Examination of Witnesses (Questions 1-62)
Q1 Chair: Good
morning, Minister. You are bang on time. Thank you for agreeing
to appear before the Committee. I understand that you want to
give a brief opening statement, and I would ordinarily ask you
to introduce yourself for voice transcription purposes, so perhaps
you can do that at the same time?
Vince Cable: Thank
you, Chair. I am Vince Cable. I am Secretary of State for Business,
Innovation and Skills, and I am with Emma Squire from the Department,
who will help me with the more difficult questions. I welcome
the opportunity to talk to you. We are in the middle of what I
think the CBI yesterday called a credit-induced recession. Because
of the shortage of time I will not go into the background to that,
but plunge into the practical response to it. I think we have,
as a Government, put in a wide range of interventions to support
businesses seeking finance, from guarantee systems to equity funds.
But a key element, as your Committee recognises, is Government
pressure on the banks to maintain the flow of lending to SMEs,
and the Merlin approach was part of that policy, and its value
lies in an explicit commitment to lending targets, both by private
and publicly owned banks. It has an independent mechanism for
verifying delivery, and a commitment by the banks to link executive
pay to performance against the targets.
We are obviously concerned that they have not met
their first set of quarterly targets. However, these are early
days, and we want to see significant improvement over the next
few months. We are going to monitor the banks' performance very
closely, and if they fail to meet the commitments that they have
agreed, we will examine options for further action. The banks
are telling us that the demand is not there, but what I hear from
business is that there is a problem of discouraged demand. Businesses
are put off making applications because they do not get the support
that they need at branch level, or their bank manager says yes
to their request for credit, but the computer says no. So we will
continue to put pressure on the banks to improve relationships
with their small business customers, starting with exploring options
to push them into being more transparent about the way they assess
and price risk. It is imperative that businesses know why lending
products are priced the way they are, and can challenge the banks
if they believe their risk has been wrongly assessed.
We also want them to publish more information about
how they are lending to SMEs. Lloyds and Santander have already
published numbers, both banks having met their Merlin targets,
and the public should see more. We also want the banks to explain
clearly how their incentives for senior managers are linked to
SME lending. They have so far declined to put the information
in the public domain, and I have written to the chairmen this
week to tell them that this is not good enough, and I have invited
them to reconsider their position.
Finally, we look forward to the recommendation of
the Independent Commission on Banking in the autumn. It is already
clear that there is a need for ambitious reform of the banking
system to deliver better outcomes for business and consumers.
Sir John Vickers has made that clear, and when the Government
considers the ICB recommendations, the lending environment, particularly
bank lending to SMEs, will help to inform its judgment. Indeed,
in all of this, competition is the key. We want to ensure that
viable businesses have access to a suitable range of finance from
a range of different finance providers. Thank you.
Q2 Chair: Thank
you. You touched on a number of issues and things that we will
be exploring, obviously. The one that you did not mention was
the fact that we, as a Committee, asked for the Chancellor to
be present, as you both appear to have a responsibility in this
area. He has declined to appear before the Committee. Now, the
Chancellor is the Chair and you are the Deputy Chair of both the
Cabinet Committees on Economic Affairs and Banking Reform. Can
you tell me whether this reflects a joint responsibility, as opposed
to, say, a general Cabinet responsibility, for these areas?
Vince Cable: Well,
we have some joint, overlapping responsibilities, but there is
also a clear division of labour. The joint responsibilities have
included us jointly establishing the Independent Banking Commission,
the terms of reference and the membership, and we jointly met
the banks as part of the Merlin process and agreed the text of
it. Clearly the Chancellor has some quite distinct responsibilities
in respect of the regulation of the banking system and in respect
of the Treasury's oversight of the UKFI, whereas my Department
has responsibility for access to business finance more generally—and
that includes aspects of banking—as well as the lending
agreements with the two semi-state-owned banks and the discussions
with the BBA about their 17 proposals for improving relationships
with customers. We are also responsible for competition and consumer
protection as it affects the finance sector. So there is a distinction
between the roles, but there are some areas of overlap.
Q3 Chair: I think
it is fair to say that in terms of your rhetoric on bank business
lending you have been somewhat more forceful than the Chancellor.
Whose view is prevailing in this?
Vince Cable: I
think we both want to be judged on results, rather than rhetoric,
but the Chancellor and the Prime Minister also have made it very
clear that, if we do not get the satisfactory results from the
Merlin lending process, we should be willing to take further actions
in relation to the taxation of banks. So I think we entirely share
the view that other measures may well be necessary. There is no
divergence of views on this.
Q4 Chair: "There
is no divergence." You have said that you have overlapping
responsibilities. Do you not agree that it would have been better
if the Chancellor had appeared with you at this session today?
Vince Cable: No,
I do not agree with that. I have several significant responsibilities,
and I think it is right that you hold me to account for them.
I know the Chancellor will be responding to the Treasury Committee,
which may well ask him questions. I think the problem is, in policy
terms, that this is a complex area. There are several different
policy problems and some overlap with the Treasury, but most of
them are distinct.
Q5 Chair: I come
back to that. If it is complex and it is overlapping, why should
the Chancellor not be here today?
Vince Cable: I
am sure that the Chancellor is very happy to be held to account
by Parliament, and, indeed, he regularly goes to the Treasury
Committee.
Q6 Chair: But
this is a specific area of business lending for which he does
have a degree of responsibility. Do you not think that the almost
inevitable conclusion could be drawn that, in the words of Nye
Bevan, today, "We have the monkey and not the organ grinder"?
Vince Cable: I
think that is a rather aggressive way of putting it. I am sure
he would not put it like that.
Q7 Chair: If I
may remind you, on one or two occasions, Mr Cable, you have been
fairly aggressive in your questioning in an appropriate forum.
