes out of this, then that is a huge benefit.

Mr Orford: Could I just add, the Small Business Finance Board which was formed as well, which brought the banks and the business bodies together, has been a fantastic aid to that dialogue; there is no doubt about it.

Mr Cave: There is a slight danger there, in that certainly we engage in the Finance Forum at national level and we develop good working relationships with our opposite numbers in the banks; that still has to be fed through to the grassroots level.

Chairman: Can we go to that now. Lembit Őpik has been very patient, but that actually leads very nicely into Lembit's question.

Q31 Lembit Őpik: The Committee has actually heard evidence that some local bank branches have not really even heard of the scheme. I was wondering if your members have provided any evidence of that? You are painting a very positive picture, I have to say, but what is your view of that point?

Mr Cave: If you had asked us that question in February, we would have agreed with you whole-heartedly. Again, this comes down to the communications lag. February, March were difficult times for businesses and they were not getting the kind of response they thought they should have got, and we thought they should have got, when they asked about EFG in their banks. That has changed. I know BERR have identified changes in that; we have noticed it as well. The number of case studies and complaints we are getting from members has fallen significantly; so we think that is improving. There is probably a way to go, and there will always be exceptions, but we are in a different situation to the one we were in in February certainly.

Professor Griggs: I would agree.

Q32 Lembit Őpik: That is interesting, because presciently, last Friday I had a small business that came to my office and said that, despite their best efforts, they simply could not get approval for their proposal. I am not going to use this, Chairman, as an opportunity to talk about this specific piece of casework, but it seems to be the antithesis of what you are telling me. They are obviously in a strong position, they have got a strong track record, but you cited inconsistency in terms of the past. Is it the case that, for example, in regard to the small business that I am referring to, and others, that inconsistency still remains? That is to say, there is not a consistent guidelines-based strategy by the banks to give the same answer, given the same facts, in different cases?

Mr Cave: This is where we get into territory where it is very difficult for us to say whether that is the case or not. In February and March, and before that, we had so much data coming towards us and anecdotal comments that what you are saying clearly was the case. That has fallen away but I suspect you are right that there are examples where there are inconsistencies in the messages that banks at local level are giving to businesses, and this is why the FSB has proposed a corporate mediator role to be run through either regional development agencies or business links, and that person in that individual role would intervene in those circumstances to see if it was the case that the business was viable and should have access to funding and then to discuss with the bank the reason for that not happening. We as a business organisation obviously cannot look at individual cases, so we think, moving on and going back to the issue about improving dialogue between businesses and banks, this would be an extremely useful measure at this stage.

Mr Orford: May I go back to some of the issues I mentioned before: questions like who defines the phrase "long-term", who defines the term "high risk"? That is going to be a totally variable definition with the banks. The Big Four, three of which you will speak to later, quite clearly are very much tuned into what is going on now. It is very possible that your constituent is perhaps talking to one of the other 22 who are less tuned in and perhaps have got less overall commitment to it and are less knowledgeable about the overall scheme. To touch very briefly on the mystery shopper exercise that was done by BERR in relation to the awareness of the scheme, I think it was reported when Baroness Vadera was here that that was related actually to companies. It was not; it was a mystery shopping exercise of the banks. I think that one of the more revealing things about that exercise was the very, very nice figure of 75% awareness, but the mystery shop actually only covered the top four, it did not cover the whole spectrum of 26, and I think at that time it would have been very interesting to see what the level would have been if it had been across the whole spectrum. Maybe that is an exercise that ought to be done in the near future.

Q33 Lembit Őpik: As it actually happens, I cannot resist telling you that the two banks in question which are causing my constituent the problem will be giving evidence after you.

Professor Griggs: Can I add one thing? I think a lot of these things are very difficult, but The Sunday Times came along every week with a whole list of companies. One of the regional development agencies - I think it was emda - decided to get them all in and have a look at them and give their opinion versus what the banks have done, and, interestingly, they wholly disagreed with the banks in 5% of the cases. I think there is now an understanding that we are evaluating things in a new world, and one of the things we have all been telling our members is that if you had a business plan that you had written before the recession came along, please throw it away and go and write it again, because nobody will believe that things have not changed. I think you have to realise that things have changed. I think a lot of the people who look at it now evaluate things, and have to evaluate things, in a different way, but I thought that was an interesting piece of work that the RDA had done to actually go in and not mediate but to look at what they were, and they found that in only 5% of the cases would they have disagreed with the bank.

Q34 Lembit Őpik: That is very helpful. I am sure the Chairman will return to this with the banks after you. Finally, what is your perspective on whether you think it is appropriate for the Government to expect entrepreneurs to provide personal security for their loans? Do you think that is a reasonable thing to do?

Mr Orford: We were very vocal on this matter because our members were very vocal about it, and we felt we ought to take it up on their behalf. I think, perhaps with the benefit of hindsight now, yes, there are cases where I think it would be appropriate to take a personal guarantee, but I would not say that was in all cases by any means. Some business owners have welcomed the opportunity for additional funding, regardless of the issue of personal guarantee, and so that is to be welcomed, but clearly others have refused on principle and they have ruled themselves out of this scheme completely, and I think that is a shame. There has been a phrase banded around that business owners should have "skin in the game" - you have probably heard it. It is a terrible phrase, because I think it makes the presumption that business owners are not already 100% committed in every possible way, and many, if not all, are. So I think it is nonsense to think that they are not taking any risk at the same time as the banks and the Government. Yes, we accept it is there. We can understand the reasons it was there to limit the potential loss to the taxpayer. Whether there could have been a more risky profile and whether there could have been smaller personal guarantees or no personal guarantees remains very much open for debate, because I think the current understanding is there have been no defaults in the scheme whatsoever, and I think that factor in itself would say that perhaps it is not as risky as it was first meant to be.

Professor Griggs: I guess this is where we would probably disagree with Phil and maybe Andrew. I think there are two issues to look at here. One is some companies have always refused to give personal guarantees; this is not a new thing. One of the companies I sit on the board of has always refused to give personal guarantees. Therefore, we know there are some banks and some financing that we cannot access because of that, and we just accept it as a declaration of principle by the business, but I guess what we felt was that it is essential that normal lending criteria are applied to the scheme. Despite the Government guarantee to the scheme, there is a sort of illogicality and a sort of counter-productiveness about placing all the risks with the taxpayer. We are talking about viable businesses here. Why should the taxpayer take all the risk? There has to be a balance on that.

Mr Cave: I completely agree with Russell, actually. This was designed to be a commercial loan open to viable businesses - it was not a grant, it was not a government handout - and it needed to be treated as such. It is perfectly acceptable, in those circumstances, that business owners have to be prepared to put that forward. Again, though, I would come back to the communication of it: that was not communicated very well and I think that has caused problems with the scheme but also a certain amount of animosity within the business community as well, and I think that is unfortunate, but I would agree with Russell.

Q35 Lembit Őpik: You say there were problems with the scheme. I understand what you are saying. It is a very useful perspective from the three of you. Did it affect the uptake of the scheme that this requirement was established? It sounds that you are not terribly worried, or two out of the three of you are not terribly worried, about that being established as one of the conditions, but did it affect the uptake of the scheme, which would obviously be a concern to the Government?

Mr Orford: I think it precluded a lot of businesses that might ordinarily have expected to have had a successful application made. There is absolutely no doubt that some businesses saw this as the business bail-out, and it was never intended to be that. I do not know if anyone was ever on record as saying that, but these communication issues did, I think, initially create a rush for this money, and certainly the member reaction that we had was almost entirely related to the fact that when they got there they were asked for a personal guarantee. I think questions still have to be asked in relation to the guarantee that is in place from the Government. If 25% is being put by the banks, 75% is being underwritten by the Government but the business owner has to provide 100%, it sort of raises the question as to whether there is that guarantee there or not.

