Session 2010-11
Publications on the internet
UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE
|
|
1. |
This is an uncorrected transcript of evidence taken in public and reported to the House. The transcript has been placed on the internet on the authority of the Committee, and copies have been made available by the Vote Office for the use of Members and others. |
|
2. |
Any public use of, or reference to, the contents should make clear that neither witnesses nor Members have had the opportunity to correct the record. The transcript is not yet an approved formal record of these proceedings. |
|
3. |
Members who receive this for the purpose of correcting questions addressed by them to witnesses are asked to send corrections to the Committee Assistant. |
|
4. |
Prospective witnesses may receive this in preparation for any written or oral evidence they may in due course give to the Committee. |
Oral Evidence
Taken before the Business, Innovation and Skills Committee
on Tuesday 23 November 2010
Members present:
Mr Adrian Bailey (Chair)
Mr Brian Binley
Paul Blomfield
Katy Clark
Margot James
Simon Kirby
Mr David Ward
Nadhim Zahawi
________________
Examination of Witnesses
Witnesses: Matthew Fell, Director, Competitive Markets, CBI, Roger Bibby, Chairman, Economic Affairs, Federation of Small Businesses, and Phil Orford, Chief Executive, Forum of Private Business, gave evidence.
Q151 Chair : Can I welcome you to our session and thank you for agreeing to attend. Could you just introduce yourselves for voice levels for the purpose of recording please?
Matthew Fell: Good morning, I’m Matthew Fell, Director of Competitive Markets at the CBI.
Roger Bibby: Good morning, I’m Roger Bibby, National Chairman for Economic Affairs and Financial Affairs for the FSB.
Phil Orford: Good morning. My name’s Phil Orford. I’m Chief Executive of the Forum of Private Business.
Q152 Chair : Thanks very much. I’ll start with fairly general questions. BIS describes itself as "the Department for growth". From your perspective and the business community what does and what should this mean in practice?
Matthew Fell: Well, I think our view would be that growth is absolutely the right overall mission. We would see the Department’s role in this as twofold. The first of those I think would be around influencing, championing and helping to create the right environment for growth, where we would see issues like macroeconomic stability, the regulatory climate, taxation and skills as the key ingredients for that. Some of those issues are clearly within the Department’s own remit, such as labour market flexibility and the better regulation agenda, but the majority of those issues are spread right across Government, so the Department’s influencing role here is critical. For examples of where it has fared well and less well in our view you could take the recent debate on immigration, where I think the Department has been very vocal in articulating the impact upon business of what the various outcomes of that may be, and taxation policy and how that impacts upon business, where it seems to have shied away from that, historically.
Then the second of its roles is very much a delivery function for the programmes and support schemes to business. Examples here, which we will no doubt get into, would include support to SMEs, trade promotion, investment and export support and building sector capability, for example. So a twin role: one around influencing and the other around delivery.
Q153 Chair : Thanks. Do you wish to add to this? I would stress, don’t feel obliged to do so.
Roger Bibby: Yes, I would like to add to it please. I think we’ve got to differentiate: what do we mean by growth? Is it by activity sector; is it by size sector? There’s still a lot of ignorance about what SME means in this country. Obviously the FSB represents the "S" in SME but people do confuse SME with "S" and the engine of the potential growth in this country is, I would suggest, £500,000 to £5 million-turnover businesses. There are a lot of them; over 50% of the private-sector employment and GDP contribution, which is very high. Also I think we have to look at growth in terms of: is it the longterm environment for growth or kickstarting the economy for growth? We have already tabled various ideas for kickstarting growth by sector, one being obviously the construction industry, which has a huge multiplier effect through the economy.
Phil Orford: Just briefly, if I could add that the role really has to be one of facilitation, whether that’s in the finance environment, which I’m sure we’ll touch on today, or indeed innovation and entrepreneurism or just in general interventions. We have a Department now which is less interventionist than the previous Government and it’s important that those limited interventions are focussed accurately and draw maximum benefit.
Q154 Chair : You’ve used exactly the word I was going to incorporate into my next question. Where should BIS with its limited funding, actually be focusing its efforts? Do you want to elaborate on that?
Phil Orford: Yes, I mean they are many and too numerous probably to mention in this meeting, but it’s quite clear that there are issues in the lending environment and much has been discussed and debated about that in previous sessions and indeed probably will be more focused upon today. The cuts that BIS has experienced have been primarily related in the university sector and clearly one of our concerns is about the ability for work readiness going forward, given the cuts that the university sector is going to be subjected to. We obviously have the issues related to the public sector cuts and how that will adversely affect the small business community. But I think in the interest of letting some of the other contributors speak, I think we would like to see a broad remit but with specific focus around competition, late payment, access to finance and the skills agenda.
Q155 Chair : Would anybody else like to add to that?
Matthew Fell: I think in answering that question I would just make a distinction between support to address cyclical issues in the wake of the current financial crisis and how we bounce back from that, and then some longer standing structural issues where the Department has a role. So on the cyclical front, clearly some of the finance support measures, particularly to the smallercompany end of the market to help with working capital cash flow issues, will be very important there and I think the Department has a number of programmes designed to help on that front. To address more structural issues, again, on the financing front: some of the longstanding equity gaps, for example, and the role of Government in helping to encourage the flow of funds to address those; some of the longer-term transition issues facing a number of our critical sectors in the economy, not least perhaps automotive; and how we move forward, perhaps helping the transition to a low-carbon economy and such like. That’s how I would differentiate the twin roles of the Department there in terms of structural and cyclical actions.
Roger Bibby: Yes, if I could just add on the equity gap, there has been an awful lot of talk about the equity gap going on for a number of years. There has been an awful lot of talk in the last year about the reincarnation of the 3i model and the banks have jumped in, haven’t they, and trumpeted their deal for the £10 million-turnover companies and an equity fund. Frankly, that is largely irrelevant because that gap doesn’t exist. It’s further down that the gap exists.
Chair : Yes, I did note your comments when it was first announced. We are going to cover this in a bit more detail in a moment. Brian Binley has asked if he could just come in on this one.
Q156 Mr Binley: Yes, I’m just interested in your answers on growth as though it were a sort of, rather, casual process, which we hope to achieve. Don’t you accept the fact, and do your members accept the fact, that if we don’t get growth the budget strategy fails and if the budget strategy fails this country is in serious trouble?
Roger Bibby: I totally accept the need for growth. I think what we want to see is less rhetoric and more action, frankly. I think there seems to be a bit of a love affair with growth of niche markets and technology. There are an awful lot of decent companies out there who aren’t in solar panels or healthcare or whatever, that provide a lot of jobs and they are good companies. So let’s not forget them when we talk about helping those sort of large sector companies.
Matthew Fell: I think on that front Roger is absolutely right. You posed the question: "Where is the growth coming from?" It’s not this amorphous thing that’s out there in totality; it’s going to come from individual firms creating jobs and creating wealth-
Roger Bibby: Yes.
Matthew Fell: And that can come from right across the economy and right across different sectors; it’s not just in certain pockets. It’s going to be about individual firms and it’s got to be about a bottomup approach to building growth.
Phil Orford: Absolutely, and if I can just add to that, there’s a lot of debate whether micro-firms and selfemployed are going to generate the growth in employment or whether it might be the small businesses that are going to generate that growth, or indeed, whether it’s going to be the medium or large. I think we have to accept that it’s all, and the focus on growth in employment needs to be across all of those sectors. Quite clearly, growth has to come from the private sector. That’s acknowledged. How do we do that? Well, it’s quite simple: you have to get out there and you have to get more business. Now, whether that business is acrossregion, acrosscounty or across the world doesn’t really matter. It’s all about getting the trading activity of small businesses and medium and larger businesses at a higher level, which will in itself generate wealth, hopefully taxation, but importantly will create employment.