Can I bring you on now to the actual bank lending figures? What
are the main reasons for the rather disappointing lending figures
so far?
Vince Cable: As
I say, we are talking about the results from the first quarter,
and, in practice, the first two months. So I think we hesitate
to draw overdramatic conclusions from that, but they are disappointing
in respect of SME lending. Of course, the overall bank lending
figures are being met, but there are problems with SME lending.
I think there is a mixture of factors. The banks themselves argue
that there is weakness in demand, and that is undoubtedly a factor.
We can argue about how much, but that is certainly highly relevant.
In addition to that, there is a dichotomy in terms of Government
policy towards the banks: through the regulator, the FSA, we are
requiring them to hold more capital to make them safer, which
in turn requires them to be more cautious in their lending. In
a sense, the banks would quite legitimately make that point.
The other point I would make, which is a longer term
issue, is that over the last decade or so banks gradually moved
away from relationship banking. The close relationships they often
had with their small business customers have gone. I think some
of the better ones are trying to reconstitute it, but it does
mean that, at a time of crisis like this, they do not have the
infrastructure in place to price and assess risk in good small
companies.
Q8 Chair: You
have touched on overall lending as opposed to SME lending. What
would be your reaction, if, after the first post-Merlin quarter
of lending figures, overall lending had hit the targets, but SME
lending, which we are specifically concerned about, had not? What
would you be doing with the banks to change that?
Vince Cable: The
fact that they had met their overall lending figures is a positive,
but I think the reason why the SME figures are disappointing is
that most SMEs do not have any alternative. If you are a big company
you can go to capital markets. Many of them do, and many of them
are very cash rich at the moment. However, there is a real problem
in the SME sector in that they usually have no alternative sources
of finance. Maintaining or extending an overdraft is often absolutely
critical to their continued operation. So the fact that the SME
lending targets are not being realised is a serious problem.
Q9 Chair: You
have touched on one of the potential defects of Merlin, which
is that the overall figures could actually fudge the real issue
here. As you say, they could demonstrate that companies that do
not need it are getting the money, whereas those that do need
it, and could play a vital part in our economic recovery, are
not. Basically, what will you do about it?
Vince Cable: It
is not a defect. It would have been a defect if the SME lending
had simply been bundled into the overall total, but it was not.
We recognised that SME lending was a separate problem, and therefore
there was a separate accountability.
Q10 Chair: If
it is itemised as a project to increase SME lending, and then
the overall figures demonstrate that SME lending has dropped,
it is a failure.
Vince Cable: It
has not dropped; it just did not realise the increase. The whole
point about Merlin is that we are trying to get the banks to raise
their ambition in lending to SMEs, and they were set a 15% growth
target, and certainly on the basis of the first quarter, that
is not being met, but it was not a question of a falling supply
of credit.
Q11 Chair: On
the evidence so far provided by the Federation of Small Businesses,
lending to SMEs is actually dropping.
Vince Cable: Yes,
I think net lending is falling because of repayments. That is
certainly true. I do study the FSB reports, which are very good,
and the FSB are a very good institution and have their finger
on the pulse, but it is striking that they tend to come up with
rather different results from, say, the CBI, which also has a
small business component to it. I suspect that one of the factors
is that within the SME sector there are very different types of
companies. At the upper end of the SME sector, you have medium-sized
enterprises that are ambitious and growing and have access to
equity, and at the bottom end, you have very tiny companies, which
probably have much more serious problems. So the FSB data is important
and illustrative, but I think there are different takes on what
is actually happening on SME lending.
Q12 Chair: Are
you trying to say that the companies covered by the FSB are somehow
less relevant or less important?
Vince Cable: No,
I did not say they were less relevant, but it is a somewhat different
sample.
Q13 Chair: Are
you saying that it is okay to base your bank lending approach
on the CBI as opposed to the FSB coverage?
Vince Cable: Sorry,
Chairman, I did not make that contrast at all.
Chair: To me, that would
seem to be a reasonable implication of what you were saying.
Vince Cable: I
cannot imagine why. I was simply saying that there are different
sources of data. Incidentally, it is one of the reasons why we
have agreed with the banks to fund much deeper analysis, which,
as I think you already know and have mentioned in your report,
will be available in July. It will be a much deeper analysis,
covering more companies, which will enable us to get at the question
of how much is due to discouraged demand and how much to difficulties
in supply.
Q14 Mr Ward: I
am interested in the process for the targets—or what the
banks would consider to be commitments, rather than targets. Having
spoken to the banks, are you aware that they are actually doing
something different in terms of the SME part or commitment? Are
we aware that anything has changed within the banks themselves,
in terms of guidelines or directives, with regard to the messages
that are put down at the level where decisions are being made
on applications as they come into the banks?
Vince Cable: We
have anecdotes about the way some banks are changing their behaviour.
For example, Lloyds now have SME lending as an item on every board
meeting every month. I do not think the other banks do that yet.
Part of the problem is that, for the very large banks, SME lending
is a very small part of their overall portfolio. It is certainly
true that Lloyds now take this very seriously and, indeed, met
their targets as well. Others are probably progressing, but less
rapidly.
Q15 Nadhim Zahawi:
Secretary of State, I just want to pick up the point about the
Bank of England bank lending data. I am inferring from what you
have been telling us already, but is this the start of a longer
process, through Project Merlin, to essentially move that data
set to the positive, especially on SMEs, or is this snapshot of
the relationship between banks and business what we are accepting
as the baseline? Where are we on that?
Vince Cable: The
Merlin Agreement is a one-year agreement, and it may or may not
continue. But within that relatively short-term framework, we
are trying to use it to improve our understanding of the data.