Q36 Mr Hoyle: You explained how it is commercial, how it is about helping business. Overall I think everybody can say, yes, this is what businesses needed, they needed to be able to access funds, but in that everybody ranks banks differently. Who are the good guys, who are the bad guys?

Professor Griggs: I do not think there is an answer to that question. I do not think there is a sensible answer to that question at all, on the grounds that this is a competitive market that we are in. If you go to any of the banks with a proposition, you will get different treatment from each of them just because of who they are and the type of products they have. I do not think there are good guys and bad guys out there. I think I agree with Phil that the Big Four have done very well. There is then this long tail of other people who applied for EFG and perhaps have not done as well as the big banks in spreading it, but I do not think in the Big Four there are good guys and bad guys. I do not think there is an honest answer to that question.

Q37 Mr Hoyle: Come on, Andrew, you are normally a bit up front!

Mr Cave: I am going to be really boring and say the same. We have had case studies from members talking badly about each of the banks and, equally, I am sure that there are examples where each of those banks has done well. One thing I would say, being up front, is in terms of the communication and around the issue we were just discussing about guarantees, I think it was very positive that Barclays came forward and clarified that when they did. It is something that we would like to have seen with the other banks as well. That is not to say that the other banks are bad guys and Barclays are good guys, but in terms of the communications front, I think it is very positive that they did that.

Q38 Mr Hoyle: You are being a bit coy before the banks come in. Let me see if I can help you a little bit more and say, okay, then, who is the one that has used the EFG scheme the most? Who is the one that has said, "This is available. This is how we help you"? That might just tease you out a little bit more, because obviously some banks are using it more than others. If we were to use it that way, would that help?

Mr Cave: It would not really, because when a business goes to a bank they do not walk into a bank and find EFG promoted as other products necessarily. They may not be told about it initially. It is very much a product that comes out through conversations. So you could not really say which bank.

Q39 Mr Hoyle: I will try a little bit more, Andrew. You are not normally this shy, I have got to tell this Committee, you usually lead from the front. Which of the banks have offered most of the government money? Who is the big player? Who is the leader in saying this money is available and have given the most away?

Mr Cave: I do not have those figures.

Mr Hoyle: So you really do not know who is the good guy and who is the bad guy then?

Chairman: I am sure our next witnesses will be falling over themselves to give you an answer to that question.

Q40 Mr Hoyle: All right; I leave it there.

Mr Orford: The only thing I would say, and the banks that follow may disagree, is that it is quite clear that there was an amount of pressure placed upon those in public ownership and that probably others decided that they needed to remain competitive and follow suit, and then there were others behind that that were perhaps more focused on certain areas of the banking community and the small business community. I do not think it is any secret as to who is providing most of the money. Whether they would have done so without a push is open for debate.

Q41 Mr Hoyle: Who is that?

Mr Orford: It would be those in public ownership.

Chairman: I am really encouraged from the answer just given, because here you are: six or seven months ago the small business community hated the banks and now you love them. The voters may learn to love politicians equally quickly!

Mr Hoyle: It might take a bit longer, Chairman.

Q42 Chairman: Before I hand over to Tony Wright, just one last question on the EFGS. It runs out in March 2010. It is a time-limited scheme. Is that the right time for it to run out? Should it be replaced with something else?

Mr Cave: I think there is a brilliant opportunity here. This has very much replaced the Small Firms Loan Guarantee scheme and there was a lot of criticism and bad press around SFLG - it was very bureaucratic to access, it was limited to certain sectors - and so I think it is quite good that EFG has replaced that, and we would like to see, when EFG does run out, if there is more demand for it, that it is topped up, that we use this as an opportunity to develop a more longer-term finance tool for small businesses to replace FLG.

Professor Griggs: I guess part of the challenge we have - and I agree with Andrew, we need to put something in place - is none of us know what the future is going to look like at the moment really. We have an idea what it is going to look like. We have discussed this morning there are going to be, and there have been already, lots of changes in the way we operate with banks and the products that we are looking at - changes between loans and overdrafts, all sorts of things - so I think it is a really good time, as Andrew said, not to rush into anything. Let us just wait and see how the economy develops, let us wait and see how all these other things fall into place. Equity we have not discussed this morning, but to a lot of medium-sized and growing businesses actually it is more important that they are banking money. So I think we need to have a whole look at what we offer in the round to businesses and maybe not go back to just saying what we want to replace the EFG with but what is the right package of incentives for government to offer that we can put in only when we are going forward.

Q43 Chairman: That probably leads on to Tony's questions but, Mr Orford, there is something that you want to add to that?

Mr Orford: Only to support it and to say that there needs to be something that takes a more strategic look, perhaps something that brings the various schemes together, perhaps looks at lease, HP.

Chairman: I am going to cut you off because you are going to start trespassing exactly on the questions that Tony Wright wants to ask you.

Q44 Mr Wright: You are pre-empting the question really. It is on loan guarantees. Do you consider that they are the best method for the problems that businesses are finding in accessing finance, and are the other government schemes considered to be working well, or do you consider it is a temporary measure that has fitted the gap at this present time?

Mr Orford: It has obviously been outlined as a temporary measure. We would like to see it, as I said earlier, under constant review and, perhaps more importantly, we would like to see the whole scope of these arrangements being looked at in a more co-ordinated way. So just expanding a little bit on what I was saying, to link to lease and HP, to link to asset finance perhaps, primarily invoice discounting which secures the debtor book, and if you link that then to the Trade Credit Insurance Scheme, so you are supporting the debtor book by that scheme, then in the round, as Russell calls it, I think potentially you have got a great model going forward, but I think there has to be a strategic approach to what is going, and that cannot be about short-term lending. We are talking here of not one to three years but probably three to ten or three to 15 and beyond.

Q45 Mr Wright: What you are really saying is that the loan guarantee at this present time is the best method to help businesses, but you would like to see it extended. The Finance and Leasing Association suggested that they should be eligible for support for small businesses as well.

Mr Orford: I think there are a number of other factors that could be supported by the guarantee type schemes, yes, definitely.

Professor Griggs: I think this gets too simplistic at times, because I think if you are a business there are things you have got to do: you have got to have working capital to run your business just on a day-to-day basis, you need to go out and buy things or lease things and, last but by no means least, you have to have money to develop your business going into the future, and I think where you go for each of those or who you would look at can vary. What we are talking about here is something that is very useful to satisfy part of that equation but by no means all of that equation. It is the bigger picture, I think, that we would all like us to have a look at going into the future. If I can take the words of Professor John Kay, the writer in the Financial Times, he says that banks should go back to being utilities, which is to look after the boring bits of working capital, et cetera, and others should look after the more, as he calls them, casino style, more the development side where there is higher risk, because we are talking about a spread of risk here across different topics that again will influence the type of finance you would look at. I think this is one of these odd discussions we are having. We are talking about something quite specific, but it is part of a much bigger package, and, yes, there are things, I guess, all of us would want to change in that much bigger package.

Mr Cave: It would be wrong for the Government to focus purely on the issue of access to finance because that is part of the problem, but you have also got to ask why businesses are needing to access finance in the first place, and there is a lot that the Government could do to decrease overheads for small business - make sure that people pay their bills on time and bring public procurement forward. If those were brought forward they would have an impact on businesses not needing to access finance, particularly overdrafts, as readily as they do at the moment.

Q46 Mr Wright: Is not the work that the Government is already doing - they have brought forward procurement of projects - actually helping businesses?