Q157 Chair : Just before I bring in Nadhim Zahawi, Matthew Fell, I think it was, earlier, made the comment that, if you like, economic growth isn’t just a product of the area of responsibility that BIS is involved with. Obviously, there’s a whole range of other Government Departments that will implement policies that will impact on the ability of BIS to deliver that growth. I suppose there are two questions here. First of all, how far do you think the responsibility of BIS is and how would you evaluate its role in providing direct support as opposed to a climate of opinion? But there’s also this third dimension: its ability to prevail on other Departments to deliver the sort of policies in those Departments that will enable BIS to deliver. So I suppose there are three elements of it. If you could just as briefly as possible sum up?
Matthew Fell: I think we would always say the starting point has to be creating the right climate for growth and that is something that stretches way beyond the role of the individual Department. If you think about the direct programme support that it’s able to offer, that inevitably will always be constrained to a certain number of firms depending on budgetary constraints and reach into the market. The issue that can touch on every single business in the country is the right climate, which would include economic issues, skills, tax and so on. So, from our perspective I think we would attach the highest priority and the most weight to its ability to perform those issues and reach into other Departments.
Roger Bibby: Yes, I’d agree with that. I think the first option you tabled was the Stalinistic approach. We don’t want that. We want creation of the climate for SMEs to grow and would welcome BIS taking that, where appropriate, into other Ministries as well.
Phil Orford: Briefly, the climate is allimportant and we are in a situation that all of us as organisations representing businesses didn’t want to be in. There’s an air of-sorry, I’ve just lost my train of thought slightly.
Mr Binley: Ambience.
Phil Orford: Yes. A bit of inertia. We have the closing down the RDAs scenario at the same time as the starting of the Local Enterprise Partnership scenario and actually there’s this chasm between the activities of both and that is not going to help the business support scenario that we are trying to achieve.
Q158 Chair : So, if you like, would you be saying-sorry I’m not trying to put words in your mouth-that areas of uncertainty have been created and one or two policy developments have made it more difficult?
Phil Orford: Yes, if you talk to all the RDAs, all the Business Links, in fact within our own organisations there is a definite uncertainty-that was the word I was looking for before-about how the landscape lies, with particularly business support.
Matthew Fell: I think it’s important to say on creating the right climate, though, that we would see the absolute critical role for the Department being one of saying on any policy coming forward from the Government, "What is its impact on growth? What does the business community think about that?" so it can identify what those impacts are, articulate them, so at the very least we’re making informed decisions about policy right across Government to say how does that impact on growth. If the Department were to do nothing else but that, a lot of people would take that as its primary function.
Q159 Mr Ward: Just on that, I think Matthew, again, you were mentioning the direct involvement and influencing role and I think you said that one of the areas where possibly BIS did not exert itself was in the direction of taxation policy.
Matthew Fell: I think that’s more on its influencing role actually. I think if you were to look back over a five or 10year period for where the Department for Business-in its current incarnation and its predecessor Departments-has punched below its weight in the view of the business community, I think that would be on tax policy and its impact.
Q160 Mr Ward: Would that apply to the VAT increase?
Matthew Fell: The VAT increase would be part of the mix, but everything ranging from corporation tax to employment taxes-
Roger Bibby: Capital allowances.
Matthew Fell: But I think the whole spectrum of that view would be that the Department hasn’t been as involved in shaping tax policy right across the piece as it impacts on the corporate world as it might be in the future and we would certainly like it to be.
Q161 Nadhim Zahawi: Thank you Chairman. Obviously the economic environment is still tough, but can I just get you to set your mind back to the beginning of the downturn and ask you how valuable was the help provided by BIS and if you could maybe articulate that through some examples of how valuable BIS was in helping businesses that are your members?
Roger Bibby: I think the best initiative of the lot was the keeping the HMRC Rottweilers in check last year. It became the unofficial fourth or fifth bank and that was incredibly useful. Without that I think a lot of SMEs would have gone under. The problem now is to wean them off it and that will take time, because just when there are signs of growth-there is no doubt about that-in that environment small companies need more working capital, just when they’re having to pay off what they should have paid last year. But that was a very useful initiative.
Q162 Chair : Could I just clarify? You say "wean them off it", you mean HMRC now in effect getting the money it had agreed to defer previously?
Roger Bibby: Well, they’re off the leash now.
Q163 Chair : Yes. Right. So you think, basically, the policy that was implemented previously should be sustained?
Roger Bibby: It would be nice to think that but you can’t have an interestfree loan forever, can you? It’s a question of how you wean them off it.
Q164 Nadhim Zahawi: You think that was the most valuable thing for small businesses?
Roger Bibby: Yes.
Q165 Nadhim Zahawi: With a plethora of other initiatives. Is there anything else that was valuable for SMEs?
Q166 Roger Bibby: I think the "dialogue"-let’s call it that-with the banks was useful. An ongoing process. Certainly it kick-started the banks that the Government have a share in into actually participating in the EFG. I was with Lloyds bank last week with a client looking for £130,000 EFG. That gentleman had just done a £30,000 EFG. So I think it is working: it’s not the half a million, it’s working lower down. So by that dialogue, I think it has forced the banks to get involved in that sort of lending.
Q167 Nadhim Zahawi: So you’re seeing signs of improvement?
Roger Bibby: Yes, indeed.
Q168 Nadhim Zahawi: Thank you. Mr Fell, I think you wanted to come in?
Matthew Fell: Sure. I would echo Roger’s comments in terms of some of the positive measures that were put in place in autumn 2008, around that time. The Time To Pay scheme to help with cash flow would be very near the top of the list I think-
Roger Bibby: Yes.
Matthew Fell:-in terms of positive things that were done. I think we would also attract favourable comment around the Enterprise Finance Guarantee, which can help lending decisions at the margins, so can help to improve things.
Chair : Yes, we will be coming to that in a moment.
Matthew Fell: I think it’s also worth noting that there were huge amounts of uncertainty in the financial crisis. It was uncharted territory for everyone: Government and business alike. So I think it’s not surprising to say that when you’re trying to introduce measures that can help, some were inevitably going to be more successful than others. What we don’t know is what the world would have looked like if none of that was done whatsoever, so I don’t think we should beat ourselves up about the fact that some fared more poorly than others too much. If you are looking for ones on the downside that were particularly ineffective, there was a major issue around trade credit insurance at the height of the downturn, and the major issue there was that everyone knew more or less what sort of solution was required but there seemed to be huge amounts of delay and prevarication in introducing it, by which time the world had largely moved on-
Nadhim Zahawi: That’s right.
Matthew Fell: -and sorted themselves out or firms had, sadly, gone to the wall. So there was a big gap between autumn 2008, when the problem was at its height, and when the scheme was introduced in late spring 2009, where those six months were really a critical period. I think the lesson to be learnt there would be one of decisiveness and faster implementation of a solution.
Roger Bibby: I think that’s absolutely right. It’s very volatile in the SME sector. Trade is very volatile, so we can’t wait a year, two years.
Q169 Nadhim Zahawi: Speed is of the essence, is it?
Roger Bibby: Absolutely. I remember in May 2009 talking to a bookkeeping agency, because I had anecdotal evidence from my client base that things weren’t too hot. Now, that bookkeeper-£500,000 fees a year-they get paid by the number of entries they make. Their fees from May 2009 were 21% down on May the previous year. It just fell off a cliff. So policy has to be good policy, and obviously has to be faster in implementation.
Phil Orford: Can I add just another point to that, if I may? I would take the view that speed on the whole was okay, in fact in some cases it was too fast. There were announcements made, and I think this was referred to in previous sittings, of initiatives that just weren’t ready for market, frankly, and EFG was an example of that. But more specifically on the Trade Credit Insurance and on EFG there was, of course, the small print that was written into these schemes by the Government; you’re all familiar with the "is it a 75% guarantee or is it actually a 9.75% guarantee" with the EFG, but there were also restrictions within the Trade Credit Insurance scheme that just made it completely unattractive for the industry to utilise it.
