2The SME finance market
Demand-side issues
4.Demand for external finance amongst SMEs remains subdued compared to recent years. In 2017, 38 per cent of SMEs used external finance, showing little change from the 37 percent that used external finance in 2014, 2015 and 2016, but some way below the 44 per cent seen in 2012.2 Looking at bank loans specifically, research by the British Business Bank (BBB, a Government owned, independently run development bank) shows that the proportion of SMEs applying for new loans has fallen from 2.9 per cent in 2012 to only 1.7 per cent in H1 2017, and that this decline is the result of ongoing “demand-side market failures”.3 The same research found that 70 per cent of SMEs are willing to accept a slower growth rate rather than borrowing to grow faster.4 Commenting on demand for finance, Suren Thiru, Head of Economics and Business Finance at the British Chambers of Commerce (BCC) told the Committee that, following the financial crisis, there has been a “shift from credit crisis to credit apathy”, resulting in “really weak” levels of demand.5
5.In taking evidence on the factors that are dampening SME demand for finance, the Committee identified a number of common themes. These are considered in turn below.
Awareness and understanding
6.The wide variety of financing options available to SMEs is a real strength of the UK market, yet the Committee heard that many SMEs may lack awareness of the various sources of finance available to them, and a sound understanding of what form of finance may be most appropriate. Stephen Welton, CEO of the Business Growth Fund (BGF, the UK’s most active investor in small and medium-sized companies), told the Committee:
What we need to do a better job of is increasing the understanding in the SME population as to where to go, because one of the frustrations is if you think that the solution to your problem is an overdraft, and you go and ask for an overdraft and you do not get it, that does not mean that you cannot raise funding. It means that you have gone to the wrong place to get funding. There is a big educational piece that we need to do.
[…]
For somebody who is nonfinancial, it is often quite intimidating to try to find funding. You do not know the language. It feels like a very opaque system, and you think that you are not necessarily going to be right for the person you are applying to.6
7.Katrin Herrling, CEO of Funding Xchange, an SME funding marketplace, noted that this problem is particularly pertinent amongst very early-stage companies, explaining that these businesses “often do not have a very good understanding of the different sources of finance, outside of the bank loan or the overdraft”, and that the solution lies largely in giving business owners the confidence to look beyond traditional debt finance.7 The BBB, too, has identified “information failures” as an important contributor to weak demand, noting that:
Anecdotal evidence suggests that some UK entrepreneurs do not fully consider the different options available to them to support their long-term growth. This reduces the efficiency by which capital is allocated to growing firms, meaning that high growth potential firms sometimes struggle to obtain the right finance that they need to grow to scale.
This is corroborated by survey data which has consistently shown that most UK SMEs are not aware of financial products beyond standard term bank loans, overdrafts and credit cards. And, even where they are aware of a product, often they may not practically know a trusted provider of that product to contact.8
8.This suggests that education and the provision of guidance is key. In its written submission to the inquiry, the Financial Services Consumer Panel said:
Small businesses need help to navigate the market. […] Authoritative, independent and impartial guidance would enable small businesses to make informed decisions about whether to borrow or not, and the most appropriate options open to them, as well as help with their wider financial arrangements. It would give them the confidence to look beyond their main bank to find more suitable products and better service.9
9.Education and guidance can also be provided through mentoring services, such as those offered by certain lenders or business networks. Previous analysis has shown that firms who seek advice have a much greater chance of securing finance,10 and Newable, a lender and provider of other services to SMEs, told the Committee that “pre-loan mentoring can make a particular difference, as many SMEs can fail to secure finance due to avoidable errors in application forms”.11 In December 2017, the Government created the Small Business Commissioner (SBC), an independent public body tasked with tackling late payment practices in the private sector. It was reported in July 2018 that the SBC is also looking to increase awareness of options for those SMEs struggling to access funding.12
10.It is naive to expect all business owners to possess a detailed understanding of the various financing options available to them. For many, the demands of running a business will leave little time for building financial expertise and searching the market. This points to a need for concise and easily accessible information targeted at the non-expert seeker of finance. As the centre of expertise on smaller business finance in the UK, the British Business Bank has an important role to play, and its Business Finance Guide and Finance Your Growth initiatives are to be welcomed. These tools must be maintained and promoted effectively to ensure they reach as wide an audience as possible.