Mr Cave: Procurement - do not get me wrong - the Government is doing a lot on that. We are always going to be critical of it because we want to see more. Where there is no action, at the moment, which we are concerned about, is on the issue of late payments. You have the Prompt Payment Code which was launched as one of the many measures launched since last October, and that is just not getting the take-up that we would like to see. There are things that are being done at a European level and in the United States that could actually get public authorities and private companies to pay their bills on time.

Q47 Mr Wright: Just turning to the trade credit insurance top-up scheme, there have been reports that some companies are finding it increasingly difficult to get credit insurance. What is your take on the scale and impact of the withdrawal of credit insurance to companies and whether the Government's scheme is sufficient enough to tackle that particular problem? Do you consider that the £5 billion funding is sufficient?

Mr Orford: The scale is huge, of course - this is a £300 billion industry - so, again, the £5 billion, I think, in itself, would seem small, but that is matched by the industry so it is £10 billion. I have to say I think this was a great and very welcome first step, and I do not think really anybody expected that it would be delivered and it was, and we and all the business organisations welcomed it. I think if there is one slight issue it is the date of eligibility from 1 April of this year, and we are calling on BERR to keep that under constant review to remove this disparity, if you like, between a business that had cover reduced on 31 March and the business that had it reduced on 1 April. That seems to be unfair; there seems to be an inequality there. So the funding has come from the working capital scheme, which is welcome, and I am sure it will be kept under review, as will the EFG, to see how take-up progresses, but rolling out the scheme to a wider sector would be very welcome indeed.

Professor Griggs: I would agree with every word Phil said. I think the challenge we had, and we discussed it at length with the Small Business Finance Forum, is that this is a very complex market - trade credit insurance - which works extraordinarily well in a growing market and abominably badly in a time of recession. It is just that its business model is really quite extraordinary. So I think Phil is right; the Government have done well and done what they can, but I would agree there are, perhaps, other things they could do as well.

Q48 Mr Wright: Such as? You say "other things".

Professor Griggs: I would agree with him that I think the date was a sort of arbitrary date that they picked.

Mr Cave: I would agree.

Chairman: This has proved to be a rather less fraught session than I imagined. I had hoped there would be lots of ammunition to throw at our next witnesses, but it seems kid gloves are the order of the day, which must come as a great relief to them. Are you sure there is nothing else you would like us to test the bankers on before you leave the witness stand? Let the evidence record they shook their head and said there is nothing more they want us to raise with the bankers. I am sure I shall be very pleased. Gentlemen, thank you for very clear and compelling evidence. We are very grateful to you. Thank you.

Memoranda submitted by Barclays, Lloyds Banking Group

and Royal Bank of Scotland Group


Examination of Witnesses

Witnesses: Mr Steve Cooper, Managing Director, Local Business, Barclays Bank; Mr Stephen Pegge, Head of External Affairs, Lloyds Commercial and Mr Peter Ibbetson, Chairman, RBS Small Businesses, Royal Bank of Scotland, gave evidence.

Q49 Chairman: Gentlemen, while you are pouring your water can I just explain that we set the rationale for selecting the panel we have in December of last year when some of the crisis was at its height, and it had a logic to it. We included Clydesdale in that process because we wanted a smaller bank as well, but they physically could not make today. So there is no reason why they are excluded; you are not more in the frame - as you heard at the last session, perhaps disappointingly, not in the frame. A lot of us have some anger to work out when other people are present, but it will not be on you, by the sounds of it! Can I begin by asking you to introduce yourselves, as I normally do? One of the representatives has changed but two are the same as last December, so welcome back to two of you and welcome to the newcomer.

Mr Cooper: Good morning, Steven Cooper, Managing Director for Local Business Banking, Barclays.

Mr Pegge: Stephen Pegge, Lloyds Banking Group, Commercial.

Mr Ibbetson: I am Peter Ibbetson; I am Chairman of Business Banking for Royal Bank of Scotland and Nat West.

Q50 Chairman: Thank you very much. We will follow quite similar lines of questioning to what we put to our previous witnesses. I think it is important to remember that this inquiry was announced originally on 25 March and the decision was taken some days before that by the Committee to do this inquiry, but it is clear that things have moved on in the interim and, apparently, from what we have just heard, in a helpful direction. Can I ask you to what extent you think this scheme played a part in supporting banks' confidence to lend to the market? How important is it in the great scheme of things? You heard the questions (I think you were in the room) that I asked the other earlier witnesses: what is the significance of the scheme, in retrospect now, from your perspective as bankers?

Mr Ibbetson: I think there are two or three angles to it. Russell Griggs commented that it has been very important in terms of providing confidence to businesses. I think that is important at a time when businesses, clearly, were concerned about whether banks would support them. This was a critical scheme to be introduced to say: "Yes, we are there; there is the ability to support businesses which are suffering liquidity problems". So it was very important on the confidence side. I would like to comment as well upon the comment that was made by the previous witnesses in terms of the percentage that this actually provides to overall lending. Yes, it is a fairly small part of the overall lending pot but it is a critical part as well because these are businesses that otherwise would not have been supported, and they are also businesses that are in the supply chains of many of the big businesses. So without this scheme it would not just be the businesses that have benefited from it that would not have been supported; there would have been knock-on impacts into other areas of business as well. So, yes, I think it is a very, very important scheme.

Q51 Chairman: If you agree with one of your colleagues you do not have to repeat everything they say, but if there is some nuance you want to add or something you disagree with you are very welcome.

Mr Pegge: If I could add something briefly, I think the use of the scheme in circumstances where security is a bit short became particularly relevant towards the end of last year and through this year, because asset prices had fallen and because businesses often require a little bit more finance than they did in the smoother times. So the ability to provide that top-up, which is often seen with the Enterprise Finance Guarantee, has been particularly critical to keep businesses going.

Mr Cooper: I do not have anything much to add; I think the scheme has been good at providing a solution to what was intended, which was to provide finance to those businesses that are, at this moment in time in the economic cycle, struggling. I think it has done pretty much just that.

Q52 Chairman: I think I am quoting the RBS evidence now to the Committee (it is a general point; it is just the source so that I get the facts correct), and I think it is your evidence, Peter, which said: "Although the Government provides a 75% guarantee, claims are capped at 9.75% (net on a portfolio basis and not advised to Relationship Managers). This is a state aid consideration and has not restricted lending under the EFG." That, I think, was your statement - "not advised to Relationship Managers" - from the RBS. Can I ask about this cap on 9.75% of claims? Have I understood that correctly? Have I interpreted your evidence correctly? Is this 9.75% cap a reasonable cap?

Mr Ibbetson: You have understood it correctly. The difference between the EFG and the Small Firms Loan Guarantee Scheme was that the banks received a 75% guarantee under the SFLGS without any portfolio cap. The EFG still gets a 75% guarantee case by case, but over the overall portfolio we are capped on the amount that we are guaranteed, which is 9.75%. I think two points come out of that. We, as a group, were nervous at the outset of the scheme that this might restrict our willingness, if you like, to support some businesses. I have to say I do not think that has been the case, in retrospect; I cannot find a case that we would have supported were that cap not there, simply because the cap has been there. So, in retrospect, I am satisfied that the cap has not been a detractor to the businesses that we support. The other point to make is that we have consciously not made a big issue of this in terms of our frontline staff. The important thing is that we use this scheme for the right businesses to support businesses, and actually the fact there is a portfolio cap should not interfere in the way that we look at that support. That is why we have not publicised the issue too heavily into the front line.

Q53 Chairman: Do you want to answer for the other two banks?

Mr Pegge: Yes. I think it is a cap of 13% on total losses, 75% of which is 9.75%, which is why you may have seen the 13 and 9.75 quoted. It is entirely consistent, I think, with the positioning of the scheme as being there to support viable businesses, and as a responsible lender I think if we were taking losses of more than that we would feel we probably would not have been lending in the right circumstances.