Nadhim Zahawi: That’s interesting
Matthew Fell: So I think going forward there needs to be that focus on delivery rather than just-
Nadhim Zahawi: Your point is well made. Chairman I think Brian wants to come in. I’ll go back to my question.
Chair : Yes. Before Brian does come in can I just make the point: it is my intention to examine this issue in some detail when we do our report on exporting. Yes, Brian Binley.
Q170 Mr Binley: It is this help from BIS. You’re talking about falling off a cliff. I’m non-exec chairman of a company I founded; we employ 140 people. We dropped 23% in turnover. That’s a massive falling off the cliff. In fact we heard nothing of any relevance at all from the Department that was of any help whatsoever at that time. It might have been talked about in this place and it might have been talked about as a good project, whatever help was supposed to be forthcoming, but it didn’t drill down to where the people actually do their jobs. Does my experience have resonance with your membership?
Roger Bibby: Yes, very definitely.
Mr Binley: I’m grateful for that.
Q171 Nadhim Zahawi: Obviously this is a very complex area and so my next question may sound over-simplistic, but I’d appreciate it if you’d have a go at answering it. What one thing do you think BIS can do now to help your members get back to growth and hiring people?
Matthew Fell: I would pick up two examples. One would be on the finance side. Roger’s comments around where we go from the current situation, as companies become self-sustaining and are weaned off the various support measures that are currently in place as a shortterm fix, that transition will be absolutely critical because we know the business failures occur most when firms are coming out of recession and activity is picking up and cash flow is the critical issue. So any of the measures that focus around cash flow and handling that transition would be critical. Second issue, I would say, is then in terms of providing the right supporting environment: what are the things that add to the business cost base and what action can Government take to make sure that that is mitigated, so that would bring into play anything around employment regulation, broader regulatory costs on business, the tax environment, all of which are external business cost measures. That’s where I think the Government can play their second role.
Roger Bibby: Yes, I’d echo that. First of all in finance, on the upswing, apart from working capital, it’s going to be development capital. I don’t see that as a role of a bank, to provide development capital. There are schemes in place like EIS, VCTs etc. Certainly I’m dismayed-the EIS scheme has the tax breaks for the equity, but there can be a case for highcoupon loans in that environment and they do not attract tax relief. It’s risky but that’s why there’s a high coupon. The banks don’t want to do it; somebody has to do it and there aren’t any tax reliefs there. So certainly financial instrument initiatives at the smaller end and we come back to the sort of red tape issues at the lower end. A whole industry has developed of outsourced advisers on employee regulations and one has to understand that below 5 million turnover there’s no formal board structure; there isn’t an HR department. The guy who owns it is probably selling most of the time and so everything else is getting in the way.
Phil Orford: Well, I’d echo everything that has just been said. These issues are what you might call the hardy, perennial weeds; they come back year after year and they’ve been with us for 20 or 30 years and we still don’t seem to have resolved these fundamental issues around red tape and tax.
Just for something slightly different, one of our big concerns at the moment is related to supply chain management. Now I know that’s very much in the hands of the business owner, but when you bring in competition issues and you bring in late payment issues, these areas are definitely where Government and BIS specifically can have a positive impact. We have the merging of the OFT and the Competition Commission; we’re hoping that that might be beneficial in looking at some of the larger players in the supply chain and some of the activities that they undertake with unilateral changes of payment terms, retrospective discounts and other things that do have a very significant adverse effect through the supply chain. But particularly late payment; we had the late payment regulations that came in in the 1990s. There’s been an initiative that has just come out of Brussels for a 30-day standard. There’s £24 billion outstanding in the supply chain in late payment alone. So, specifically if you’re looking for one, I’d say that’s an area to focus on, because if you can free that up it’s going to take some of the pressure off the lending issues from the traditional banks.
Q172 Nadhim Zahawi: Thank you very much. I’m just conscious of the time; Chairman, just very quickly, my last question: you obviously have seen the announcements in terms of the cuts that the Department’s having to take through the CSR. What is the most worrying for you in terms of support for your members in terms of the service that the Department offers vis à vis those cuts?
Roger Bibby: I think Business Link was past its sell-by date and going online with a lot of the initiatives was the right thing to do. I think there is a danger of throwing the baby out with the bathwater in terms of the Innovation and Growth initiatives where there were some interesting clusters. I’ve come from Buckinghamshire and Milton Keynes and High Wycombe, where companies right across the spectrum of activity were being nurtured and there has been a cut-back in the budgets helping those companies. One guy running one of the portfolios is down from a fiveday week to a threeday week. Now that doesn’t seem to chime with "we need to grow in the economy", so that is disappointing.
Matthew Fell: We would err toward the side of the argument that said perhaps the biggest longterm threat was a failure to get the deficit under control, so I think the starting point is the right one. Inevitably that creates pain depending on where the cuts are going to fall but our starting point would be to say that that has to be the right course of action. The only observation I would make in terms of impact on the business community is that in my experience there was a huge amount of uncertainty before the announcements. That in fact put activity on hold because no one knew where the cuts were going to fall and how it was going to impact upon them. So I would say the one practical thing that Government could do right across the piece from now on in would be to provide absolute clarity on where those cuts are going to be, how they are going to be managed, and how they impact on firms. Then people can start to take action and plan around those cuts with a much greater degree of certainty and that helps to build confidence going forward. So I think that’s a real practical thing that can be done.
Roger Bibby: The nation was waiting outside the headmaster’s study for too long for the 20 October announcements and you’re absolutely right, it froze decision making. There has been a surge since, but whether that is genuine growth or a catch-up remains to be seen.
Phil Orford: In terms of the landscape of uncertainty, the RDAs are talking now about being in closure mode. They are not focused on looking at what they can do to support their regions. Of course, in terms of Local Enterprise Partnerships and in terms of the Regional Growth Fund, applications for that fund are open until midJanuary and in fact awards are only going to be made next April. Now, that is a long period of time without any significant activity in the area, to be honest with you.
Chair: Can I move on? We have had a long inquiry into RDAs and LEPs and to a certain extent covered these issues, but you can rest assured that we are well aware of them. To a certain extent you have anticipated Katy Clark’s next question, but there are a couple of questions I want to bring her in for.
Q173 Katy Clark: You have mentioned a specific concern you have about cuts in a particular scheme and earlier on you mentioned your concern about the implications for Higher Education if it has the budget cuts that have been announced. Now that we have had the Comprehensive Spending Review, we have a far better idea of the kinds of cuts in funding that BIS is going to receive. Do you think that is necessarily going to mean that valuable schemes and services that are of benefit to business are going to be affected?
Roger Bibby: No. Looking at it in the narrow context of Government support for SMEs, as I have already said, I think where it could hurt is on the Innovation and Growth Initiative. Business Link had run its course. As has already been said, business is not stupid; they knew there had to be severe cutbacks to contain the deficit. So nobody is after a free lunch; it never did exist. But it is a question of a bit more selectivity. It would not have cost much to keep the Innovation and Growth Initiative alive. Well, it is still alive, but it would have been peanuts compared with the noughts off the end of the table we are talking about in other matters.
Q174 Katy Clark: We have heard evidence previously about picking winners and the Department itself has said that it is willing to adapt policy, in particular in sectors where there have been potentially large economic gains to be had, to help those sectors succeed. I know you have touched on this previously and it may be something that you are just not in favour of at all, but where in your view does Britain have competitive advantage? If there were to be sectors that were to be targeted for support by BIS, what do you think those sectors would be?
Roger Bibby: Well I would refrain from picking individual sectors, because it is the management of individual enterprises that will decide whether they are viable or not. I think this eco focus is very topical, but is it deliverable financially in terms of getting a good bounce of your buck?