11.The Small Business Commissioner is also well placed to assist SMEs in building awareness and understanding of the financing options available to them. The Government should expand the remit of the Commissioner to provide it with a formal role in helping small businesses to access the finance they need, particularly by improving levels of awareness and understanding of financing options.
Trust
12.A healthy SME banking relationship is dependent on mutual trust. However, high profile examples of widespread mistreatment of SME customers have negatively affected SMEs’ trust in the banking sector, and have exposed the vulnerability of small business customers to poor conduct. This erosion of trust has contributed to the relatively weak levels of demand for bank finance in recent years. Suren Thiru of the BCC told the Committee:
Issues around trust are feeding into what is commonly called discouraged demand. Businesses are not going for finance in the first place because there are issues around trust. Some are lingering from the financial crisis.13
13.Restoring trust in banking is no small task. Since the financial crisis, financial institutions have made changes to the way they are run to instil greater confidence in their customers. The Committee heard that many incumbent banks have undertaken “root-and-branch” reviews of how things are done,14 with Amanda Murphy, Head of Commercial Banking at HSBC, noting that the bank has changed the way it trains, manages and incentivises its staff.15 At an industry-wide level, the Banking Standards Board—established to rebuild trust and promote high standards of behaviour in banking—continues to play an important role, particularly through its annual culture assessment programme.
The “perception gap”
14.In spite of this work, it is clear that there exists a perception amongst many SMEs that, were they to apply for external finance, they would not be successful. The expectation that they would be turned down leads many businesses to avoid applying in the first place.16 John Glen, Economic Secretary to the Treasury, told the Committee:
There is a challenge in terms of the mindset of SMEs […] In a recent survey, 41 per cent of them said that they did not think they would be accepted for a loan, yet the facts are that eight out of 10 who apply do get a loan.
[…]
There is sometimes […] a gap around people’s perception of the likelihood of securing a loan.17
15.Data provided by UK Finance shows that around 100,000 SMEs applied for a bank loan in 2016/17, of which around 70,000 were successful.18 However, some in the industry question the usefulness of these statistics. In its written submission to the inquiry, iwoca, a micro- and small business lender, noted that “reporting of loan approval rates fails to capture the large numbers of businesses that enquire in branch or online about credit, but never formally apply because they believe they will be rejected whether for lack of collateral or historic financials, or that are simply discouraged by the drawn-out and burdensome application process”.19
16.Data on SME attitudes to external finance are concerning. The reluctance amongst many business owners to seek external finance is driven by a variety of factors, though it is clear that a lack of trust in lenders and an often misplaced fear of rejection are key contributors. The Economic Secretary recognised the challenges that stem from an entrenched unwillingness to apply for finance. The Treasury should conduct or commission work to identify why this attitude is commonplace amongst SMEs, and develop a strategy to ensure the UK’s small businesses have the confidence to seek the external finance that is right for them. Efforts should also be made to ensure SMEs are aware of the options available to them if they are turned down for finance; specifically the Lending Appeals Process and the Bank Referral Scheme.
The supply of finance to SMEs
Equity finance
17.Given the importance of SMEs to the UK economy, it is vital that they benefit from an adequate supply of finance. Philip Duffy, Director, Enterprise and Growth at HM Treasury, told the Committee that “if you do not get a good supply of finance to high growth firms, you are going to struggle with the mediumterm productivity”.20 Equity finance is particularly important for these high-growth firms, with Mr Duffy adding:
[…] compared with comparator economies [such as] Australia, the United States and some of the European economies, we clearly have a problem. We have a much lower proportion of our companies seeking equity. When they do seek equity, they do not do as well in later rounds of equity raising, and they exit the market sooner. There is a view from us that to fix some of these productivity problems we need to support that […]. The work the BBB is doing is […] not going to be enough unless we think about how we manage the really big resources—our pension funds and some of the institutional investors. That money is not reaching some of our start-up companies at the same speed that it does in other economies, and that is something that naturally really worries us.21
18.This point was also raised by Stephen Welton, CEO of the Business Growth Fund, who described the UK growth capital market as a “cottage industry”. He argued that the UK’s long-term investors, namely the pension funds, are not channelling enough capital into small businesses.22 In October 2018, the Government announced the appointment of Andy Haldane, Chief Economist of the Bank of England, as the Chair of the Industrial Strategy Council.23 The Council’s remit includes, amongst other things, reviewing the impact of the Government’s Industrial Strategy, which contains various measures aimed at improving productivity and fostering the growth of SMEs.