Essentially, the position at the moment is that our Department
produces monthly lending data, which are then published by the
Bank of England. Separately from that, the Bank of England publishes
data on the Merlin Agreement—the Merlin banks. The data
are pooled, but published by them as a way of holding the banks
to account and independently verified by them. But we want to
supplement those two sources of information with more data. There
is some cross-industry research being done so that we can drill
down into sectors and areas of the country, and we want a broader
survey of data with more questions on discouraged demand, for
example, so we can get a better understanding of what is going
on.
Q16 Nadhim Zahawi:
We know that in the SME sector over 50% of the lending is done
by two major banks. I agree with you that we need more data, but
presumably focusing on those two banks, one of which is Lloyds,
as you have obviously just mentioned, would help move the dial
further, i.e. rather than our focusing on the others which are
much smaller in the sector.
Vince Cable: It
would at one level in a static way. But as we may well come to
in your questioning, the long-term way forward and the medium-term
way forward is more competition and more banks entering and supplying
credit on a competitive basis. We are seeing activity from smaller
credit suppliers and also the non-conventional suppliers. We are
beginning to see more lending against assets and against orders,
as well as against property and security, and this is all part
of the diversification of supply that is badly needed.
Q17 Nadhim Zahawi:
I am glad you mentioned that because that is one of the causes,
for small business but also for larger businesses. I have certainly
had evidence from very healthy companies in the FTSE 250 of where
they have applied for loans from two banks but the offers that
came back were almost identical, which is a symptom of the lack
of competition. So that is certainly an area I am pleased to hear
you mention as being one of the problems that we face as an economy.
Vince Cable: Indeed,
and this is a long-standing issue. I am sure the Chairman will
remember, because I believe he was in the House with me at the
time, that 10 years ago we had the Cruickshank report, in which
one of the core conclusions was the lack of competitiveness and
the lack of competition in SME lending and relatively high costs.
The problem has not changed in the last decade, and we are now
having to address it in a much more forceful way.
Q18 Nadhim Zahawi:
Going back to the Merlin Project, you, and other Ministers have
said that we ought to look at the performance over the whole year,
rather than just taking the first quarter. I understand that,
but what do you say to the business that needs help now, not in
a year's time or eight or nine months' time?
Vince Cable: The
degree of Government reaction to it will build up over the year.
I think it would be unwise to rush to conclusions after the first
quarter, but when we have had another quarter and it shows the
same results, clearly we are not going to say, "We cannot
say anything; wait for the rest of the year." However, in
terms of prompt action, I do not think we should underestimate
some of the things that are happening in parallel with the Merlin
Project that the banks are engaged in. For example, the BBA's
initiative to introduce an appeal system, with Russel Griggs acting
as an assessor, is a big step forward. They are doing a lot in
creating a network of mentors, for example, who help small businesses
with their loan applications. So, a lot is happening now. It is
not a question of just waiting until the end of the process.
Q19 Nadhim Zahawi:
Do you think that the banks need to significantly improve on the
SME lending? I understand that the overall targets are being met,
but is there a need for significant improvement?
Vince Cable: Yes,
that is why we have gone into the Merlin process. Clearly, there
is a serious problem. As I say, we can debate how much is lack
of demand and how much is supply, but certainly we believe that
there is an issue with the supply and cost of finance, and it
is inhibiting recovery. Certainly, if it is not dealt with, it
will inhibit recovery as we move into more rapid growth.
Q20 Nadhim Zahawi:
How would you define significant improvement?
Vince Cable: I
think the targets we have set in Merlin were not just plucked
out of the air. They represented an attempt to make a judgment
about what was a significant improvement that was also compatible
with the banks' requirements to meet their regulatory requirements.
Q21 Nadhim Zahawi:
Can I just push you on that point a bit further? For example,
if they have fallen behind in the first quarter on the SME sector,
they have more catch-up to do in the next three quarters, presumably?
Vince Cable: Yes,
that is logical.
Q22 Nadhim Zahawi:
Are you then going back to them and saying, "What are you
doing not just to meet your targets but to catch up with the first
quarter of backwards movement?"
Vince Cable: No.
The Merlin targets will have been met if they have been met over
the year as a whole. You are right that there is now a catch-up
requirement, yes.
Q23 Nadhim Zahawi:
In terms of timetable, I know it is the whole year, but is there
any way that one can weight it slightly in favour of the first
half, rather than the second half of the year?
Vince Cable: The
Chancellor and I, separately and individually, have discussed
this problem with the bankers when we have had an opportunity
to meet them. So it is not a question of us just sitting and waiting
until the end of the year and seeing what happens; it is an iterative
process.
Q24 Margot James:
Secretary of State, you have summarised the key problems. One
question I wanted to ask you beyond that was about the developments
in banking over the last decade or two. Decision making has been
removed from the high street, and also, even before the crisis
hit, banks were telling me that it was no longer so economical
to lend to small business, and the time and problems involved
in securing a large business were the same as for a small business,
and they were drifting away from it. In addition, the high street
manager is no longer involved enough to know the small businesses,
which makes it hard to evaluate the loans. To what extent do you
think the change in that model over time is still a bit of a problem
in driving credit through normal high street banks to small businesses?
Vince Cable: It
is a very serious problem, and, as I think I said in response
to one of the earlier questions, there is a cultural issue here,
which is that the banks have changed their nature. Certainly for
the big global banks—essentially there are three of them
that operate on a global scale, each of which I think has a balance
sheet bigger than British GDP—if you are in that world,
then British SMEs are not a big part of your business. Understandably,
I think attention drifted away from it.
However, it is also clear that there are banks that
can operate profitably and successfully in that sector by doing
it properly. Svenska Handelsbanken, for example, is entirely focused
on building up relationships with SMEs and treating that as their
core business and doing it well. I think some of the bigger banks
are now realising that is something they should be going back
to, and I have cited one or two examples of the ones that have
got that message and are trying to change their culture.