Matthew Fell: Where I think the Department in terms of its sector capability can play a very important role is not to be cherry picking particular sectors to back, but it is about having an understanding and building up a sector capability within the Department so it understands across all the parts of the economy what the particular drivers are in that economy and what the roadblocks to growth are in each of those, so then it can act upon those from an informed base on an understanding. So I would say the critical role for the Department is almost to have an account management mentality, if you like; to be saying, "In some of the areas where we know we have comparative advantage-pharmaceuticals, creative industries, high valueadded manufacturing, for example-we are not picking winners and backing those solely at the expense of others, but what we are doing is understanding what the investment decisions that are going on in some of those companies are, what is making them choose the UK over our international competitors and where there are barriers or roadblocks to growth in those sectors, understanding those and helping to unlock those barriers."
Q175 Paul Blomfield: I think I would like to follow on from Mr Fell’s response to that last question. You mentioned the role of the Department where we have competitive advantage in sectors. Is there not some role in identifying areas where we might have competitive advantage? I guess that leads on to a more general question about the role of BIS in terms of having a larger and more proactive role in long-term economic planning and strategic development and how you feel the Department has played and should be playing its hand in that area.
Matthew Fell: I think this has to come back to building blocks for economic growth. I do not think the Department would necessarily have any better track record than me or anyone sat on this panel in terms of being able to say with a great degree of certainty where those future winners are coming from. We would certainly not advocate the Department being in that game. What I would say is it should be about those basic building blocks for growth that can help to facilitate any new industry growth. I think those always come back to a number of fundamentals in the economy. Have we the right skills base? Is it a competitive tax regime? Is the economy stable and growing? Have we the right regulatory climate? I think all of those issues would have to be at the foundations for growth and they would apply to any sectors going forward. I do not think we should be trying to second guess what the winners of tomorrow are.
Roger Bibby: I totally agree with that. It is back to the Stalinist approach, isn’t it, which we do not want. Also, is BIS even remotely qualified to judge what industries could grow? Have they ever been and run an SME business, for instance? Or are they business degree addicts, or what? What gives them the right and the street credibility to identify sectors?
Phil Orford: I think I would slightly disagree. My view would be that BIS’s role is to be very strategic. There has been much talk-preelection, preCSR and now postCSR-about the obvious need to rebalance the economy to a more industrial, manufacturing, servicebased, maybe less so on the financial sector, although that is very vital to our economy. There is already an initiative, with the Regional Growth Fund, to identify transformational projects, primarily with a regional slant, and I do not think we should ignore that aspect to what is going on with the interventions where they are made. What I would also add to that is small businesses particularly, but many large businesses as well, are the innovators; they are the ones who adapt to change; they will be the ones that will drive economic growth. But they need a strategic lead. That is I think where Government have to come in. We need to understand long term and medium term what the strategy is, whether it is green, whether it is pharmaceutical, whether it is nuclear or aerospace; whatever it might be, we need to know that those sectors are going to be focused on-on an international scale, not a local scale-so that the businesses ready to innovate in those areas have the confidence to make those investments.
Q176 Nadhim Zahawi: I just want to pick Mr Bibby up on a point that you mentioned. I think you are quite right to say that the Department should not be picking winners. I obviously am someone who has started an SME. But where I would just want to push you a bit further is: it can only be right for the Department to at least collect evidence, because evidencebased strategy is the right way forward. In my constituency, for example, we have a cluster of automotive supply chain, so you would want to understand what is happening to that sector and how you can help it to grow, rather than having a complete "strategy in the dark" situation.
Roger Bibby: Yes, but I think that is very different.
Q177 Paul Blomfield: If I might, my followup question would have been along similar lines, in terms of what is the role of the Department not in imposing, but working with business to develop strategy?
Matthew Fell: I think if I could just refer back to the comments I made, though, about building up a sector capability and understanding those drivers. So your point exactly would be to say, "Where there is emerging strength, for example, can we really understand what is creating that growth and what the barriers are to future growth and then help to knock those down?" It is not saying, "Let’s artificially create something out of a vacuum." I think that is how I would square off the two points.
Q178 Paul Blomfield: Mr Bibby mentioned earlier the importance of development capital and in one specific context that was a reason for the creation of the Strategic Investment Fund, which is coming to the end of its life. But I wondered what your thoughts were on whether that was a good vehicle and whether we should not have been looking at extending it beyond April 2011.
Roger Bibby: Well, I agree with the last point. It was so artificial, wasn’t it? Development capital and scheme and then all of a sudden the guillotine comes down. Development capital is a long-term issue; you cannot just say it is on the supermarket gondola for 12 months and then it is gone. It is back to creating the right environment, isn’t it, for small businesses and consistency of policy? So I would agree totally with your comment there.
Matthew Fell: I think that is absolutely right in that the Government have a clear role to help to address some of the longer-term structural issues.
Roger Bibby: Yes.
Matthew Fell: This development capital and equity capital issue is not something that has arisen out of the financial crisis. It has probably been exacerbated by it, but it has been a longstanding issue. So what is the role of the Government in helping to tackle some of those? Clearly getting the regulatory and tax environment right to attract investors in the first place would be part of the mix. They can certainly play a role, as they do through this scheme, in putting down some initial capital that can then get a multiplier effect, with private-sector money sucked in as well to have a broader and bigger impact. And I think they can play a role in bringing together a number of different public funds to create a critical mass, for example, that makes it a much more efficient form of investment, so you get a better return on investment. Then they can also play a role, I think, in addressing some of the demand side issues to ensure that firms are investmentready. I think that particularly is when you come to look at the development and equity capital side of things to help build up some of that capability and understanding so that you are ready to make that leap to the next stage of growth when development capital is critical.
Q179 Paul Blomfield: Thank you. Mr Orford mentioned the Regional Growth Fund. I wondered what your thoughts were in terms of the role that it can play in stimulating private-sector growth and long-term economic development and across the sector; whether the framework for applications is going to be limiting for some SMEs with the emphasis on "S", as you described it earlier.
Phil Orford: Yes. The size of it is obviously of concern; £1.4 billion over three years-roughly £460 million a year-is not a huge amount, probably less actually than one year’s funding for some of the northern RDAs. So that is one area of concern. I think where it is allocated is still unclear. The scope of bids has been left very broad. Words like "transformational" have been used to guide, but what exactly does that mean? Is that related to sector or region; is it related to employment? I share your fear, actually, that the remit may be too large and in fact the bidding size of £1 million may be too low to be able to facilitate a scale of provision that is going to be economic and fruitful. In fact, I think Lord Heseltine this week is on record as calling for joint collaborative bids to be made at a much higher level than £1 million because the Department does not have the capacity to handle many smaller bids. So certainly that is where I would say I have some significant concerns.
Q180 Paul Blomfield: Thank you. The evidence we received from the TUC suggested the creation of a £5 billion investment fund along the lines of a similar one operating in France, which would enable the Government to act as a friendly investor in industries of long-term strategic importance. Would you support that sort of approach?
Matthew Fell: I think our view would be that if you take a step back from that specific proposal and say, "Where should Government be playing a role and where should it not?", the first thing is it has to be addressing a clearly identified market failure and it should also be largely transitional in nature, to address any problems. So I think you would need to be taking a step back from that to say, "Where is there a clear example of market failure? Is that something that we need to help a transition in?" I think we would also need a test to make sure it was not crowding out any private-sector provision or market solution. So I think it would need to be assessed against those criteria before you give it a green or a red light.
Roger Bibby: Yes, the role of the Government is as a facilitator. I think that is the best way forward.
Phil Orford: And I think the market should be allowed to develop. The banks have already put forward their £1.5 billion capital fund. 3i have followed that with a £1 billion announcement. We are not far away from a £5 billion fund there, organised through the private sector. I think there will be a lot of movement in this space over the next couple of years.
Paul Blomfield: Thank you very much.