Mr Cooper: It is a consideration, clearly, in terms of the loss rate that may be experienced. If the loss rate is higher than that then banks will suffer that loss. At Barclays we have not built that into our risk modelling; we have not communicated that at all to our front lines. We do not want that to be a distraction ---

Q54 Chairman: So all three of you have not communicated to your front line.

Mr Cooper: That element of the scheme, yes.

Q55 Chairman: So, in fact, the Government got the risk call better than the banks then.

Mr Ibbetson: Time will tell.

Q56 Chairman: They appear to have so far. That is unusual. This other issue we explored with the previous witnesses is the turnover limit on loans. We heard concerns expressed in the Automotive Assistance Programme sector. That has a high bottom limit and this has a low top limit, and there is a gap in the middle, but, in fact, we heard most of the loans are actually going to micro-businesses anyhow, with much smaller turnover limits than £25 million. Is that £25 million turnover limit the right one, and should there be another scheme in the middle - for, particularly, the automotive sector but other sectors too - to cope with the businesses in between these two thresholds?

Mr Cooper: From my point of view, the £25 million threshold is a useful definition of what an SME is. Clearly, there are a few SMEs towards the top end of that. In my experience the volume of applications come very much from the smaller end. I would not necessarily see any benefit in reducing the turnover threshold; I would not necessarily want to exclude anybody from applying for that, but we have seen that the demand is very much from the smaller end.

Q57 Chairman: Is that experience shared?

Mr Ibbetson: I agree with Steve that putting it at a £25 million level to recognise the SME definition is a sensible place to put it anyway, but quite aside from that there have been about 40 applications in the £10 million to £25 million band, which is about 2% of the overall that has gone into that band. So you could conclude that is not the most active band, and that is true, but nonetheless there are 40 businesses that have been helped there, so it is appropriate that it should sit there. In terms of: "Should we be doing anything in excess of £25 million?", I think Russell Griggs made the point that when you get beyond the £25 million level actually the businesses are slightly more complex and it is better to look at those on a case-by-case basis rather than put in place a generic solution, which is what the EFG is.

Q58 Chairman: Before I hand over to Roger Berry, what I am left feeling in all this is that it was quite heavily sold and promoted as a scheme that would answer a lot of the problems the economy faced before Christmas. If we have got something of the order of 3,000 schemes processed, on average that is five per parliamentary constituency. It is making, really, quite a modest contribution but, you would say, a useful one. It is the thing that Baroness Vadera said; it is actually a targeted scheme to help address specific problems and it is part of an overall package in which the fundamental issue was fixing you guys - fixing the banks. In essence, that was the most important single step and there are individual interventions which are appropriate in the great scheme of things. I am leading my witnesses, but is that your feeling?

Mr Ibbetson: Yes, it is. By the time this has been run out at the full £1.3 billion it will have helped 30,000 to 40,000 businesses, and that is important. It is absolutely important. It would be wrong not to have that scheme in place to support those businesses.

Q59 Chairman: So useful, modest and appropriate?

Mr Ibbetson: Yes.

Q60 Mr Hoyle: It is interesting how many businesses have been helped. Have you ever equated how many jobs that has saved?

Mr Ibbetson: We have not done, case by case, as a macro, but there are cases I could quote you. There is one in the West Midlands, funnily enough, that we supported that saved 200 jobs. So there are those cases. There will be others where that has saved one or two jobs. We do not just go into the deal because it is going to save jobs; we are there to support viable businesses and supply chains, and things like that, but it is a critical component.

Q61 Mr Hoyle: I am just saying that is another benefit that I think we ought to mention - that, actually, not only have we saved a business but we have saved people's livelihoods and jobs.

Mr Ibbetson: Absolutely.

Q62 Roger Berry: Good morning. Do you think the scheme has been distributing funds to businesses at the rate it should be? I guess you are probably going to say yes, because we are talking about a fixed scheme. Do you believe that businesses are being supported at the right rate, which is what the Minister felt when she gave evidence to the Committee?

Mr Cooper: How we approach EFG at Barclays is that we do not say: "Come and talk to us about EFG", and we do not have a target that we must do X number per day; every interaction we have with the customer is around borrowing money and we look at whether we can support that borrowing request or not. If it does not meet our normal, daily sort of credit criteria, we then look at: "Would this work through EFG?", and about half of those actually do fit the criteria that we can support under EFG, which is usually because there is a lack of security or there is a higher credit risk assessment with that customer and we believe that through time and the economic cycle they will be viable and able to repay that borrowing. There is no target around that. We find that we get a number of applications direct for EFG, some we approve and some we do not; some we do not approve because they do not actually need EFG support; we will very happily give them money without that additional guarantee. So we look at 20 to 30 applications per day, we approve about half of those, which is about £1 million a day, and we find now that EFG represents about 10% of all our new lending. The point I am trying to make is actually the market itself is driving the demand and the flow rates, which I think is the right way for it to be.

Mr Ibbetson: I think that is right. I agree with that. This intervention fills the gap between commercial support for businesses from a bank in the normal way and those businesses that we believe are viable in the long term but do not have the security to the extent that the banks support them. It fills that gap and I think it is at the right level at the moment.

Q63 Roger Berry: Are you worried the money might run out too quickly?

Mr Ibbetson: There has been discussion within government, and Baroness Vadera has asked the question several times: "Is it enough? Give me notice if it is running out". I think the general sense, at the moment, is that within the programme that was announced it should be sufficient, but certainly we have read the messages from the Government that if it is being used at a greater level then there would be an appetite to consider extending it more.

Mr Pegge: I think the run rate at the moment would see use of most of the allocation originally set out, and would very much support the point that in most circumstances we are able to lend without the requirement of the Enterprise Finance Guarantee - saying yes to three-quarters to 80% of business applications. That does not require the taxpayer to support it and it also means that the business itself is not having to pay a premium, which it does pay, of course, for the Enterprise Finance Guarantee over and above any other costs of borrowing.

Q64 Roger Berry: If the Government had made a commitment to a higher level of funding initially, from your point of view that would not have made any difference because this is about right.

Mr Pegge: I think so.

Q65 Roger Berry: Finally, the Department has recently extended the scheme to include Community Development Finance Institutions. I would like your comments on that.

Mr Pegge: My understanding is this might enable some Community Development Finance Institutions themselves to lend to some of their clients who might be small firms. I think for some of those lenders it might be quite useful for them to have that capacity. Not in all circumstances because some of them do lend in very high risk cases and the kind of cap that is necessary under this scheme would not be consistent with that, but for some it could be a useful facility for them to have. So I do not see any reason why they could not be added as lenders if it suits their individual circumstances.

Mr Ibbetson: I agree with that. I actually chair a CDFI myself so I have a vested interest in seeing the EFG being used by them. Absolutely, it is another way to support CDFIs. Moreover, the EFG is available for CDFI themselves borrowing from banks; it is also available for CDFIs to use when they themselves lend to community borrowers. At both levels it is a useful intervention.

Mr Cooper: I agree. We have recently done a number of workshops and road shows with the CDFIs and sponsored them quite significantly. I think it is important that they focus on where they are best, which is supporting those who do not have access anywhere in the community. I saw a case study of a person being released from prison and setting up his own ironing business. That is exactly what the CDFI is meant to support; not to support the much bigger businesses who are looking for finance they cannot get from banks and go elsewhere; actually, the real issue for those businesses is they are not viable at this moment in time and they need to change their business model and be more relevant to the consumer.

Roger Berry: Thank you.

Q66 Lembit Öpik: We talked during the previous session prior to you about the local branch responsibility and the level of knowledge about the Enterprise Finance Guarantee scheme primarily. How did you educate your staff at local branch level to understand that and, perhaps, the other schemes too?