Q25 Chair: There
is one issue in relation to this: one of the consequences of this
centralisation, if you like, of banking decision making is that
loans were withdrawn from certain sectors of industry, i.e. the
motor supply industry and the construction industry, and small
businesses found themselves unable to get access to credit, irrespective
of their balance sheet and prospects. What progress are you making
with the banks in changing this highly centralised corporate decision
making to local decision making, judged on the merits of the business
plan and approach of the company concerned?
Vince Cable: In
terms of changing behaviour, there was an issue that I referred
to in my introductory comments. Potentially, one of the most useful
outcomes of Merlin was the agreement of the banks that they would
tie the pay and overall remuneration of their Chief Executives
and their senior managers to performance in SME lending. They
told us that they would ensure that the rewards would be proportionate
to the share of SMEs in their portfolio. Where I am disappointed,
and I made this point at the outset, is that they have so far
not been willing to tell us how exactly this system of incentives
works, and I am pressing them now, because this is not just crucial
to the credibility of the Merlin arrangements but is good corporate
governance—to know how people are paid and why and what
their incentive system is. So we are pursuing that issue very
forcefully.
In your question, you started by referring to particular
segments of the British economy where there have been particular
problems, such as the supply chains of the manufacturing industry.
I think here the issue is often not about the banks—it may
be in some cases, but it is also about credit between companies
within a supply chain. This is one of the things we are working
on in the Automotive Council, which I think is a very successful
example of big companies working with their supply chains. Certainly
this is an issue we are trying to focus on. There are other sectors,
for example, creative industries, where there are well-known credit
problems because traditional forms of security are not easily
available. So you are quite right that it is not just that there
are aggregate issues; there are specific sectoral problems that
we are trying to get at and deal with separately.
Q26 Chair: I recognise
that, if you like, the industry sectors themselves are responding
to set up their own investment and support mechanisms to the supply
chains, but I am trying to pick the bones from the statement you
made earlier in response to that question, about linking pay of
executives to supply of lending to SMEs. I suppose the question
is whether those executives are changing the culture of their
business and structures to deliver that. Have you seen any evidence
that they are doing that in response to the pressure that you
are putting on their pay and bonuses, etc?
Vince Cable: We
are not seeing enough evidence, which is why I am pressing them
to give us more information. We do not know how radical this change
is, because they are not telling us. As I said, both to maintain
the credibility of Merlin and for good corporate governance reasons,
we want that information, and I am pursuing them to get it. But
I think I have also given you examples earlier of particular banks
that are very clearly giving SME lending a higher profile within
their operations, and we are seeing that.
Q27 Mr Ward: My
question carries on from some of Nadhim's questions, but one of
your earlier responses to the question, "Why is there a low
level of funding particularly for SMEs?" was, "It is
early days yet." It seems that two judgments are to be made.
The first is whether the banks are doing what we want them to
do; the second is, failing that, how capable the Government are
in making the banks do what we want them to do. You said it is
early days, but this is merely a one-year agreement. At what point
is the constant monitoring pressure and call for the banks to
respond seen as a sign of weakness and inaction by the Government?
Vince Cable: I
do not think the banks see it that way at all. There is a system
of sticks and carrots built into the system through executive
pay, and we will see how big the sticks and carrots are when we
get the information. This is a continuing process. However, at
the end of the day it is a one-year agreement and, as both the
Prime Minister and Chancellor have made clear, the Government
have the option of being more forceful, for example in tax policies,
if the banks do not deliver on their agreement. It is very much
in the banks' interests to make sure this agreement is a success,
and I am confident that that message has got across.
Q28 Mr Ward: I
move to the question of gross or net lending targets. I believe
the agreement is based on gross targets, but before the election
and on Opposition days you questioned the value of that and considered
the net target to be a better measure. Would you like to comment
on that?
Vince Cable: They
are both relevant but in different ways. Net lending tells you
what is actually happening in relation to the overall economy.
Ever since the credit crunch, net lending to SMEs has been negative
because repayments are exceeding new commitments. This tells us
that clearly there is a problem. However, in terms of the Merlin
agreement what we needed was a metric that enabled the banks to
be held to account. You can hold them to account on gross lending.
This is activity that they undertake. If small companies decide
to repay their loans—there are good reasons why they might
want to—the banks have no control over that. I think that
to build in a system of incentives or penalties for net lending
over which ultimately they do not have full control would not
be appropriate.
So, net lending is useful. If you read the Merlin
agreement you will see that it is referred to several times. Our
overall policy objective is to get net lending going into corporate
Britain, particularly SMEs, but in terms of a metric for measurement
of performance, gross lending is easier to monitor and measure
and hold them to account.
Q29 Chair: No
doubt you know that when you are in government, words uttered
in opposition can come back to haunt you. Perhaps I may quote
the following: "It is perfectly possible for banks to achieve
a gross lending target while withdrawing capital from small- to
medium-sized businesses." You said that in opposition. Are
you still of that view?
Vince Cable: Having
looked at this in detail, it is clear that gross lending has a
role. I would still want to make sure that we are monitoring what
is happening with net lending for the reasons I have just given
to David Ward. The gross lending target in a very imperfect world—for
example, you cannot tell whether the repayment of a loan is because
of pressure from a bank or the borrower has voluntarily chosen
to do it—is something quantitative to grab on to, and that
is why we have used it.
Q30 Chair: But
do you still agree with the comments you made in opposition that
it is possible to mask it?
Vince Cable: It
is possible to mask it, yes, of course; it is not perfect.
Chair: So, you are consistent
in your view?
Vince Cable: Yes.
I am critical of the data that are put in front of us, but we
are in the world of the second best and we have to use what we
have.
