Written evidence submitted by Metro Bank
Competition is the key to customer choice and Metro
Bank is the first of new competitors who will challenge the present
oligopoly.
British banking has developed into a commoditised
market in which there is very little service differentiation and
players compete solely on product and price. This has led to a
degradation of service and mass customer dissatisfaction.
Metro Bank is the first new entrant in Britain in
over 100 years. It is a "community bank" model focusing
on gathering deposits, without wholesale funding, and lending
within the UK. Our basic proposition is a retail service model
where our customers become fans and where the human being is the
"deliverer of profit", as commented by TSC member John
Thurso, "not a generator of cost". There are many examples
outside of banking, ie Apple, where a better value proposition
creates successful and sustainable business models.
We believe that new competitors with differentiated
business models would improve the economic and banking climate
in Britain. As in every market, there are barriers to entry and
we have noted some we think apply in the UK:
1. A lack of entrepreneurship in the banking
field as all the banks have consolidated into a few very large
commodity providers.
2. Financial Services Authority ("FSA")
approval is required for new entrants and, indeed, should be required.
This process needs to be thorough but responsive and we understand
that the FSA is streamlining the process.
3. The application of modern integrated information
technology is central to the implementation of a service-based
bank and the lack of external providers such as Fiserv and Fidelity,
is a serious barrier to new entrants. The formation of new entrants
would encourage the development of this important support segment.
4. New banks rely on customers exercising their
freedom of choice to switch banks. The account switching process
in Britain is complicated and needs to be streamlined and improved.
We would make the following suggestions to improve
competition:
1. Account mobility: Members of your Committee
suggested a standardized account mobility program similar to the
mobile phone account mobility program. After discussing this with
our management team we believe that this can be done and is a
practical solution to providing customers more freedom of choice.
We urge that this option be explored.
2. Deposit Insurance: The deposit insurance scheme
is not well understood in Britain. It does not have the same degree
of customer confidence as the Federal Deposit Insurance Corporation
("FDIC") in America. The FDIC requires its banks to
display words to the effect: "All deposits are insured by
the FDIC." On inquiry, the UK deposit insurance scheme, the
Financial Compensation Scheme ("FSCS"), does not require
such advertising and in fact, the FSCS advises we are not allowed
to make such a deposit insurance statement. A change in this area
would encourage competition.
3. Small and Medium Enterprises ("SME"):
This segment is the most under-served portion of the British banking
society. I call to your attention the Enterprise Finance Guarantee
scheme which provides limited loan guarantees to the SME segment.
While worthy, this scheme is underfunded and severely restricted
and we urge the government to consider an expansion of this scheme
including: (a) allowing new banks to enter as lenders; (b) increasing
the size of the loans subject to guarantee; and (c) removing the
barriers to taking residential homes as collateral for loans.
As you may know the Small Business Administration ("SBA")
lending guarantee program in America has been extremely successful.
I have enclosed a brief paper, which discusses the two schemes.
4. Planning: The development of new retail sites
is essential to new bank competition. While the existing banks
are located in the premier retail areas, the existing planning
permissions exclude banks from A1 locations, thus providing a
location advantage to existing banks. Allowing banks (which currently
require A2 consent) to use A1 locations would level the playing
field.
As to compensation, we believe that the granting
of stock options encourages individual performance, focuses the
team on the total performance of the bank while aligning staff
and shareholder interests.
Annex
PURPOSE
- Comparison between US Small Business Administration
(SBA) 7(a) Loan Scheme and UK Enterprise Finance Guarantee (EFG)
Scheme and recommendation of action to take forward.
- The SBA is a multi faceted independent agency
of the U.S. Government, created to aid, counsel, assist and protect
the interests of small business concerns, to preserve free competitive
enterprise and to maintain and strengthen the overall economy
of our nation. Details of the 7(a) Loan scheme are attached in
Appendix 2.
- The EFG Scheme is managed by Capital for Enterprise
Limited a wholly owned subsidiary of the UK Government managed
by the Department for Business Innovation and Skills. Details
of the EFG scheme are contained in Appendix 3.