Mr Cooper: In Barclays we have about 3,000 relationship managers who deal with businesses. We sent every single one of those on a face-to-face training course around the scheme, and some training around how to support businesses in an economic downturn. Clearly, that takes time to put in place but all 3,000 have gone through that. In addition, we have 2,000 branch managers and they have all had awareness training of the scheme, not in so much detail because they have other things to focus on as well, but they have all gone through awareness training on that and significant weekly communications around where we are, how much we are doing - the "learns" we have got from the scheme overall. So a significant amount of communication has gone into that.

Mr Pegge: At Lloyds Banking Group we have done a mixture of communications on line, through cascades in team meetings, and training, and that has involved training for retail frontline staff as well more recently to make sure that they are as aware as we can make them. However, constant reinforcement is important. One thing we found quite useful is focusing on case studies so we are able to show where this has been particularly useful and how to use the scheme to best effect, so that there is that awareness and enthusiasm for the scheme as appropriate.

Mr Ibbetson: We have about 4,000 business managers and round about 30,000 people in the retail channel. On day one (and I am mindful of the comments that you made before that you have experience of some of the branches not knowing about this), all of our 4,000 business managers had been fully appraised of the scheme, which we had done on an audio basis; so all managers voice-to-voice rather than face-to-face have been trained in the scheme. The criticality we thought - because it had been announced fairly quickly - was to ensure that all the people that needed to know about the scheme, in terms of dealing with businesses, knew about the scheme on day one. We thought that was the right way to do that. We were less quick about making sure our receptionists in the branches knew what the scheme was. We had rather assumed that businesses would go to their business managers to ask about it and not walk in to the receptionists in the branches. The message we got very quickly was that people were going into the branches and asking about it, so within the fortnight following the announcement we ensured that all our receptionists and cashiers were also fully aware of the scheme and who to pass on the lead to. The BERR mystery shop that was carried out five or six weeks after the announcement went through the processes with us and told us that 95% of our people were fully aware of the scheme and knew what it was at a good level. So we believe we communicated that well internally. I think the bigger challenge, frankly, was communicating it externally and getting the media to pass on to the external community what this scheme was , and we had to work very, very hard on case studies with journalists to try and help them put that out in the media properly. I think we have made good progress in that; there was a case study (I am sure the other banks will have them as well) about three weeks ago in The Mail on Sunday which actually was very positive about the scheme and explained how it worked, but we had to work hard at doing that.

Q67 Lembit Öpik: It sounds, from our previous witnesses, that they are quite satisfied now there is a high level of understanding. We did talk about inconsistency though. What is it that you are doing to maintain consistency in terms of the judgments, so that you get like outcomes for like facts from the various applicants?

Mr Cooper: It all comes down to the word "viability". The problem with viability is it is, largely, a judgment call; it is not a mathematical formula. Clearly, there are some common bits of information such as forecasts or previous actual financial information, but it does come down to a personal judgment as well and how well the bank knows the business and how well the business has portrayed what their business and their forecasts are in the current environment. Equally, every bank has their own risk criterion and risk policy based on their appetite - what their shareholders want them to do and their depositors - and that is what competition is all about. We have processed about 3,000 loan applications and approved just over half of them. What I generally look at is: "Why have we said no to these and yes to these?", and there are three common things among those who have not got the money. The first one is their sales had been deteriorating well before the current economic downturn; these businesses were already starting to struggle and the downturn has just accelerated that. Second is that those businesses that have not got the money have been significantly in debt; in most cases they have got bad debts elsewhere or outstanding county court judgments. The third factor has been that the management team of that business is not taking any action to make their businesses more viable and commercially sustainable over time. Those businesses that are getting the money are taking that action. In some cases they are still very weak and very vulnerable but at least their management team is taking action to make themselves more relevant to the consumer in a more commercially sustainable way.

Q68 Lembit Öpik: Is that the same for you?

Mr Pegge: To ensure absolute consistency I guess we could have a very centrally oriented credit model. We choose, actually, to have managers with local discretions to get to know their customers and make those judgments on a local basis within the framework of a consistent credit policy. We do have a bit of an overview of that through the senior manager line and through the credit support that those managers have. We, clearly, can see the results of lending, and where that seems to be out of line in one area then it is something that we can correct, and we have put a lot of investment into training relationship managers so they have got a consistent view. However, it will not be 100% the same and I am not sure I can guarantee that in every single case the same decision will be made; it does depend very much on that relationship. I think that is a good thing and there is a useful mechanism there that if a business feels that they disagree with that decision they can go to another bank. We have looked at switching opportunities which have come out of this scheme and taken on businesses where other banks have taken a different call, and I am sure that might be the case occasionally with us.

Mr Ibbetson: Consistency is very important and I think we are able to maintain it in Royal Bank and Nat West through the regional credit functions that we have. We are regionally structured in terms of our lending decisions and that goes across about eight or nine different units so we can ensure consistency in the decisions that are there. That does not mean to say that decisions are made 200 miles away from where the customer is. So there is a very, very high input from the relationship manager in getting that decision made, but we do think having the regional functions talking closely together and training together actually gives that consistency. We go further than that: if there is a decline, that gets looked at by a second pair of eyes before we pass that down to the customer, and we also have an appeals process through a business helpline that we have introduced. Furthermore, we have around 400, as we call, specialist relationship managers that we put around the country sitting with our relationship managers, who will become involved in situations that have become difficult, where we believe an innovative way of looking at the situation will pay dividends. However, consistency is important and we do focus quite heavily on that.

Q69 Lembit Öpik: Sounds great when you put it like that. I, as you know, have this case I mentioned before. I am not going to embarrass any one bank nor mention the actual specific company, but it is a useful case study because they seem to have been frustrated by a process which necessarily went up the line to a regional or a head office, and then the results seem to come down again. To what extent do you require these loans to go to a central resource? All three of you have intimated that the decision is sort of made at the local level. Which of you, as banks, actually require the approval to be made at some central facility? If that is the case, are there certain criteria as to the size of the loans that need to be referred to the centre?

Mr Cooper: We do a combination of the two at Barclays, so up to £25,000 the relationship manager on the ground can pretty much make a decision within certain parameters, which I think is sensible. Over and above that we do involve a credit risk expert team who are, generally, regionally based. The reason we do that is we find a combination of top-down and bottom-up works well. The top-down is credit experts who see trends in the economy and sectors countrywide; they get a lot of data they can actually assess against. An example might be - I saw one recently - where an accountancy firm had a gross profit margin of X, which they thought was pretty good, but when you compared that to our thousands of other accountancy customer firms actually their gross profit margin was not that healthy, and they just had a conversation with them in terms of: "You might want to investigate this". The relationship manager on the ground is the bottom-up; they know the business on the ground; they spend time with the customer; often they live and work in the same community and they hear people talking about how good or not that business is. We find that combination of top-down and bottom-up works well, and we have a fairly robust process in place to make sure it does not take too long, subject to getting certain information out we need: up-to-date trading accounts, forecasts, bank statements, for example, if it is for another bank. So, provided we get all that information, we generally come back to the customer with a fairly descriptive position on where we stand on it within 48 hours. So 48 hours is, generally, the turnaround time it takes, but if we decide we cannot help them for whatever reason (a) we look at it twice and then we look at whether we can do something in partnership with, maybe, the CBI adviser, and so forth, or we sort of share the lending and the risk between us.

Mr Pegge: For Lloyds TSB we have around 200 senior commercial managers with a couple of thousand relationship managers locally based. They will have local discretions of up to £500,000 before that goes up to a central call. We do ask with Enterprise Finance Guarantee ones, to make sure it is being used appropriately and used where it should be, that the senior commercial manager has a quick look with the relationship manager at those particular applications, but that would be done at a local level. So it means about 90% of decisions are made locally.