Q31 Paul Blomfield:
In your opening remarks you highlighted the contradiction, which
I think we have all experienced when talking to banks and small
businesses, in the interpretation of the problem of inadequate
levels of lending. The banks say that it is all down to lack of
demand, and businesses say that it is due to barriers to borrowing.
They cannot both be right. Whom do you believe?
Vince Cable: I
think there is a bigger supply problem than the banks acknowledge,
but clearly there is an issue about demand, which has several
forms. A company will approach a bank and will be rebuffed, or
may have been rebuffed in the past and will not go back again.
It may be that they have approached a bank, been encouraged and
then discovered that the cost of borrowing is prohibitive and
therefore walk away again. It may be that none of those things
has happened and they have just read in the newspapers that there
is a problem and they do not bother to pursue it. There are different
ways in which discouraged demand can operate. One of the reasons
we wish to do these more detailed surveys, which are to be published
in a couple of months, is to try to understand how the problem
of discouraged demand works and how serious it is. To answer your
question, we think there is a more serious supply problem than
the banks acknowledge.
Q32 Paul Blomfield:
You talk about the deeper work that you are doing to understand
the problem. I think you said you were doing it with the banks.
What deeper work are you doing with small businesses themselves
to understand the problem?
Vince Cable: The
banks are funding the survey, but the design of it is being constructed
through dialogue with the FSB, British Chambers of Commerce and
I think the CBI, so small business is directly involved in the
design of the work that we are pursuing.
Q33 Paul Blomfield:
Do you think small business would acknowledge your description
of the demand-side problems?
Vince Cable: Yes,
some of them would. I go back to my earlier analysis. For example,
the FSB would acknowledge there is a demand problem but that many
of the faults lie with the banking system. The CBI survey tended
to put much more emphasis on the demand problem. There may be
different groups of SMEs with different experiences.
Q34 Chair: If
I may intervene at that point, the BIS business barometer in February
2011 showed that 21% of businesses had sought external finance,
and that was higher than the previous figure of 18% in December
2010. Your own departmental figures would seem to underline the
fact that demand has not dropped; if anything, it has marginally
increased.
Vince Cable: Those
figures do. I am not contradicting that. Different people are
coming forward with different interpretations of what is going
on. I think the latest survey published by the Bank of England
acknowledged there was a demand issue. The question is: what weight
do we put on that? Since we are talking about data sources, perhaps
my colleague may come in.
Emma Squire: We
produce an annual small business survey, to which you have just
referred, as well as a barometer, which is a very small sample
size once every couple of months. The new independent survey that
will be published in July will have a much larger sample size.
That is being chaired by Mike Young, formerly of the Bank of England's
small business team and now an independent person. As the Minister
has said, the methodology has been designed to enable it to build
on our own small business survey to create a timed series of data
but also to go deeper and test results with a greater number of
businesses.
We recently published our own small business survey
that looked at demand from the second half of last year and our
barometer from January and February, which showed that 21% of
firms sought external finance. It also set out what proportion
of those firms had received finance in whole or part from some
source. Speaking from memory, the proportions remain at over 65%
for the smallest businesses and about 80% for larger businesses
with turnover of up to £25 million.[1]
Q35 Chair: As
I understand what you say, there is a more indepth survey
and the outcome of that will be published in July?
Emma Squire: Yes,
and quarterly thereafter.
Chair: We will await that
with interest.
Q36 Paul Blomfield:
The Federation of Small Businesses in a recent survey reported
that 44% of their members who had approached banks had been turned
down. If, at the end of this year, the banks are making the same
arguments and small businesses are expressing the same frustrations,
what plans do you have to tackle the issue?
Vince Cable: Referring
to your quotation of the number turned down, I think the standard
figure for approvals is between 70% and 80%, isn't it? It may
be that we are defining rejection in a somewhat different way,
but I am sure the FSB are right. I encounter numerous businesses
who relay that impression back to me. Was your question: what
do we do at the end of this?
Q37 Paul Blomfield:
If at the end of this year the banks are underachieving the targets
for SME lending and they are still saying it is a demand-side
problem, what will be your plans for action?
Vince Cable: If
it is clear at the end of the year that the banks have not significantly
changed their practices and have not made a significant effort
to achieve the targets that they agreed with us, it will be a
question of the Government saying, "Well, sorry, this agreement
has not worked and we are absolved from any commitment on our
part in terms of restraint in respect of taxation," but we
hope that situation will not arise. As I said earlier, I think
there are some signs of changing culture and attitudes. I probably
did not make enough of the micro-level changes that have taken
place through the BBA agreement and the numerous small ways in
which they are trying to improve relationship management and opening
up appeal systems against rejections. We acknowledge that a change
is taking place.
Paul Blomfield: I am sure
colleagues will want to press you on some of those issues.
Q38 Simon Kirby:
My constituency, Brighton Kemptown, has a lot of small businesses;
unemployment there is falling, and there is a shift from the public
to the private sector. In many ways it is a microcosm of the country.
I am approached by a fair number of small businesses that want
to grow and obtain finance from banks. They have been discouraged
from applying. To use your words, they do not know whether the
computer says yes or no because they are not allowed in the door.
You have mentioned the ability to have a more transparent process
and perhaps the ability to challenge banks' decisions, but when
I go back to these small businesses that want to do well and create
more employment, what can I tell them straight away will happen?
Vince Cable: I
recognise your description; it is entirely right. As a Minister,
I still do a weekly surgery and small businesses come to me with
exactly that story. What I think you should tell them, if they
feel they have been treated unfairly, is to appeal against it.
I have met Russel Griggs, the assessor who has taken on this job.
He is a tough, professional guy who will look at it very carefully.
If the banks have acted in a peremptory and unfair way he will
pursue it with them and make sure that the companies achieve satisfaction.
One thing that slightly concerns me is that we now have a good
system in place with which the banks have cooperated, but not
too many companies use the appeals process. It is possible they
do not know about it, but I would certainly encourage them to
use it.