Q181 Mr Ward: Talking of banks, you have no doubt picked up the debate that we have had and indeed many people are having about banks’ relationship with businesses and the game of tennis that is going on: "Yes, we are willing to lend." "But you are not lending." "Yes, we are willing to lend," and so on. So really just some reflections on that and broaden it possibly to the general relationship as you see it between the two sides-banks and businesses-at the current time.
Roger Bibby: I think it is an uneasy relationship at the moment. There are cases where quite definitely SMEs should not get any more money. I had one the other week: £400,000 turnover beyond supplier terms, £200,000 worth of debt and they wanted more debt to solve their problems. Well, quite clearly that would be a wrong step.
Having said that, I think there is a lot of unease in the relationship. There is all this talk about lack of competition in banking and I think the people who make those comments have to be very, very careful, for two reasons. One: there are not enough good banking staff to go round. There is a pool of talent that has been neglected by the banks and there is not enough to go round, so putting in a new entrant, all that is going to happen is they are going to cherry pick the best ones from the existing banks and move across.
Secondly, if someone is behaving badly as a bank and they say, "Well, they have to be split up; we will give it to another bank," what I do not think is clear to people is that there are huge software issues. I can think of one particular bank-that shall remain nameless-that has made four acquisitions in the last three years and has four software platforms. They are trying to integrate them and there are huge problems. That does not solve anything. So I think we have to be very careful.
I also believe that as and when this crisis is over, there is going to be a huge migration of customers from banks that they are locked into at the moment. People will not forget how they have been treated. At the moment they are locked in, but there will come a day when they will migrate.
So what can be done at the moment? I think constructive dialogue with banks, rather than just bashing. But I really do think somebody needs to push them. They had all these billions of profits and they have palpably failed to keep their software up to date. A lot of it has Elastoplast on it. Those are not my words; those are the words of a chief executive who took over another financial institution. It was 1970s software.
Matthew Fell: Perhaps I could come in. We have recently conducted a survey of our regional council network to try to get behind some of the headline numbers about what is going on with lending just to understand the latest snapshot of that. I think if you look purely at the numbers, you would see that on a macro level, lending has broadly been restored, but there is a sharp contrast between gross and net lending flows, which largely reflects the weakness in the demand side at the moment. Secondly, you would find that smaller companies are perhaps inevitably still finding life the toughest of all because the credit-scoring mechanisms make lending more difficult for the banking community. Thirdly, there are a number of sectors in particular and sizes of business where accessing lending is still particularly difficult. Ones I would pick out there would be sectors that do not have much in the way of physical assets to lend against; I am thinking of the creative industries-firms that are rich in intellectual property but do not have the hard land property, plant and machinery to secure lending against-and also anything in a property-related sector, where bank loan portfolios are still very heavily skewed towards that sector. They are, not surprisingly, trying to move away from those, but it does mean that if you are in anything that touches on those sectors at the moment, then lending is still very difficult to come by.
Then I think, with a forward look, there is certainly a question mark around export finance and we will probably come to look at some of those issues. We have already touched on issues at the midcap point in the market, which is a combination of debt and equity finance; what more needs to be done to fill that space. And we have certainly picked up a much greater appetite from our corporate members to diversify forms of finance where in the past they have been over-reliant on bank debt lending. There is an appetite to diversify that, including emergence of a lot of supply chain finance and issues around that. Looking forward, you mentioned relationships and I think that is perhaps one of the things that is going to be most difficult to fix in all of this. Issues around costs, risk appetites and all of that I think will come back over a period of time. Relationships were very badly damaged at the height of the financial crisis, where people found that if they had banking relationships that spanned back a decade or more, they seemed to count for very little at the height of the crisis when credit lines were pulled unilaterally. I think the only way forward on that front is a much stronger and sustained engagement on the ground from the banking community in among their business customer base, because I think there is a perception at least, if not a reality, that lending decisions are all too often punted up to central credit control and there is less autonomy now in terms of local decision making, branch networks and so on. I think getting those relationships fixed-
Q182 Mr Ward: Just on that point, and going on from what Roger was saying, which is to say that there may be a lot of businesses that will change banks.
Roger Bibby: Yes.
Q183 Mr Ward: But are they not then going to change to banks that other people are changing from for the same reasons?
Roger Bibby: To some extent. I think, though, that the appetite for small business lending is quite muted among the high street banks. Some have very different business models, and that is their right; they have to look after their shareholders and the "S" in SMEs does not necessarily figure very highly in that. The other thing I would say is, when the banks say, "Well nobody wants our money," I am sure I know quite a few businesses where they would love to apply for more money but they are petrified that if they do, they open Pandora’s box and the bank will say, "No, and by the way, we will have what you owe back straight away as well." So all is not what it seems.
Matthew Fell: It is also worth not losing sight of the demand side picture as well, because I think there is, as Roger alluded to there, a certain riskaverseness still in the business community. Companies, not surprisingly and entirely rationally, are looking to derisk and deleverage their balance sheets. I think that is still the predominant state of mind at the moment. So there are demand and supply side issues going on here.
Q184 Mr Ward: Does BIS have a role to help with this relationship?
Matthew Fell: I would say the role that Government and BIS can play in this is some of the forums to broker discussions between the two parties. I think those have been, on balance, deemed helpful. Clearly, they are not going to change lending flows by a factor of 10, but what they can do is help to understand the different drivers on each side of the equations. So for the banks to be hearing what the perceptions and issues from the small business community are and equally for small businesses to be understanding what the lending criteria are from banks and what the capital requirements are that are placed upon them, so that they can understand and make sure that their business plans and business proposals are as user friendly as possible in the eyes of the banks. That helps to unjam some of those lending flows.
Roger Bibby: I think also when one gets the answer from the banks, "Well we spend so much money on training our staff," they do spend a lot of money; there is no doubt about that. But what do they spend it on? It is usually how to crosssell financial products, not on the good old-fashioned skills of passing your banking exams. There is a huge amount of work to be done by the banks on getting back to training their business development managers and business relationship managers in good old principles of banking.
Phil Orford: If I may, there is an opportunity in this area and the opportunity came actually from the last hearing, where Peter Ibbetson said something along the lines of, "The banks are not constrained by capital and liquidity to provide more lending." So they say demand is down; that may be partly the case, but they are now saying they have sufficient funds to lend more. I think it is incumbent on all of us in the business community, for all of you in the House, for the banks themselves and for BIS, importantly, to say, "Great. Are they doing enough? We know what they are doing, but are they doing enough? More importantly, can they do more?" Frankly, I think they can and I do not think they are doing enough.
They have ways of innovating with products, for a start, which would make finance more available. Just one quick example of that is that invoice finance-whether you describe that as factoring or confidential invoice discounting-is now a larger lending pool than overdrafts. 30% of that lending pool is actually from nonbanks; something in the £4 billion to £5 billion region is provided by the private sector. So money is out there, available. Just on that same point, I was actually at a conference last week that was a commercial finance brokers’ event. They are at the coal face; they say demand is there, very much so. They could lend more money, but they are struggling to get that.
Q185 Mr Binley: First, can I just ask, where are they going to migrate to? They are going to migrate from like to like. That is the massive problem with our banking system at the moment. So I would first of all like to know how we change the banking system to become much more competitive, much less a trade organisation that seems to only be bothered about its own interests and to do the job they need to do in the high street, not in the casino gambling centres in the City. The second point I wanted to make is about the way banks are forcing small businesses-who quite like overdrafts, actually-out of overdrafts into loans and worse still, they are forcing them into factoring. The only advantage of factoring to the banks is they get much more money from it. How do we change those two factors?
Roger Bibby: Well first of all, with respect, there will be migration and that will cause a political outcry because market shares of the better banks will go up and then they will say, "Well we need to break up that bank." So there is a problem there. Secondly, as far as assetbacked lending and invoice discounting factoring etc is concerned, to prove my point on migration, there is a huge migration from invoice discounting with the banks to invoice discounting with independents. One of the leading independent invoice discounters, in the six months ending June, 70% of its lending was snatching business from one particular bank. 70%. Invoice discounting is thought to be dinner with the devil by a lot of people. It need not be. It depends how you market it. Certainly, the banks have not been good.