Mr Ibbetson: I actually do not think it matters where the decision is made, if I am honest; the most important thing is that the bankers that are working with the businesses are experienced and end up with the right solutions in the best relationship-managed way. I have seen some fantastic examples where the people that we put in (the "grey hairs" as I call them) - the 400 really long-term experienced people working with the relationship managers - have worked with businesses to produce the right solutions, and I think that is the important point. In terms of discretions, anything over £25,000 in Nat West and Royal Bank goes to our regional credit officers, but, as I say, I do not think that matters; the important thing is that the right solutions are delivered with the businesses.

Q70 Lembit Öpik: In terms of speed, it sounds as if Barclays have a target of a 48-hour turnaround, at least in some circumstances. Can you do that as fast?

Mr Ibbetson: There is no hard and fast rule on this. For a complex application it will take longer; for a simple application you can turn it round in 24 hours, and over 60% of the Enterprise Finance Guarantee loans that we have issued have been drawn down within 14 days. It is a mixture, but "as soon as possible" is the measure we try to apply.

Mr Pegge: An Enterprise Finance Guarantee, typically, is within two weeks. We have done them well within a week; in fact, I think the first one we drew down within the first week of launch of the scheme, but if there is more complicated security involved in the package of facilities (not necessarily for Enterprise Finance Guarantee but the other facilities that might be drawn down), including security over land, for instance, where a valuation is required, it will take longer.

Q71 Lembit Öpik: It is very exciting, Chairman, because this case study is a real one and they need a decision by 12 June. One of the banks - I am not going to say which one it was, of course - has chosen to reject it and they are applying to another of the three of you as well. So I will be putting to the test what you have just said, and report privately and confidentially to the Chairman. There is just one other area, really, and this applies to this case: my constituents have offered £1 million of personal loan guarantee here, and it is on, I think, their primary homes. To what extent will you accept primary homes as the guarantee, because I have heard it said that that is not regarded as acceptable in some circumstances?

Mr Ibbetson: To be absolutely clear, the Enterprise Finance Guarantee is available only when other forms of eligible security have been exhausted. So we will invariably ask for an unsupported director's guarantee. We, as a bank, as a matter of policy, will normally ask for a 25% guarantee but these are unsupported guarantees and we do not ask - are not allowed to ask - for principal, private homes to support them. It is quite likely that homes, if they are eligible for security, have already been used to collateralise guarantees in respect of already agreed commercial debt.

Mr Pegge: This was an area of confusion initially with the scheme; that people saw this as a scheme that would enable them to get support and finance without them requiring to rely more on their own personal assets. However, in fact, I think it has been made clear more recently that, no, this is where security is not available; we should look, first of all, to see if we can lend on a normal commercial basis, and that might involve talking about personal security for those limited companies where a personal guarantee is appropriate. As it happens, more than 50% of borrowing businesses are unincorporated businesses where personal liability already exists.

Mr Cooper: Very similar. The principal private residence is excluded under the Enterprise Finance Guarantee - rightly so, in my mind. In most cases, that asset has already been fully collateralised either against the existing personal mortgage or for other borrowing reasons to support the business. As one of the previous witnesses alluded to, there was some confusion in the early days around that. I must admit, I found myself questioning that when I was doing an interview on radio, and I came out thinking that we needed to get this clarified, so, therefore, we have excluded that from all our documentation, making it very clear that the principal, private residence or the matrimonial home is not at risk under the guarantee to support the Enterprise Finance Guarantee. It does not mean that other assets are not.

Q72 Lembit Öpik: I think you have explained how you seek to streamline your processes. Any advice for the Department for Business and Enterprise about what they might do to make the system faster or are you satisfied that they have got it about right?

Mr Cooper: We meet regularly both with the forum plus the team dealing with the mechanics of the Enterprise Finance Guarantee. I think this is a scheme which has been put together pretty quickly and pretty well in that time. Yes, there were teething problems but that is not unreasonable, given that it was put together in six weeks, and I think the "learns" from that have been learnt and rolled out. I think if I am critical in any way it is around the communication of the scheme - again, it was rolled out quickly. "Learns" have been made from that, from all round - banks, Enterprise Links, BERR, CDFL etc; there have been "learns" from all of that. I think we can take those "learns" and take them forward to when the next iteration of EFG comes around.

Mr Pegge: I think the scheme works pretty smoothly and quite quickly. There is a portal and an extranet - a website - that we have access to so that we can manage these loans very quickly. We have a central support team who are specialists in it, so they can provide a bit of help directly to customers and managers and know the scheme and know the people that run it very well. I think it was about as quick as you can make it, really, given that we are talking about taxpayers' liability here and the need to make sure that eligibility is properly managed and controlled.

Mr Ibbetson: In terms of meeting the need and getting it out there, where we were in October was pretty unprecedented. There were very open dialogues at that time between the banks and the Government, and we thrashed out a scheme that actually meets the need, I think. Getting it launched from announcement in six weeks, again, was pretty impressive; if you compare it with the Small Firms Loan Guarantee Scheme that took about 15 months to get out there. There have been criticisms about was it communicated adequately at the outset. My boat would absolutely be get it out there on the streets, and if there are a couple of rough edges we will sort those out afterwards, but let us get it out there, and I think businesses would support that. I think BERR did a pretty job, frankly, of pulling this together to meet the need and getting it launched. I think if there is a lesson we learnt, yes, it was communication, and it was not the speed at which that communication went out, it was the actual message.

Chairman: I am going to stop you there because we are going into this with Mr Clapham's questions, in a minute or two.

Lembit Öpik: You have given very helpful answers, and if any of you wants a sure-fire investment opportunity in Montgomeryshire in the food sector, see me after!

Q73 Mr Hoyle: Nat West and RBS, Peter; you have suggested that you ask for 25% of the guarantee to be covered.

Mr Ibbetson: Yes.

Q74 Mr Hoyle: What do the other two banks ask for?

Mr Pegge: Sometimes no guarantee, sometimes up to 100%, sometimes 50%. So it varies and is dependent on the circumstances.

Q75 Mr Hoyle: So it depends how you feel that day?

Mr Pegge: It depends on what assets the business has and how high the credit risk of that business is.

Q76 Mr Hoyle: So you have no limit. If I have got it right, RBS/Nat West, 25% and you do not ask for any more; you can go up to 100%. Mr Cooper?

Mr Cooper: Similar: we treat every single case on its own merits.

Q77 Mr Hoyle: So you have no limit either; you will pull a loan and expect 100% guarantee?

Mr Cooper: It could be zero; it could be 100% - it depends on the circumstances.

Q78 Mr Hoyle: So your maximum is 100%, yet one is 25%. Why have you got differentials?

Mr Ibbetson: Exceptionally, we could give you under 25%, but the normal policy we have is 25%. I think the view we take is these are unsupported guarantees. It actually does not matter that much whether it is 100% or 25%; they are unsupported, and the rationale for having them there is to ensure that the directors share the risk with the bank, the Government and the taxpayer, which is the right place to be. Exceptionally, if those directors have no other commitments into the business we may say: "Actually, we need you at 100%", but we actually think the message that is put over by having 25% meets the need.

Mr Cooper: I think it is worth adding on that, I am well aware of just how much commitment business owners put into their business - in terms of time, money, and investment over time - but when you lend additional money there is additional risk, and the bank is taking that additional risk, as is the taxpayer. What we find, at the time of giving that extra money, is if there is an additional personal stake, which could be up front cash or a guarantee by the business owner, the likelihood of default reduces by 40%. I do not like the phrase that I think was mentioned by one of the previous witnesses - "skimming the game" (?) - but having that sort of additional commitment by the business owner has proved to be worth having.