Q39 Nadhim Zahawi:
I think you are absolutely right to insist on banks publishing
how they incentivise their managers to deliver on SME lending.
This is the biggest challenge facing us as a country. We have
4.8 million SMEs. How do you get through to them that things are
changing? As someone who built a small business into a bigger
one, one of the difficulties—I know you are doing lots of
research work on this, which is to be commended—is that
when SMEs need funding they do not apply early enough in the process,
because they are small businesses and the manager is also the
receptionist, secretary, salesman and everything else. What are
you doing with the banks to try to educate SMEs to think through
the process and apply early enough so they have a chance of success?
I hope the research will show that that is one of the challenges
that face both banks and SMEs. Part of the problem of the perception
gap is that when they do apply it is almost too late, because
they cannot get their act together in time for the banks to be
able to assess it correctly.
Vince Cable: That
is one of the reasons why mentoring is quite an important part
of the new process that the BBA have established. If small businesses
make contact with them—clearly, they have not got themselves
organised in the way you describe—there are people with
real expertise and business experience available who can help
them do it. Not just in respect of banks but more generally the
Government are putting resource into improving mentoring. Rather
than people with a departmental background advising businesses,
real businesses are telling other businesses how to handle things.
That could radically change the way the system works.
Q40 Katy Clark:
To go back to the independent survey funded by the banks that
was mentioned earlier, Emma said that it would build on various
surveys that you already have: the Department's annual small business
survey and the barometer survey. To what extent will the new survey
replace what you already do and to what extent will it complement
it?
Emma Squire: Our
annual small business survey covers much more than just access
to finance. The new independent survey will focus on access to
finance. If we are satisfied that it covers all the areas that
we used to cover in full, we shall revisit whether it still makes
sense to spend taxpayers' money asking similar questions of a
smaller sample size or whether we can rely on this independent
survey.
Q41 Katy Clark:
To what extent will the new data that you get from the independent
survey influence your view on the overall level of bank lending
to business? Will the overall lending figures or the survey data
influence your thinking more strongly?
Vince Cable: The
survey helps us to understand what is going on, but the overall
lending data are the basic metrics against which this agreement
is being tested.
Katy Clark: I think you
said that the survey would be published in July.
Vince Cable: Yes,
that is right.
Q42 Katy Clark:
Would it not make more sense if the survey was published perhaps
quarterly, on a more regular basis, alongside the Bank of England's
data on Project Merlin? Do you think that to wait until July will
give both you and the banks sufficient time to address any serious
shortcomings before the end of the Project Merlin timetable?
Vince Cable: There
has been a lot of to-ing and fro-ing and discussion about how
to get the best value out of this.
Emma Squire: The
survey methodology was agreed with the business representative
bodies and BIS and Treasury earlier in the year. July was the
earliest date by which we could produce it. It will be produced
quarterly, so, while it will not come out at exactly the same
time as the Bank of England Merlin figures, it will be an ongoing
source of information to help unpack issues, such as whether the
banks are right when they claim that demand is subdued and, if
so, why demand is subdued. Is it because of bank behaviours?
Q43 Chair: Perhaps
I may ask a couple of questions that are tangential to this issue.
Under the Merlin Agreement, the banks were to do regional outreach
events. Have you any evidence of these events or feedback from
them? Are there any statistics about improvements in lending arising
from them?
Vince Cable: I
have been to one in my part of London. Essentially, it involved
bringing together local branch managers, people providing other
forms of finance, local angel investors and things of that kind
and the local chambers of commerce representing small business.
I have not been to all of them. I am sure they have now developed
a pretty smooth process for dealing with it, but I found it very
good as a way of getting the relevant stakeholders together. I
think that the businesses that came found it very good. How many
have we had?
Emma Squire: I
cannot remember exactly how many, but there have been several.
There was one in Manchester yesterday. Each one is organised in
conjunction with the local chambers of commerce to make sure that
small businesses attend. Each one has a series of workshops running
in duplicate so that businesses can attend more than one on topics
such as mentoring and finance for exporting. In particular, yesterday's
got good press coverage, which is part of making sure that even
those businesses that do not attend hear some of the messages.
I think that the one held yesterday in Manchester was covered
by the BBC, for example.
Q44 Chair: Are
you proposing at any stage to do an assessment, which you will
publish, of the effectiveness of this approach?
Vince Cable: It
is not done under Government direction; it is an initiative taken
by the BBA.
Q45 Chair: But
it is legitimate for the Government to have a view of its effectiveness.
Vince Cable: Yes,
and I think we have people present at each of them.
Emma Squire: There
are Government representatives at almost all the events. It is
only part of the BBA taskforce outreach programme. In addition,
they have set up a website called Better Business Finance, which
brings together lots of information and advice to SMEs. We do
not have plans to evaluate the road shows for the reasons the
Secretary of State provided.
Q46 Chair: Given
the fact this was part of the Merlin Agreement between the Government
and the banks, would it not be reasonable to have an assessment
of how an element of that agreement was actually working?
Vince Cable: I
think that is a constructive suggestion. I think we will take
that on board and try to build it in and report back.
Q47 Chair: On
a slightly different issue—I accept that this is not a direct
departmental responsibility—the BBA in their proposals talk
about setting up a mentoring network of organisations and individuals.
Will the Department be making any assessment of the effectiveness
of that?
Vince Cable: I
do not know that we have a formal process for doing it, but for
the reasons you have just given I think that is a sensible suggestion.
We ought to do that.
Q48 Rebecca Harris:
The whole of Project Merlin and all the things that you have outlined
today are basically an enormous move by the Government to try
to change the culture of banking to address a big market failure.