Why do they want it? One, because of the famous legal case, priority of debt, several years ago, which upset the apple cart. They thought they were safe, but the invoice discounting people ranked higher and somebody went bust. Secondly, they do not like overdrafts. Why? Because they do not know when they are going to be used and not. It is, in their eyes, an inefficient use of capital in the current crisis. Thirdly, with Basel III, are we seeing the death of the overdraft for that same reason? Invoice discounting factoring can be appropriate in the right circumstances and it is quite clear-again, market forces-the independents provide a more flexible and efficient service.
Matthew Fell: Competition in the banking sector. There are high levels of entry to that sector and I think the important thing to get right, which is a number of the issues that the Independent Commission on Banking is juggling with, is the tradeoff between how you get a much greater degree of stability in the sector-where the starting point is raising the levels of capital for banks to hold-and how you encourage new entrants and greater competition in the sector. Getting new players in the market is the fundamental way that I think you go to address your question. The second issue I would raise, though, is how do we go about reattracting foreign banks into the corporate lending market? I think at the onset of the crisis, something like 40% of the market was occupied by foreign banks in some form or other. Those have now largely gone from the UK market for the time being, so I think reattracting those back to play will be a key part of the equation in terms of much greater competition in the sector. I think there, we need messages around regulatory certainty facing the banking sector and making sure that the UK does not go it alone and instead actually enforces a much greater international set of agreements in reforming the financial system; if we raise the bar in the UK relative to elsewhere, there is no way we are going to reattract those foreign banks who will play such a critical role. I think they in particular played a key role in the SME banking sector before the crisis.
Q186 Margot James: I will ask a couple of different questions on the same theme, if I may, because I think most of them have been answered. I would like to tell you what the banks told us. We had banking come to our last session and separately to that I have had a meeting with RBS. As regards Basel III, they stated that there was not going to be any impact on their ability to lend to SMEs; the increased capital requirements of Basel III were not going to affect their liquidity. I would be interested in your comment on that. RBS stated to me in a meeting a few weeks ago that it the Independent Commission on Banking is juggling with had £43 billion in outstanding overdraft facilities to the business sector that have not been taken up. So I was wondering, in light of your comment about the fears businesses have about applying for more overdrafts lest they be cut back, whether you are surprised by that figure and what impact that has on your view of their willingness to lend at the moment. RBS also said that 85% of their requests from businesses for loans were granted on the same or lower interest rates from 12 months previous, which makes me think that the cost of lending, according to them anyway, is not the issue that we are led to believe from the business community that it is. I wonder if you could unpick some of that for me, please.
Roger Bibby: Okay, well I think there were three questions there. The first was about will Basel III make any difference? My response to the banks’ response is, in the words of Mandy RiceDavies, "Well, they would have said that, wouldn’t they?" Second is with regard to overdrafts. That is the dilemma for the banks, first of all; if they have unused overdraft facilities, from their point of view it is an inefficient use of capital, because they have to calculate that it will be used at some point. But on the other hand, the whole purpose of an overdraft theoretically is that you are not up to the limit of the overdraft all the time, otherwise you need a loan. So there is a delicate balance there between those. Now your third question was-
Q187 Margot James: My third question was about the cost of lending and the fact that they say 90% of the loans they granted were on the same or lower interest rates than 12 months previously.
Roger Bibby: And 85%-
Q188 Margot James: 85% were accepted.
Roger Bibby: That’s right.
Q189 Margot James: If there are reasons to cast aspersions on that information, I would love to know. That is why I am asking the question.
Roger Bibby: Well I think as far as the 85% is concerned, part of my business outside FSB is sourcing finance for clients. There are people who want the money and they will not go near a bank at the moment, for reasons I have already said; there are those who would like to get the money. What do people like me do? They do a one-page pen sketch of the situation, send it to the business development manager: "Do you think this will fly with your credit committee?" A lot get thrown out at that stage, so they do not appear in the statistics.
Q190 Margot James: Ah, right. So they are not official applications; they do not turn into official applications?
Roger Bibby: That is right. As far as the cost of the money is concerned, I think, bearing in mind low interest rates, a lot of people’s interest rates are not that bad, but according to the risk profile, there are some horrific stories around of late teens interest rates from a major high street player. But you then have to delve to think, "Why? What were the particular issues behind it?" Because obviously there may be a risk profile that causes that and I do not know the individual circumstances in those cases.
Matthew Fell: I think on the capital side of things and the impact of Basel III, the UK banks are clearly in a much better shape in terms of meeting the Core Tier 1 capital requirements. They need to get to 8% by 2015 and all of the major UK banks are already in excess of that and even at the bottom end of that scale within a whisker of it or there already. So I do not think overall that will have a huge impact on lending. In our judgment, it seems that has been calibrated quite sensibly and carefully. I think within that on the capital side, there are potential impacts both on the small business front and on trade finance, where those debates are still being played out as to if the capital rules would inversely impact on those. But at a headline level, I think we see that being okay.
On the point about overdrafts not being drawn down, I think all the anecdotal evidence that we have picked up would suggest that if you look at that macro-picture again, then overdrafts are not fully utilised and the banks are consistent in saying that. The element that I would just refer back to there is on the sector differences. I think clearly that tells a very different picture once you get beyond the headline macro level as to overdrafts. There are parts of the business community that are less attractive; those I mentioned earlier: firms who are rich in intellectual property, property related sectors and such like. So I think there is a mixed picture across business, but the uniform overall level overdrafts are not fully utilised. On approval rates, that I think is pretty consistent. We ran a survey with the ACCA quite recently on small business finance and one of the findings from that was that approval rates were running at three-quarters, 80%; something of that order, which I think is pretty consistent with the bank data on approval rates overall. We do not see that as being a major problem. I think they are broadly consistent with where they were pre2008.
Q191 Nadhim Zahawi: Just on that point, did you look at approval volume? Because rate may be fine, but did your survey look at that?
Matthew Fell: What it does not capture, as was alluded to, are the "nonapproaches" to banks. Clearly, that is almost impossible to capture. If the word of mouth or the negative impact stops firms approaching banks, then that is inevitably phenomenally difficult to get to the bottom of and that is something that we did not pick up in the survey.
Roger Bibby: I think if you looked at sectors, the banks understandably are pretty apprehensive about the retail sector and construction. So a lot of people will say, "Oh they won’t give me any money anyway, will they?" and they do not bother to apply.
Margot James: That is a rather unsatisfactory response, really, isn’t it?
Chair: I congratulate you on your Mandy RiceDavies quote, but I think there is only thee, me and Mr Binley who are of the generation who knows who she was. Simon.
Margot James: That’s very kind, Chair.
Roger Bibby: But none of us were customers.
Mr Binley: You speak for yourself.
Q192 Simon Kirby: Thank you, Chair. All three of you have alluded to some businesses being attracted to derisking strategy and I was quite interested to read the written submission from Mr Orford where you say that there is a real chance that any recovery may be a jobless one because businesses will be using their own profits to grow from rather than having their fingers burned by going to banks. Do you really think there is a chance that we will have a jobless recovery?
Phil Orford: Well I think there are two parts to your question there. Yes, that research was part of what we call our Economy Watch panel and that was measuring the change in our members’ attitudes as we come away from the recession. There was a genuine concern that they felt that they had to go to greater lengths to prove their credit worthiness, that even if they did that they came up against some of the objections that have just been debated at length with the banks and that therefore they were relying more on their own reserves-whether that was personal reserves or business reserves was unclear-to fund their business. Now, clearly from a longer-term perspective that would raise concerns about their ability to fund growth.