Q79 Chairman: Before we move on to the next round of questioning, I have one question to you from the Chair: to what extent does the visibility of the scheme to your clients actually matter? Is it just a tool in the armoury that you have at your disposal when a business comes to you wanting financial assistance? Do we need to worry about the public perception of the scheme? Is it not something that you need to have at your disposal - does the consumer end of it actually matter?

Mr Pegge: Chairman, could I take that one? I think it does matter in the sense that was described at the very beginning of this session, which is this has been helpful in raising business confidence that finance is available, and in that sense people are more likely to come forward at an early stage when they need finance and may be more prepared to invest in their businesses to grow them and get the economy going. However, you are right, the level where, ultimately, the decision as to whether the Enterprise Finance Guarantee is necessary and whether we can just lend anyway on a normal basis, is one that it is up to the bank manager to worry about. If a business does not know about the Enterprise Finance Guarantee then that should not be a bar to them having it, where it is appropriate, because it is up to the manager to apply it.

Q80 Chairman: You do not need to add anything if you agree with that answer.

Mr Ibbetson: I agree with that. I think it is very, very important in the context of the confidence to prove to the outside world we are emphatically open for business. Here is a scheme which is Government guaranteed for those businesses that are in difficulty, and we really are open. That is what it said.

Q81 Mr Clapham: Just looking at the problems, and I hear what you say about the training - all three of you explained how the training schemes were run for the people who were actually dealing with businesses and explaining the scheme - but are you happy that the Government got it about right between the announcement and the implementation, or do you feel it could have been done more speedily?

Mr Ibbetson: I think they got it about right, if I am honest. Personally, I spent Christmas Day and Boxing Day negotiating it with Government (I am sure the other guys did as well), so there was a lot of work put in in a very short timeframe to get this thing on the streets as fast as we could. I think we got it about right.

Mr Cooper: I totally agree.

Mr Pegge: Yes.

Q82 Mr Clapham: So the three of you agree they got it about right. There has been a criticism that perhaps the lack of skilled civil servants, to some degree, was a constraint on the Department in rolling the scheme out. Did you find that? In your discussions with civil servants did you find that they were up to speed; that the skills were there?

Mr Ibbetson: I think that would be a fair criticism if the banks had not been involved from the outset in trying to define the skills, but we were. The dialogues with BERR were open from the outset and I think it is unreasonable to expect BERR to know every industry that they ever deal with, and I think it is right that they refer to the experts in that industry when they are looking at that industry, and that is what they did on this occasion.

Mr Pegge: I think BERR, the Bank of England and many of the other authorities involved - the Treasury and so on - have all reinforced their resources since the autumn with extra skills in this area. I think that has been necessary and helpful but, I have to say, my experience of BERR is that they have always had a remit to look at SMEs and access to finance, so there was, probably, a good baseline for that already. However, it was unprecedented circumstances and, clearly, people were working incredibly hard under a lot of pressure initially, until those extra resources came through.

Mr Cooper: From my experience, I have spent quite a time over the last 12 months with several civil service divisions, and I have been impressed, actually, by the level of passion and commitment. I think the skills set and knowledge has been of varying quality and my experience of the Enterprise Director within BERR is that they are top of the tree. I have been pleasantly surprised by how knowledgeable they are of the sector. Clearly, the close relationship with the banking community has helped, I think, to facilitate that, but they are, I think, pretty good.

Chairman: I am not sure some people would approve of passion in civil servants, but apart from that that is very encouraging!

Q83 Mr Clapham: So we are saying the template was there but that was reinforced for the betterment by virtue of the fact that there was a dialogue with the banks?

Mr Cooper: And the representative bodies, the CBI - the community has played a part here, and I think that has been very powerful.

Q84 Mr Clapham: We have heard from both sides - people that represent small business and yourselves, the banks - talking about the dialogue and the better working with small business. Does this mean that for the future we are going to see, perhaps, a different way and a way that is going to be based more on dialogue with small business than has previously been the case and was the case before the recession? Are we likely to come out of the recession with a much better understanding of how banks work together with small business?

Mr Ibbetson: I think there is pretty clear evidence (I will speak for Nat West and Royal Bank) that we are now getting out in front of the businesses in the high street; we have put business managers back into the branches. Those sorts of initiatives are happening now; we have put out 400 specialist relationship managers - these are the really experienced managers. To give you an example of that, in Northamptonshire we have 11 of these that sit with the managers; between those 11 they have got 328 years' experience in banking. Those people are sitting down, day-in, day-out, with businesses and I think it is pretty clear that will continue even as we come out of the downturn.

Mr Pegge: I do not think relationship banking ever disappeared. I think it was in its infancy in the last recession, in the early-1990s, but since then it was there, but it is certainly true to say, I think, in the boom times, there was, on both sides - on the business side as well as the bank side - a tendency sometimes to just look at banking as a transactional thing; to provide finance, perhaps, without a long-term view for building relationships. I think on both sides people now realise the value of relationship banking, and so I think that is important for the longer term.

Q85 Mr Clapham: That is good to hear.

Mr Cooper: I would add to that. I do not think it was ever "lost" but I think the relationship was put under strain at the early outset of the economic downturn. A shock to the system is sometimes a good wake up call. Similar to the other banks, we have spent a lot of time making sure we get our people to spend more time with their customers understanding their customers' needs more and better, and certainly our research from our customer base is showing that is starting to work; they are saying that we understand their needs more and their satisfaction level with us is improving.

Q86 Chairman: Did you recognise the description from, I think it was, the CBI in the last session that there was too much contact by email but now people are talking face-to-face again? Do you recognise the comment behind that observation?

Mr Ibbetson: To be honest, I did not really recognise that. I understand what he was saying, and I think there is a generic tendency for people to converse by email. I am not sure that is necessarily a bad thing ----

Q87 Chairman: The perception was that the banks - and perceptions, as we know in politics, are very painful, and can often be real - were no longer quite as engaged in this relationship process, and you have to do more to explain. I openly declare, I was impressed with what I saw, when I was attached to the Royal Bank of Scotland, between relationship managers and the business community in Liverpool when I came and saw your office there. I was impressed by that. You have to do more to explain that rather than just relying on people understanding it.

Mr Pegge: I think there is scope for face-to-face, email and telephone - whatever methods of contact are required. One of the things that we have done much more - and kicked off this year - is we have done 90 of 120 customer seminars around the country, but we have involved not just the businesses and the banks but, also, Business Link and representative groups, like the FSB. So, on a local level, they are actually building up networks. I think one of the roles of a bank relationship manager is to help put a business in contact with other businesses and other forms of support, and probably we were not doing enough of that. That has been something that we will need to continue to do.

Chairman: My observation - and I pass on to Tony Wright with this - is that in the old days we MPs used to know bank managers; we had a reverse relationship with them. Banks have become very anonymous to us, as Members of Parliament now; we do not have contacts at branch level, typically. (That is not true of Lloyds; I have had direct contact from my Lloyds' branches). So that anonymity has become, perhaps, a problem of perception on our side as well. I just pass that thought on.

Q88 Mr Wright: I go on to the same questions I asked the previous witnesses in respect of the loan guarantees. Do you think they are the best method of addressing the problems that businesses have had in accessing finance? Do you consider that the other government schemes have worked quite well?

Mr Pegge: They have a role but it is around that sort of 10% of lending cases, at the moment. Most of the time it should be necessary; we should be able to lend without any requirement for taxpayer guarantees behind it. I think the other areas of support that government provides, and they are important, are in terms of advice, guidance and help around information to help them comply with regulations, advice on managing their businesses, getting paid on time, and so on. That is just as important, I think, as the money to make sure that businesses are robust enough to be creditworthy and to be successful.

Q89 Mr Wright: Do you consider this is one of the solutions to the particular problem, not the panacea?