19.The Committee welcomes the Treasury’s recognition of the challenges faced by high-growth, scale-up businesses seeking investment. The Treasury should assess what can be done to improve the extent to which these companies benefit from the capital of the UK’s long-term investors.
Bank lending
20.Despite gross bank lending to SMEs falling slightly in 2017, it remains a key source of finance for smaller businesses.24 Nevertheless, the level of bank lending to SMEs remains lower than before the financial crisis.25 Commenting on trends in the supply of bank finance, Keith Morgan, CEO of the British Business Bank, told the Committee:
… immediately after the financial crisis there were genuine issues of capital and liquidity in the banking system. You saw that many banks pulled back from lending and from lending to small businesses. We then went through a period, up until roughly 2014, in which there were continuing issues of supply and demand. From about 2015 onwards, we finally got to the point in the banking markets where the new lending that was issued to SMEs was larger than the repayment of old loans, which meant that the net increase was positive.
Frankly, since that time, it has not been very positive. If you look at the figures, they are very small increases. Roughly speaking, the stock of bank lending has been constant since that period.26
21.Micro- and small businesses—as opposed to those at the larger end of the SME spectrum—have seen a particularly stark reduction in lending. In its written submission, iwoca noted:
The value of annual total lending approved for micro- and small business plunged by 38.7 per cent between 2013 and 2017, down to £7.2 billion. As part of that, the annual value of loans approved to micro- and small business dropped by a massive 40.2 per cent over the 4 years.27
iwoca argues that this is down to a reduced risk appetite amongst banks coupled with a reluctance to adequately market credit to that segment of the SME community.
22.Nevertheless, the banks that provided oral evidence to the Committee stressed the importance of SME lending to their overall businesses, and their ambitions to increase gross lending in the coming years.28
23.Banks are often the first port of call for business owners seeking finance, and the importance of bank lending for SMEs is clear. While the fact that bank lending remains below pre-crisis levels may be cause for concern, the Committee accepts that a bank’s risk appetite, and thus its willingness to lend to SMEs, is a legitimate commercial decision and a competitive differentiator. However, banks should keep their levels of SME lending under review to ensure they are regularly deciding whether it is optimal, rather than merely perpetuating historic trends.