It is an extremely complex subject, because it is not only about the banks’ willingness and the banks’ risk strategies; it is also about the business’ ability to manage the supply chain finance and it is actually also about the business’ ability to provide the sort of financial and management information to their prospective lenders that is of a quality that is going to get them past the finishing line. Again, that all links in with the volume of approvals. A lot do not even get to the approval playing field because they are rejected at an earlier stage.
So I think bringing that together, our submission was based upon the fact of all three of these factors having an adverse effect on a business owner’s ability to think medium and long term about investment and growth and therefore employment. Now, we significantly hope that that is not the case and all of us as organisations will be working hard lobbying to make sure that in all three of those areas some finance can be freed up.
Simon Kirby: Thank you.
Q193 Margot James: My last question is on the small businesses, as opposed to SMEs, because most SMEs were once small. I am concerned when I hear that the current banking model does not find it cost effective to loan to the small end of the market and I wondered what your view was of whether that is true or not and whether you feel that the BIS Department should do more to encourage alternative forms of equity and loan capital for the small end of the market. I am thinking of cooperatives and that sort of thing.
Phil Orford: Can I come in with a specific example on that, which might help? I agree with what Roger said earlier in terms of the cost: the higher costs do tend to be at the lower end, so your £5,000 to £20,000 to £30,000 area is where you tend to find the banks charging higher rates. I suppose you could argue to some extent that it is market forces and that the costs of providing lending are similar regardless of size.
On the alternates, absolutely. There are some innovative activities already taking place in this arena. A small company called Funding Circle launched itself just three months ago. Funding Circle is a peertopeer lending and borrowing environment and I was very proud of the fact that while the investors in that business were the founding lenders, our members were the founding borrowers. We were able to point members in the direction of an alternative form of lending that has proved quite successful. It is not huge; £1.5 million. It does not sound a lot, but it is approximately 50 small businesses, an average of £30,000 each, at interest rates of about 4% lower than they would have got through the traditional banking. Now, you extrapolate that to the £1.5 million and that is £60,000 in interest charges alone that is retained within those 50 small businesses. So there are mechanisms out there and I think BIS ought to be encouraging more of them.
I will let my colleagues come in, but can I just say on that point, there is an issue-and we are probably going to talk about EFG later-in that that organisation at the moment is closed out from supporting that lending mechanism via EFG. That is because Capital for Enterprise is closed to new applications. I think you have heard evidence already that the Big Six lend something like 96% of EFG funds. There is a huge number-I think Mr Binley referred to 27; EFG is actually available at 45 access points, but a huge number of them have the facility of the guarantee but just are not using it at all. So I think that is an area that specifically the Committee could look at talking to BIS about: reviewing it to get rid of those that are not using the guarantee; and allowing those that are capable of providing alternatives into that scheme.
Margot James: Thank you.
Q194 Mr Ward: We have already had a couple of references to Stalin, but I am just interested in whether you think we are at the point where some Government backed rules are required or whether this is, as you also mentioned Roger, staff training or even the culture of banks. Is it to be developed naturally between the banks and the businesses or is there a role for Government?
Roger Bibby: It is a very difficult balance, isn’t it, between being prescriptive and interfering with the free market, where the banks have shareholders to appease, and steering, shall we say? But I do think that the debate will rumble on with the banks. I think one has to be constructive about it. You can go and listen to the taxi drivers-anybody-and they will all bash a bank, but it is a question of helping the banks to help the "S" market. Let’s be fair to the banks. I know-and I am sure my colleagues do-in the boom days there were small business owners who had funding facilities, they made money and they hoovered all their profit out in a dividend, leaving the bank to keep funding the business. They did not reinvest in the business themselves at all. Now, those days should be over, quite rightly. So one should step back from just bashing, bashing, bashing and understand some of the problems the banks have, but where there are reasonable grounds for steering them-I come back to training and software particularly, because there are some horrific examples about.
For instance, I will just quote one: a building society where somebody wanted to move money from that building society to another one, outside this group of building societies that had been taken over by a bank. This lady pressed the button for the £1,000 to go from that one to that one. It immediately appeared in that one as received but it still, for 24 hours, stayed in this bank as £1,000 there. So theoretically, she has £2,000 for a £1,000 transfer. That particular lady is an accountant so she picked it up straight away, but if you were running a business along those lines, several transactions, you could get in a hell of a mess with your cash flow. It is crass in this day and age for that to happen.
Q195 Mr Ward: Did she get interest on both and did she declare it?
Roger Bibby: Being an accountant, probably.
Q196 Mr Binley: Very quickly gentleman-from my point of view and yours-the Government have put in place lending agreements with both Lloyds and RBS that last until February of next year. Are you confident that funding will be available after this date as the economy moves out of recession? Doesn’t Basel III in truth give us some hope in that respect? Although it is complicated, there is a thought that if money is lent to Government that they guarantee, it remains capital reserve. Shouldn’t we be unlocking some of that? Shouldn’t that be our message to the Government?
Roger Bibby: I agree with that. I do have a worry about when payback time comes for those two particular banks, because there are huge amounts involved, aren’t there? We are talking telephone numbers. If Basel can help, fine; if it cannot, do you push back the date?
Mr Binley: I do not know.
Roger Bibby: Because I think the first quarter next year is not going to be very clever for economic activity. It could be the worst timing of all.
Q197 Mr Binley: And with the Irish situation, the euro and all of that, you are a little fearful?
Roger Bibby: Yes. It is a cocktail, isn’t it?
Phil Orford: To answer your question, the answer is no, we are not sure. Again there are many things coming into play here. My message would be really for Government to continue to push the banks and for BIS to play an active role in that; for you as individuals when you can as well. It seems clear that they can lend more. Let’s test it. Let’s get everybody testing it and see what their resolve is, because then we will know what the truth is. That growth phase is going to be particularly vital.
Mr Binley: Absolutely vital.
Matthew Fell: Long term the answer should not be topdown directed lending, but I would be entirely sympathetic to your view about an issue of timing and carefully judging that. I think much more important, though, are the issues about getting lending decisions pushed back down to on the ground. That comes back to the rebuilding relationships and trust issue. I think that should be a priority and I also think then, with a view to the medium and the longer term, making sure there is much greater regulatory certainty and a route map for the banks so that they know the rules of the game that they are lending against. I think those will be two more important issues over the long term than the topdown directed lending approach.
Chair: This relationship issue is one of the things that the banks’ Business Finance Taskforce is addressing. I just wanted to bring Brian in to ask a couple more questions on that.
Q198 Mr Binley: Yes, because last week the banks praised the work of the Small Business Banking Forum. Are you confident that the two new bodies-the bankled Business Finance roundtable and the BISled Small Business Economic Forum-will work just as well, or are we talking about more bureaucracy upon bureaucracy?
Matthew Fell: Well I think the Small Business Economic Forum, as the name suggests, has broadened the frame of debate, if you like, whereas the other was focused explicitly on banking relationships. I think this is designed to be more about the broader economic climate that supports small business. I would say in that there are, quite obviously, still a number of unresolved issues that are banking specific for the small business community, so it would be important not to lose sight of those. On the question about the effectiveness of these various forums, as I said earlier, they are not going to be the vehicle that changes lending flows by a factor of 10, but I think we have seen examples of helping to stimulate some dialogue. If you go back to the onset of the crisis, one of the concerns we heard from our corporate members was that there was a low level of awareness on the ground of the various support schemes that were put in place and that was relayed through these forums. So the message was to the banks, "You need to do a much better job in pushing out messages and understanding of the measures that are available to draw down on." So I think it all comes back to that dialogue point again. So helpful, but it is not a silver bullet.
Q199 Mr Binley: Can I just add, what practical help will they be to small business on the ground? I want to understand how they really can help your members.
Roger Bibby: I think the problem is that in the title, "forum" sounds like a talking shop rather than an action. There are any number of these groups talking and there is not definitive action.