Mr Pegge: It is not the whole story, but it is an important little part of it.

Mr Ibbetson: I agree with Steven; the advice and the networking will be a benefit that comes out of the work that is being done now. I think that will be quite long-lasting and it will be a real benefit. When an intervention is needed I think the guarantee route is the right route. One of the initial problems that we had with the Enterprise Finance Guarantee was the perception, which was fuelled largely by the media, that this was free government grant money, which was the genesis of some of the early, difficult conversations we had. It is not; it is right that when a business borrows money it should repay it. I think the best way to deliver that is by way of government guarantees.

Mr Cooper: I think the EFG has met a root-cause of problems of access to finance, but it is very much around debt finance; debt is not a substitute for long-term capital. There are small businesses out there who need capital to recapitalise themselves; they need help in terms of changing their business models to be more relevant. So EFG does not meet that need, and I think further things need to be done to support businesses around education and so forth. Like Lloyds and RBS, no doubt, we have held a significant number of seminars for small businesses to support a change in terms of: "What do I need help with?" We can give them some advice and some support; we want them to tell us what they want help with as well, and we have helped out 12,000 SMEs this year, but in terms of meeting that need I think EFG has gone a long way to meeting that.

Q90 Mr Wright: You mentioned capital. The banks have put money into the Capital for Enterprise Fund, for instance - £25 million, as I understand - with £50 million from the Government. Did the banks do this on the basis that they are going to get a return on their investment, or did they consider it was just something that was required to back up the Government's investment?

Mr Pegge: For us it was a combination of the positive impact that that should have; where actually it would not be helpful for a business to borrow money and have to service a debt but where they really need risk capital, which does not require that but where there is a potential return on the outside, it is useful to have that additional source of funding available. Yes, we would also be hopeful. I think these co-investment funds, where you have got private capital going in alongside government funding, do work quite well because the decision should be commercial, and we would expect and hope that those would give us a return as well.

Mr Ibbetson: I agree with that; it is a commercial decision and we would expect to get a return on it. That is the right way to put that investment in, notwithstanding the Government's majority shareholding. That is the basis on which it went in. The bigger picture about the Capital for Enterprise Fund is what it does and what experience we get out of that, and the consultation is now starting about whether we need a wider fund to replace what used to be the 3i fund and the ICFC funds. The "learnings" we get out of this fund will inform that debate, and I think that is the most important part about this fund.

Mr Cooper: I would agree, particularly with the last point. The equity markets and small businesses in the UK are very, very immature - very undeveloped - and have not been particularly successful in other markets either. So I think the "learns" we get out will be very important in terms of how we can take this forward.

Q91 Mr Wright: Bearing in mind the Capital for Enterprise Fund is a shared fund with the Government and yourselves, why was it that the banks went in to share rather than backing what could have been a promising business opportunity for the bank and, obviously, for the business? It would have been far better for the bank to have invested 100% in that.

Mr Ibbetson: We have been there, done that, in years gone past, with the 3i's and ICFC, and, as Steve said, this is a very immature market. The experiences that the banks had previously when they looked at that low end of equity support were not an economic success, so it is probably better to look at the creation of a fund which is managed by arms-length, independent fund managers. It is better to look at it in that way, and that gives the opportunity of a more economic return. I think that is why we went into it in that way rather than creating our own fund. We all have our own equity funds but predominantly the equity funds in the UK focus on businesses looking for investment of £25 million-plus; it is the bottom end of that scale that we are looking to address with these funds. Actually, for very small amounts of equity one of the best sources of fund is Business Angels - private investors who put in their time as well as their money. There is an awareness campaign that I spoke at the launch of last week to try and encourage both businesses to think of looking for finance from private investors and private investors to get involved in that. The recent research that we have done across Europe shows that there is an average 22% return by those private investors in managing that, and I think they can do that individually because they are hands-on involved and have the ability to manage their investment, manage the risk that they are taking and get a better return by putting management skills in as well as the finance.

Mr Cooper: I would agree. I think the interesting figure is the 22% return, which is an average so some of the returns will be much higher than that and some of them could also be lower - big losses. So it is really about having the expertise, the skills set and the time to spend with that small business in terms of helping them to grow with support.

Chairman: I am going to ask a micro question and Lembit can ask a macro question. We will take them together; I will ask my question and Lembit will ask his by way of conclusion. You heard me ask this of the last witnesses. The EFGS runs out in March 2010. Should the Government think of replacing it with something else or extending it, at this stage? Lembit?

Lembit Öpik: Understandably, banks are more cautious about risk now, for very good reasons. What can the Government do to help you as banks invest in new or lend to new business growth?

Q92 Chairman: What is the future?

Mr Pegge: Shall I start with the last question first? I think demand for finance is the big issue, at the moment, but business confidence is still relatively low. It has improved recently in some of the surveys - the CBI survey that came out today suggests that - but, nevertheless, businesses are not investing in capital equipment, so requirement for finance is not so great. That, ultimately, will hold back recovery. So one of the things that, I think, we can all do is encourage businesses to see that banks are open for business; that actually there are some good opportunities for small firms - it is not doom and gloom everywhere - so that we start to get back some of that confidence into the economy. On the question of EFG, I do not think we should go straight back to the Small Firms Loan Guarantee as it was; I think there were some helpful changes that were made here - for instance, the extension to slightly larger businesses, and it will be helpful, I think, to keep that element of it - and, also, the ability to provide finance to that wider range of sectors. I would hate to think that there would not be any guarantee scheme there, but, equally, it is a matter of priorities, is it not and, perhaps through a process of consultation, looking at how we can target it on where it is really needed.

Mr Cooper: I would agree. I think EFG is working well, at the moment, and significant improvements on that compared to the old scheme. In terms of what is needed next, I think we need to take stock of where the economy is as we turn into the second half of the year and into quarter one next year. We very much look forward to helping to shape that with BERR and my colleagues here, plus the representative bodies and so forth. I am not sure whether EFG is the right solution going forward, but there is certainly room for something going forward. Again, whether it needs to be the same size of fund, I think, remains to be seen. Interest around access to finance is still an issue, but I think we are over the main part of that hurdle. If you look at the latest surveys from the FSB, the FPB and BERR's own survey, access to finance is no longer one of the top ten issues - other things like late payments very much are there, which actually is some of the root-cause behind the need for finance in the first place. I think on the latest BERR survey the percentage in terms of people struggling to get access to finance is now back where it was at pre-economic downturn levels. EFG is there, I think, working with the community, representative bodies, government and yourselves, around helping to resolve other things, such as late payments, which is killing the small businessman, which I think is very important.

Mr Ibbetson: At the macro level I agree. At the micro level, in terms of the EFG, it depends where the economy is at. If we have not exited from the downturn, clearly, we need an extension of the EFG, but I think there have been many elements of the EFG which are very good. The scheme has been broadened to some of the sectors that were not included under the Small Firms Loan Guarantee Scheme - that is good - and I think we should look at growing EFG and seeing how we better cover that. There are two specific areas that we need to look at and focus on: it would be good if we could look at those sectors that are still excluded from the EFG (in particular, I would refer to export finance support; I think that will be important as we emerge from the downturn); and then the second area, which I am not sure we can cover within EFG, would be looking more dynamically at what we can do for credit insurance, where I think we will have some work to do.

Chairman: That has given us a clue as to what issues the Committee might look at in the future. This was intended to be a narrowly-focused inquiry on one particular aspect of government policy, and I think it is quite clear, from what you have said, and what the previous witnesses said, that although it started, perhaps - what is the correct word - a little slowly and falteringly, it has gained momentum and you now think it is broadly doing what it should be doing. What is in the box is what it says on the box. That is very encouraging. Thank you very much indeed, gentlemen.