Competition in the provision of SME finance
Banking competition
24.Following a lengthy market investigation, the Competition and Markets Authority (CMA) concluded in 2016 that “competition … for SME lending is not working well for customers”.29 It introduced a range of measures seeking to improve competition, which it acknowledged may take three to four years to fully take effect.30 A lack of competition means banks have limited incentives to improve the price and quality of the services they offer to SMEs. A number of witnesses told the Committee that weak competition remains a key issue today. In its written submission, the British Chambers of Commerce described a “fundamental lack of competition” in the market,31 and Rishi Khosla, CEO of OakNorth, told the Committee that “competition is not working”.32 The Economic Secretary also recognised the problem, saying of competition in the sector:
There is more progress that can be made. […] I have met with a number of challenger banks in the last few weeks and they are very determined to increase their lending to SMEs.33
25.The UK banking market has seen a number of new entrants, with over 50 firms being granted a banking licence since 2008.34 Yet the sector is still dominated by a small number of large institutions; a structure that the Minister described as “lots of Davids and four Goliaths”.35 A number of challenger banks told the Committee that they remain at a significant competitive disadvantage, primarily due to the way in which certain regulatory requirements are implemented. John Glen recognised that challenger banks “are at a significant disadvantage in terms of their size and proximity to getting a bigger foothold in the market”.36
26.Capital requirements are typically calculated differently for challenger banks compared to their larger competitors. Calculating the amount of required capital involves determining a firm’s “risk-weighted assets” (a measure that assigns weights to a bank’s assets to reflect their relative risk of incurring loss), and making sure a certain percentage of these assets are backed by capital. For smaller banks, risk-weighted assets are typically calculated using a standardised model, whereas larger banks are often able to employ bespoke, internal models for some SME lending portfolios. OakNorth described the implications of this discrepancy in its written evidence:
… new banks like OakNorth have to adhere to more onerous capital requirements and hold up to 10 times more capital than larger banks to write the same loan. We have to use a Standardised Approach to our risk weighting, compared to the Internal Risk-Based model that larger banks get to use. By being able to apply our own model regarding risk weighting instead of having to use the Standardised Approach, we would have a larger amount of capital at our disposal.37
27.Capital requirements in the UK stem from EU law, which is in turn derived from global standards set by the Basel Committee on Banking Supervision. Rishi Khosla told the Committee of his hope for changes to the UK regime following the country’s exit from the EU:
The risk-weighted assets are less in our control today, but obviously with Brexit that is an opportunity for the UK to take a view itself away from the EBA’s guidance on how to treat risk-weighted assets—we hope in a more proportionate manner for organisations that are scaling …38
This view was shared by the Institute of Chartered Accountants in England and Wales (ICAEW), whose written submission stated that Brexit may provide “greater flexibility to examine options that could reduce the costs for smaller banks […] For example, more proportionate, differentiated capital rules”.39 The Economic Secretary also noted the need to consider how best to structure the requirements in future, telling the Committee:
… I have had my ears blasted a number of times by challenger banks over the way that capital requirements have been applied […] We have been bound by the rules as they have existed. There are new ways of looking at it. If you look at the way the banks operate in the US, there are different ways that the capital requirements can be interpreted. These are matters that will need to be considered.
[…]
We need to do all that we can to enable real competition between those different entities—legacy and new entrants.40
28.The Prudential Regulation Authority (PRA) made adjustments to its capital regime in 2017, reducing capital requirements for smaller firms using the standardised approach to risk weighting. The changes were described by Sam Woods, Deputy Governor for Prudential Regulation at the Bank of England, as “a major step forward for the PRA in facilitating effective competition”.41 These changes were welcomed by the challenger bank community, though evidence submitted to this inquiry suggests that capital requirements remain a concern.
29.A lack of competition in SME banking, which has long-plagued the UK market, remains a key area of concern. While the emergence of new entrants is welcome, by the Government’s own admission, more work is needed to bring meaningful competition that will improve outcomes for SMEs. The Minister is correct to recognise the significant task faced by challenger banks seeking to break the stranglehold of the large incumbents.
30.The previous Treasury Committee was unconvinced by the outcome of the CMA’s retail banking market investigation. Two years have passed since the publication of the CMA’s final report, yet the concerns around the level of competition persist. Given that the CMA itself noted that its measures were expected to take three to four years to have a noticeable impact, the Committee will monitor developments closely over the next two years. The Committee recommends that, in response to this report, the CMA provides an update on the implementation and impact of the measures introduced to improve competition in SME banking.
31.Despite welcome changes to the PRA’s regime in 2017, capital requirements remain a specific source of dissatisfaction for the UK’s smaller banks. The Committee is clear that the UK’s exit from the EU should not herald a new era of laxity in capital regulation, but considers that there is an opportunity to consider how the regime can better support competition without compromising safety and soundness. The Government should provide its assessment of how this could be achieved.