BACKGROUND
- The EFG Scheme is a relatively new scheme introduced
in January 2009 to replace the previous Small Firms Loan Guarantee
Scheme.
- Metro Bank PLC have made approaches to Capital
for Enterprise Ltd, to participate in the EFG Scheme, but been
advised that it was closed to new entrants in July 2009. Further
approaches have been made and our request is currently under consideration.
- The Scheme is offered by 44 lending institutions
in the UK, but has not been extensively publicised by the government/member
lenders.
- The current funding pot (£500 million) has
been fully allocated to existing member lenders through to 31
March 2011 (the extension date for the scheme revised in December
2009 pre budget report). At present there is no level of commitment
beyond then.
- By comparison a wide range of material is available
on the US SBA 7 (a) Scheme, it is long established and the SBA
is looking to expand the Scheme by increasing the maximum loan
which may be part guaranteed to $5 million.
- Whilst there are a number of similarities between
the two schemes, the opportunity exists to bring the two schemes
closer together in terms of content to help support small businesses.
COMPARISON
The table below and additional attachments (Appendices
1 and 2) provide details of both schemes and a comparison.
| | SBA
| | EFG |
| Product | — | Bank provides funding, government provides guarantee
| — | Bank provides funding, government provides guarantee
|
Eligibility/
Criteria | —
| Qualifying US Businesses up $28.5 million pa turnover (criteria varies dependent on sector).
| — | Qualifying UK Businesses up to £25 million pa turnover.
|
| Purpose | — | Established or new businesses
| — | Established or new businesses
|
| — | Purchase of land & buildings (for businesses own use), equipment fixtures & fittings, supplies and materials
| — | Business expansion, includes own premises purchase
|
| — | Long term working capital
| — | Refinance existing loans where security reducing or cashflow not adequate to meet current payments
|
| — | Refinance existing debt (if not structured reasonably)
| — | Conversion of overdraft to meet working capital requirements.
|
| — | Short term working capital
| — | Guarantee to support additional invoice financing facilities
|
| — | Purchase an existing business
| — | Short term working capital (to support new/increased overdraft).
|
| — | Working Capital
| | |
Maximum Loan/
Guarantee | —
| Maximum loan $2 million | —
| Maximum loan £1 million |
| — | Guarantee 85% for loans up to $150,000, 75% loans $150,000 to $2 million
| — | Guarantee 75% |
| Maximum term | — | 25 years for Real Estate purchase/construction/ refinance
| — | 10 years |
| — | 15 years for business acquisition, equipment, fixtures
| | |
| — | 10 years for working capital
| | |
| Fees | — | 2-3.75% initial guarantee fee (dependent on amount of loan).
| — | 2% per annum on outstanding guarantee balance
|
| — | 0.55% per annum fee on outstanding guarantee balance
| — | Bank arrangement fee subject to negotiation
|
| — | No lender fee
| | |
| Interest Rates | — |
Variable rate loans subject to negotiation |
— | Negotiable |
| — | Fixed rate loans maximum margin (over base rate) of 2.25%-4.75% depending on loan size and term.
| | |
| Collateral/Security | —
| Up to 85% Government Guarantee | —
| Up to 75% Government Guarantee |
| — | No restriction on business/personal assets which may be given as security
| — | Personal main residence may not be taken as security
|
| Lenders | — | Most US Banks and financial institutions
| — | 44 UK Banks and financial institutions
|
The principal similarities between the two schemes are:
- Both are designed to encourage lenders to support small businesses
where the request for funding meets Bank criteria with the exception
of the level of security available.
- Both delegate the assessment process fully to the lenders
who are members of the scheme.
- Both have seen significant volumes of business:
- SBA 7a Scheme in 2009 guaranteed $9.2 billion to 44,222 small
businesses resulting in over 450,000 jobs being created/retained.