Matthew Fell: I think the example I just cited, though, would be just one where that was the case; this point about the message had not got out, percolated through the branch network, of how to operate and how to utilise some of the support measures that have been put in place as a transitional scheme. I think then those forums did play an important role in getting that message back to the banks, who then pushed the awareness and the training out through the branch networks.
Q200 Mr Binley: But it was a very patchy result, wasn’t it, from bank to bank? A very patchy result, actually.
Phil Orford: Can I just make a distinction? The Small Business Economic Forum, of course, is the Small Business Finance Forum as was, in new form. I have to be honest: for me, it is a vital forum. It is an opportunity with Ministers, the banks and the business bodies in the same room to really hammer out some of the bigger issues. It works and that is why we were very keen that Mark Prisk carried that forward. The Banking Taskforce forum, of course, is completely different. The Taskforce report related to funding private-sector recovery. A lot of what is going on in there is related to the Growth Capital Fund; the £1.5 billion equity fund. A lot of it is also around how they can facilitate a mentor network; this is a mentor network related to banking mentors, finance mentors as well as general mentors. A "network of networks" is the way it has been described.
Now, it is clearly in the Government’s or BIS’s interests to have the banks fund those sort of mechanisms, because there isn’t the funding there available to do that themselves. I think we have to wait and see what comes tangibly out of the Banking Taskforce forum. I sit on it; the first meeting was only two weeks ago and I did find it helpful. But I think we should make sure we maintain this distinction. One is very much about Ministers, banks and business bodies in the same room across a table; the other is actually about implementation of what has come out of the Banking Taskforce report.
Q201 Mr Binley: So we need a little time before we really know the definitive answer, then; is that what you are telling us?
Phil Orford: Yes, and I think you can feel reassured that the business groups are in both of those pushing for a faster pace of change.
Mr Binley: I am grateful to you. Thank you.
Q202 Katy Clark: When we heard from Angela Knight, she suggested that the application of the Enterprise Finance Guarantee Scheme has improved in recent times. Do you agree with that?
Roger Bibby: The volume of applications has certainly improved and the pace of decision making, which was a key issue not only for this but for the previous scheme-the Small Loans Guarantee scheme-has improved. It was a slow takeup to start with and then the banks got it and they started to improve.
Q203 Katy Clark: So what do you think the source of the initial problems was? There has already been mention about problems when you have a quick introduction of schemes. Do you think that was why there were originally problems or do you think it was something more fundamental?
Roger Bibby: It was miscommunication at the start over the guarantees, wasn’t it?
Phil Orford: Very much so, yes.
Roger Bibby: You could go into a room and get three different answers, so that was a key issue. And then it was the attitude of the banks to start with; most definitely. Eventually, they realised that they had to get on with it.
Phil Orford: Some of the initial announcements frankly gave the impression that it was a small business bailout: "If you cannot lend or borrow, go for the EFG." We all know now that that was never what it was intended to be and as a result there were a lot of very early declines, because the businesses were not within the defined guidelines laid down by BIS at the time. Miscommunication was a serious issue. Mechanically, it works very well now, just to reiterate. We have no issues with the mechanics. I think the risk profile could be improved with the banks, but fundamentally the scheme works quite well.
Matthew Fell: I would echo the comments in terms of direction of travel and overall journey. I think we now see the scheme operating much more successfully than it did at the outset. We argued for and were pleased to see the extension of it for the lifetime of this Parliament. If there are two areas that you could continue to evolve and improve it, I would suggest that one is around its applicability to those IPrich sectors. For example, we touched earlier on difficulties of lending for firms who do not have huge amounts of physical assets to secure loans against. I think there is an existing review led by the Department for Culture, Media and Sport to see if there are tweaks that could be made to the scheme to improve its applicability to those sectors. I think the other point that we would look to is to say how does it fit with the demand throughout the growth cycle? There certainly seems to be demand for it at the upper end in terms of size of lending, so we would advocate pushing the boundaries of what is permitted under state aid rules and indeed looking beyond it to say it might not be an exact extension of the EFG, but for the top end of an SME market or a mid-cap firm size, are there any issues there that should be explored and a similar vehicle put in place for those? But it is against a backdrop of overall improvement and greater satisfaction with the scheme to date.
Q204 Simon Kirby: Just some very quick questions. You have covered quite a lot of ground on the EFG. You mentioned that the banks have got it. Is there now an increased awareness among businesses that this scheme is available? Because it takes two to tango, doesn’t it?
Matthew Fell: Yes, I mentioned the survey that we ran a little while back with the ACCA. That indicated quite a high level of general awareness for the various financial support measures that have been put in place; running into 80% plus awareness ratings. Not to that extent, but this and the tax rebate scheme on the Time to Pay were among those that picked up the highest levels of awareness. So I think through word of mouth and other measures, awareness is running reasonably high on this scheme now.
Q205 Simon Kirby: Okay. And just picking up on your point about the medium sized businesses, you referred to how the scheme should be perhaps more flexible. Just so I am clear, you are referring specifically to the cap; perhaps removing the cap of is it £1 million?
Matthew Fell: It is a £1 million ceiling on loans and for firms with up to £25 million turnover. Those are the eligibility criteria.
Q206 Simon Kirby: Okay, so there are two caps, effectively?
Matthew Fell: Yes, one related to firm size, one related to loan size.
Q207 Simon Kirby: Okay. Can I ask Mr Orford, you make reference to-I quote-"at some stage the EFG needs to be scaled back to levels closer to the Small Firms Loan Guarantee Scheme". What sort of time scale do you see that should be happening in?
Phil Orford: Well I think, if memory serves me right, this scheme is running until the spring of 2012, I think. It is certainly beyond 2011.
Matthew Fell: I think the EFG particularly was for the lifetime of this Parliament. I think that was an announcement in the recent spending review.
Phil Orford: Obviously we would like to see it retained through that period of time. In terms of its scaling back, one of the reasons for making that comment is that we believe the time is now right to move beyond EFG.
Q208 Simon Kirby: Okay, just so we are clear on this, what you are saying is if we move out of recession, then it is a safety net that is not required and can be provided-
Phil Orford: No, that is not what I am saying. It should be there for its specific purpose, which is that lending of last resort for those businesses that are struggling with business assets to secure, whether that is debtor books or whether it is property or whatever, where they are prepared with the support of the bank to provide an unsecured personal guarantee. We do think that mechanism needs to be put in place, but if you look at the market that that is addressing and you look at the scale of the funding, the bigger issues are actually in the general lending by banks and in the alternative markets, rather than specifically in EFG. I am not being overcritical-I do think the debate about EFG is mechanically sound; it certainly supports the purpose that it was intended to do-but what I would like to see is pressure on the banks beyond EFG, because that is really where the bigger scale of lending needs to-
Q209 Chair: Just to clarify, it is extended until 2014-15.
Phil Orford: 2014? Okay, thank you.
Q210 Simon Kirby: Okay, a final question. Can I ask the three of you whether you have been involved in the discussions about extending or replicating an EFG-lite into a commercial scheme for exporters?
Phil Orford: Yes.
Q211 Simon Kirby: Can you elaborate? Would that be a sensible way forward?
Phil Orford: Well, for us, the trade credit issue is still a big one. There are obviously mechanisms of raising trade credit, but it still needs to be looked at. Anything that could be looked at along these lines-some form of guarantee-would be very welcome.
Simon Kirby: Okay.
Chair: I can assure you that we will be looking at that in some detail. Can I thank you for attending and thank you for the fullness of your responses. It was a very helpful session. If, on reflection, you feel that there are any points you may wish to add to any of the questions that we have asked or indeed any that we have not asked but should have asked, then please feel free to give us a written submission afterwards so that we can incorporate it into our report. Thanks very much.
|
|
|
| ©Parliamentary copyright | Prepared 30th November 2010 |