Obviously, it needs to succeed and we hope it does, but both you
and the Prime Minister have said that sanctions are an option
if the banks do not deliver. An additional tax or levy has been
suggested. What other sanctions do you have in mind? You have
told us that Lloyds and Santander appear to be on line to deliver.
What if we have a situation where some banks are living up to
the demands of Merlin and some are not?
Vince Cable: When
we evaluate it, obviously a key is what has been achieved through
lending targets, but it is not the only aspect. One of the positive
achievements of the negotiations that led to Merlin was the commitment
of the banks to put £2.5 billion into the business growth
fund, which is equity finance. We believe that is additional and
useful. In making an overall assessment of the scheme, we have
to think of it a little more widely.
I believe that in your questions you have spelt out
the Government's options. It is tricky in the sense that any actions
against the sector would impact on all banks, whereas some are
clearly trying harder than others. Obviously, that is a difficult
one for us when we come to taking action, if we ever have to.
It certainly would be useful to know as explicitly as possible
how individual banks are performing. We appreciate that Lloyds
and Santander have been completely upfront and said what they
are doing. It would be better if we had that for the whole sector,
but others have chosen to maintain their confidentiality.
Q49 Rebecca Harris:
Perhaps I may press you a bit on ultimately what sanctions you
are considering if the sector or individual banks do not live
up to their commitments.
Vince Cable: I
do not think I can say anything more than what I, the Chancellor
and Prime Minister have said in the past. We have the option of
approaching the taxation of profits, bonuses or balance sheets
in a more forceful way. That is certainly one of the sanctions
open to Government. It would be very difficult to envisage a situation
in which we could penalise individual banks, but clearly you have
pointed out a genuine problem here. Some banks might overachieve
and others underachieve.
Q50 Rebecca Harris:
You have also argued for a complete break up of the larger banks,
separating the "high street" from the "casino"
elements of the banks, as you have described it. If this happened
would you envisage its having a positive or negative effect on
bank lending, particularly to SMEs in Britain?
Vince Cable: It
is a very important question. I have read the interim report of
Vickers in order to try to answer that question, but it is not
very explicit about it. I would hope that the final report in
September helps answer it. The processes would be very complex,
because if his interim recommendations were followed, the retail
banks, which would be ring-fenced, would have higher capital requirements
and that in turn would impact on their lending. The socalled
casinos—everybody calls them that—would be able to
fail and, at least in terms of the interim draft, would have lower
capital requirements. There are potentially quite complex effects.
The stability of the system, the capital requirements and the
focus of senior management would change. Presumably, if you have
a ring-fenced retail bank you would not have, as two do at the
moment, investment bankers overseeing it. There would be some
very complex effects. It is a very good and important question.
Rebecca Harris: What is
your suspicion about the implications?
Vince Cable: My
overall instincts would be that the process of separation by increasing
the stability of the system would be desirable for the real economy.
Essentially, that is what the Vickers report is about. But it
is an interim report and, as a Government, we are not coming to
a conclusion on it until we have the final report.
Q51 Chair: As
a point of clarification, I think that in response to one of Rebecca's
earlier questions you talked about funding of £2.5 billion
in the context of Project Merlin. My understanding is that £2.5
billion was announced well before that in the October Budget.
Is that correct?
Vince Cable: They
announced a smaller sum at an earlier point. I cannot remember
the exact chronology, but I think that at the time Merlin was
announced there was a considerable increase in the sum of money
involved.
Emma Squire: As
part of the BBA taskforce commitments, the 17 commitments the
banks made at the end of October, they volunteered £1.5 billion
for a business growth fund. As part of the Merlin Agreement, they
increased that from £1.5 billion to £2.5 billion.
Q52 Nadhim Zahawi:
To go back to the sanctions that are available to you and pick
up your point, Secretary of State, that some banks, Lloyds and
Santander, are doing well and others are not and how you differentiate,
is there a way that you can nudge the banks to do the right thing
by reward rather than sanction?
Vince Cable: That
is the whole purpose of the executive remuneration arrangements.
Indeed, if it works, clearly that is the best way of doing it
because they have self-interest in delivering the results, and
it applies bank by bank and manager by manager. That is the best
way forward. That was why I introduced my remarks today by saying
that one of my worries about the system was that we did not know
enough about that. If the banks are more forthcoming and have
a satisfactory incentive package, that will go quite a long way
towards assuring business and you that this is a very serious
arrangement. Clearly, it is better to deal with incentives of
that kind rather than penalties, which, as I said to Rebecca Harris,
could be a blunt instrument.
Q53 Nadhim Zahawi:
So, you could see Government differentiating in that way in rewarding
bankers who do the right thing in terms of SMEs?
Vince Cable: Yes;
that is what we want to encourage. Rather than being defensive
about it, I think it would be in the banks' own interests to make
much more of this and be quite open about how they are doing it.
Nadhim Zahawi: It is a
very interesting idea.
Q54 Margot James:
I want to turn to HSBC and RBS, in which the Government have a
substantial stake.
Vince Cable: Not
HSBC—Lloyds.
Q55 Margot James:
Yes; sorry. Can you comment on what additional leverage, if any,
that gives the Government in those two relationships?
Vince Cable: The
Government own RBS; in Lloyds they are a minority shareholder.
With ownership goes the potential for decision making. The Government
have taken the view that UKFI should operate on an arm's length
basis. They should be operated commercially for several reasons,
one being to maximise shareholder value and, therefore, the value
of the shares of the taxpayer, but also because if they did otherwise
there would be issues about competition policy and allegations
of unfair competition and state aids, which would considerably
complicate the decision making.
Q56 Margot James:
Do any benefits at all in encouraging lending, which are the subject
of our discussion this morning, flow from the stakes that we have
in those banks as taxpayers?