- Of the EFG Scheme budget allocation of £1.3 billion for
2009-10 (ending 31 March 2010) a total of £1.304 billion
to 11,648 small businesses has either been drawn or is in course,
of which £931.1 million to 9,127 businesses has been drawn
to date. (No information provided on jobs created/retained). A
new fund allocation of £500 million has been made for the
year to 31 March 2011.
The main difference is one of approach by the lenders/governments
to the two schemes:
- The SBA 7a scheme:
- Actively pushed by the participating lenders, has been running
for a number of years and the government are looking to expand
(proposal to increase loan maximum from $2 million to $5 million
being considered).
- Focuses on and readily provides information on successes such
as jobs created.
- Apart from the guarantee fees, the lenders are not allowed
to charge additional arrangement fees.
- The scheme is generally more flexible—longer terms,
more flexibility around security, other guarantee schemes available
with specific target markets.
- The EFG scheme:
- Established in 2009 to replace the previous Small Firms Loan
Guarantee Scheme, and funding is only approved by the government
so far for a year at a time. The forthcoming election may well
have an impact on the approach going forward.
- Whilst the numbers are still significant, the scheme managers
advise that the attitude of lenders varies, but certainly you
have to look harder to find information on the scheme from the
major lenders. Experience from working within some of these institutions
is that the scheme is not pushed forward.
- There is a restriction on other security taken to exclude
the personal residence of guarantors/business owners.
- There is no certainty beyond the 31 March 2011, and the outcome
of the forthcoming election in May is likely to impact, although
it is likely that whatever the outcome, the new Government will
want to be seen to be supporting Small Businesses.
CONCLUSION
Whilst the EFG Scheme is more closely aligned than it's predecessor
to the SBA 7(a) Scheme, an opportunity exists to help shape how
the government and lenders approach providing support to small
businesses going forward, and to bring it closer into line with
the US scheme.
Metro Bank PLC are ideally placed because of their US experience
to have an input into both shaping and pushing this going forward,
and with the current scheme presently only extended through to
March 2011, we believe now would be an ideal time to start this
process.
APPENDIX 1
EFG SCHEME
- Product:
- Lending Bank/other lending institution provides debt, Government
provides partial guarantee to lender.
- Eligibility/Criteria:
- Qualifying UK Businesses up to £25 million pa turnover.
- Most sectors—principal exclusions are Coal, Real Estate
and Insurance.
- Purpose:
- The guarantee will cover the following types of lending:
- New term loans (with terms of between three and 10 years).
- Refinancing the existing term loans, where the loan is at
risk due to deteriorating value of security or where for cashflow
reasons the borrower is struggling to meet existing loan repayments.
- Conversion of an existing overdraft into a term loan to meet
working capital requirements.
- Guarantee on invoice finance facilities to support an agreed
additional advance on a SME's debtor book. This will supplement
the invoice finance facility already in place.
- Guarantee on new or increased overdraft borrowing for the
SMEs experiencing short term cashflow difficulties.
- The guarantee will fund:
- working capital; and
- investment by businesses seeking to grow or develop.
- Maximum Loan/Guarantee:
- Loan amounts from £1,000 to £1 million.
- EFG Scheme will guarantee 75% on all loans.
- Maximum Term:
- Collateral/Security:
- 1st charge on assets funded. If less than 100% cover (on discounted
basis) the lender will look to the guarantors personal assets,
but cannot take a charge over guarantors principal residence.
- Remuneration:
- Interest rates:
- Subject to negotiation between borrower and lender.
- Fees:
- 2% per annum guarantee fee based on the balance of the guarantee.
- Loan arrangement fee is subject to negotiation between borrower
and lender.
- Supplier/Lender:
- 44 UK Banks/lending institutions.
APPENDIX 2
SBA 7(a) SCHEME
- Product:
- Lending Bank/other lending institution provides debt, SBA/Government
provides partial guarantee to lender.
- Eligibility/Criteria:
- Designed to be as broad as possible:
- Operate as a for-profit company.
- Do business (or propose to) in the United States or its possessions.