Vince Cable: The
bank that seems to be leading the way in cultural change is one
of those two banks. Whether that is cause and effect or just reflects
senior management's decision to be a leader in this respect I
do not know, but clearly we see some consequences there. For the
state-owned or semi-state-owned banks the issue is that they have
a strategic choice in the sense that bank lending operates on
a demand curve. You can have lower price and more volume or higher
price and lower volume. You can have bigger margins for a lower
volume of trade. They can make that choice. One could argue that,
in the wider national interest, there would be an interest in
their having lower margins and a greater volume of lending. For
the reasons I have just given, the Government have not intervened
to impose that choice on them, but potentially it could be done,
with all the complications I have just described.
Q57 Mr Ward: I
am intrigued by what we are asking the banks to do. Presumably,
at the level of a bank employee who has a loan application before
him, the criteria he would use would be the same in any situation.
You have mentioned return and volume, but the other element is
risk. If we assume that capital is available—the banks tell
us that it is—do you feel the problem is the risk-averse
nature of some banks as opposed to others?
Vince Cable: Yes,
it is. Clearly, what has happened in this crisis is that the banks
have moved. They have operated in a very pro-cyclical way. They
fed the boom with what in retrospect was in many cases fairly
reckless lending, and in the downturn they have reverted to much
more risk-averse behaviour. That is in part an understandable
wish to correct past mistakes and in part a reflection on the
way the regulation operates, with a requirement on them to hold
more capital, and under the Basel agreements the SME lending component
has quite a high risk weighting. Therefore, in part they are reflecting
regulation, but I would argue that in the wider national interest
it is important we smooth out this cyclical behaviour, and not
lurch from highly risky behaviour to highly risk-averse behaviour
but have a steady approach to the real economy. That is what we
are trying to achieve as a result of pushing the banks to be more
ambitious through the Merlin lending agreement.
Q58 Dan Jarvis:
Following on from the questions of my colleague Margot James,
I would like to tease out a bit more detail on the relationship
between Government and the state-owned banks, because I think
that underpins the whole debate. I am afraid I have another quote
from when you were in opposition. You said in the run-up to the
general election: "I think rightly that the banks have no
excuses as they can't go bust; they are owned by the Government."
Why, therefore, can you not enforce even more stringent targets
on those banks?
Vince Cable: As
I said a few moments ago, the Government have made the choice
not to adopt a very prescriptive approach to lending specifically
for the state-owned banks. Indeed, I would turn that round and
say that one of the successes of the Merlin agreement is that
we have got the private banks as well as the semi-state-owned
banks to make a commitment to more lending than they would otherwise
have made. In other words, on a level playing field, all the banks
are now being pressed to do more lending than they otherwise would.
I think that is a better outcome than just picking on one big
bank, or the two semi-state-owned banks, and saying they now have
sole responsibility for keeping going the flow of lending, because
that would have impacts on state shareholder value and implications
for unfair competition in the long term. The Government had a
choice. I think Alistair Darling made the same choice. Given the
choice between simply using those two banks as the instrument
of the state and getting all banks to lend in a more proactive
way, the latter course was in practice the better one.
Q59 Dan Jarvis:
I remind you that when you came before us on 27 April you
said that Project Merlin was an agreement rather than an instruction
because it involved banks that were not state owned. I am conscious
of what you have just said about the choice you have made, but
does that mean you are able, should you wish to do so, to instruct
those state-owned banks? If so, do you think there is a compelling
argument for doing so over and above the terms that have been
agreed under the Project Merlin agreement?
Vince Cable: Clearly,
the Government could, through their shareholder representatives,
instruct what is effectively one major state-owned bank to do
what the Government require. That was a choice the Government
could have made. But the last Government and this one have chosen
a different path and just accepted that, looking at the pros and
cons, it is better to treat it in an arm's length way. We have
that choice; it remains there, but both the last Government and
this one have chosen a different path and an arm's length relationship.
Q60 Chair: That
concludes the formal part of our questioning, Minister. I thank
you for coming here again and answering our questions. I am sure
I do not need to tell you that this particular issue is regarded
by the Committee as of strategic importance in developing business
and our ability to grow out of the recession. We will be monitoring
the figures carefully and may want to have you and even the Chancellor
back at some stage in the future. We will publish a supplementary
report. I have just a couple of other questions. First, can you
tell us when the higher education report will be published?
Vince Cable: The
White Paper?
Chair: Yes.
Vince Cable: I
think it is the beginning of July. It is certainly at an advanced
stage of preparation.
Chair: First, we were
told it would be in January, then June and now it is July.
Vince Cable: I
think it is the beginning of July, but I do not have the date
to hand. We can certainly let you know the current target date
within a few hours.
Chair: That would be very
helpful. This Committee is in the final stages of its inquiry
into that issue and without the White Paper there would be considerable
difficulties in getting its report published before the summer
recess.
Vince Cable: I
understand that.
Q61 Chair: The
second matter is that, in view of the publicity given to energy
prices yesterday and their significance, is the Department looking
to do anything about them?
Vince Cable: The
key step that is now being taken in relation to energy pricing
is the electricity market review, which is ongoing, and my colleague
the Secretary of State for Energy and Climate Change has responsibility
for that. There is the option of looking at the role of the competition
authorities in all this. That is something the Government have
under review, but the main policy action is in respect of the
way the electricity market works. I am sure that my colleague
could answer questions on that.
Q62 Chair: Are
you likely to refer it to Ofgem?
Vince Cable: I
cannot say that. It is something we have under review, but I am
not coming forward with a recommendation on that.
Chair: Again, we will
watch that carefully and, if necessary, hold a future inquiry
into it. Thank you very much, Minister. We will let you go now.
1 The actual figures are 63% of micro businesses (1-9
employees); 73% of small businesses (10-49 employees) and 77%
of medium sized businesses obtained some form of finance from
some source (source Annual Small Business Survey 2010) Back
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