- Must meet SBA definitions of Small Business. A range of sector
specific criteria:
- 500 employees for most manufacturing and mining industries.
- 100 employees for all wholesale trade industries.
- $6 million for most retail and service industries.
- $28.5 million for most general & heavy construction industries.
- $12 million for all special trade contractors.
- $0.75 million for most agricultural industries.
- Be an eligible type of business. While the vast majority of
businesses are eligible for financial assistance from the SBA,
some are not (including Real Estate Investment, Banking/Finance/Insurance,
Gambling/Speculation, anything illegal).
- Plan to use proceeds for an approved purpose. Loan proceeds
may be used to establish a new business or to assist in the operation,
acquisition or expansion of an existing business.
- Have reasonable owner equity to invest.
- Use alternative financial resources, including personal assets,
before seeking financial assistance. SBA does not extend financial
assistance to businesses when the financial strength of the individual
owners or the company itself is sufficient to provide all or part
of the financing. Both business and personal financial resources
are reviewed as part of the eligibility criteria. If these resources
are found to be excessive, the business will be required to use
those resources in lieu of part or all of the requested loan proceeds.
- Ability to repay the loan on time from the projected operating
cash flow of the business.
- Good character. SBA obtains a "Statement of Personal
History" from the principals of each applicant firm to determine
if they have historically shown the willingness and ability to
pay their debts and whether they have abided by the laws of their
community.
- Management expertise and commitment necessary for success.
- Feasible business plan.
- Purpose:
- Loan proceeds may be used to establish a new business or to
assist in the operation, acquisition or expansion of an existing
business. Eligible use of proceeds include (non-exclusive):
- To purchase land or buildings, to cover new construction as
well as expansion or conversion of existing facilities.
- To acquire equipment, machinery, furniture, fixtures, supplies,
or materials.
- For long-term working capital, including the payment of accounts
payable and/or for the purchase of inventory.
- To refinance existing business indebtedness that is not already
structured with reasonable terms and conditions.
- For short-term working capital needs, including seasonal financing,
contract performance, construction financing, export production,
and for financing against existing inventory and receivables under
special conditions.
- To purchase an existing business.
- Ineligible Purposes:
- To refinance existing debt where the lender is in a position
to sustain a loss and SBA would take over that loss through refinancing.
- To effect a partial change in business ownership or a change
that would not benefit the business.
- To permit the reimbursement of funds owed to any owner, including
any equity injection or injection of capital for the businesses'
continuance until the loan supported by the SBA is disbursed.
- To repay delinquent state or federal withholding taxes or
other funds that should be held in trust or escrow.
- Maximum Loan/Guarantee:
- Maximum Loan $2 million.
- SBA can guarantee as much as 85% on loans of up to $150,000
and 75% on loans of more than $150,000.
- Other guarantees ranging from 50% to 90% of the loan balance
are reserved for sub-programs targeting specific borrowers (veterans
or underserved markets: rural areas or areas of, high unemployment
or poverty) or loan purposes (export finance).
- There is currently a proposal under consideration to increase
the loan size from $2 million to $5 million.
- Maximum Term:
- 25 years for purchase, construction or refinance of Real Estate.
- 15 years for business acquisition, equipment and fixture purchase.
- 10 years for working capital.
- If for more than one purpose, the term is blended.
- Collateral/Security:
- 1st charge on assets funded. If less than 100% cover (on discounted
basis) the lender will look to the guarantors personal assets
(guarantees from all owners of 20%+ of the business).
- Remuneration:
- Interest rates:
- Variable rate loans (linked to base or LIBOR) subject to negotiation
between borrower and lender.
- Fixed rate loans subject to maximum margin (over base rate)
between 2.25% and 4.75% depending on loan size and unexpired terms.
- Fees:
- 2-3.75% guarantee fee dependent on amount of loan.
- 0.55% annual fee (calculated on the outstanding balance of
the guaranteed portion of the loan).
- No lender arrangement fee.
- Supplier/Lender:
- Most US Banks and other lending institutions.
January 2011
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