The RBS Alternative Remedies Package
An overview
32.As a condition of the European Commission’s approval of the Government’s £45 billion bailout of RBS, the bank had to take measures to reduce its size and market share. This involved undertaking five major divestments, four of which have been completed. The fifth commitment—to sell off its Williams & Glyn business—was aborted after attempts to sell it to a competitor and to establish it as a standalone bank both failed.42 In response, the Government proposed an alternative set of initiatives with the aim of achieving the same outcome; improved competition in the SME banking market. This set of initiatives—known as the Alternative Remedies Package (ARP)—was formally approved by the European Commission in September 2017.43
33.The package seeks to transfer three per cent of RBS’s SME banking market share to its competitors through two remedies:44
- Capability and Innovation Fund: This initiative will see RBS provide 15 grants, ranging in value from £5 million to £120 million and totalling £425 million, to its competitors. The recipients will be required to use the grants to improve their SME banking service, and thus their ability to compete with RBS. The grants are split into four “pools” as set out below.
Table 1: Capability and Innovation Fund
|
Fund |
Number and value of grants |
Purpose |
|
Pool A |
1 x £120 million 1 x £100 million 1 x £60 million |
To facilitate the development of more advanced business current account offerings and ancillary product sets by banks with existing and substantive business current account capability |
|
Pool B |
1 x £50 million 2 x £15 million |
To facilitate the modernisation of existing business current account offerings or (in the case of eligible bodies without existing business current account offerings) the development of new propositions |
|
Pool C |
4 x £10 million |
To facilitate the development of new and existing SME lending and payments businesses with a particular focus on facilitating the deployment of new technology to the relevant markets |
|
Pool D |
5 x £5 million |
To facilitate the commercialisation of financial technology that is relevant to SMEs |
Source: Introduction to the alternative remedies package: information pack, HM Treasury, 3 September 2018
- Incentivised Switching Scheme: Under this scheme, RBS will provide to its competitors dowries totalling £275 million, which those firms must use to incentivise certain RBS SME banking customers to switch their business to them. RBS will provide a further £75 million to cover the costs associated with switching.
Concerns over design and implementation
34.Firms applying to receive grants under the Capability and Innovation Fund must meet certain eligibility criteria. These criteria stipulate that those applying for Pool A and Pool B grants are required to have gross assets in the UK of less than £350 billion, with the largest grants aimed at firms with “existing and substantive” business current account offerings.45 Many challenger banks have expressed concern at the eligibility criteria, arguing that they enable large, well-established firms to benefit most, whereas the package would be better targeted at smaller challengers. Anne Boden, CEO of Starling Bank, said of the package:
The small business banking market has no meaningful competition and the RBS fund needs to back genuine disrupters, rather than established high street banks who have taken small business owners for granted for too long.46
In its written submission, OakNorth argued that “larger banks such as Santander, Nationwide and TSB should be excluded from the fund”.47 Smaller banks may also be unable to devote as much resource to applying for the grants compared to their larger competitors. Two of the UK’s most established challenger banks, CYBG and Metro Bank, reported £5 million and £590,000 of spending relating to the package respectively earlier this year.48 In his evidence to the Committee, the Economic Secretary recognised the “concern expressed about who is eligible”.49
35.Non-banks have also expressed displeasure at the design of the package. Written evidence submitted by iwoca states that “less than 8.5 per cent of the £700 million package is potentially available to alternative lenders despite their proven track record of providing much needed funding to micro and small businesses”.50
36.The Alternative Remedies Package was originally due to be implemented in the first half of 2018. However, as noted by the Minister, the recruitment of the Directors of the independent body (Banking Competition Remedies Ltd. (BCR)) responsible for administering the package “took longer than initially expected”. As such, the package is now due to be launched in November 2018.51 Prior to the announcement of this timetable in July 2018,52 firms looking to benefit from the package complained of a lack of communication regarding the package’s implementation and of the costs associated with delays.53
37.The Economic Secretary told the Committee that there is more that needs to be done to improve the Alternative Remedies Package. This is unfortunate, as the opportunity for the Treasury to adjust the package has long since passed. The Committee views the initiative as a rare and critically important opportunity to provide a meaningful boost to competition in the SME banking market. Both the Treasury and the independent body administering the package must take a similar view, and should not see this initiative simply as a compliance exercise to satisfy the European Commission’s State aid requirements.
38.It is disappointing to hear that the industry is expressing concerns about the package’s design and implementation. Delays to implementation are not without cost, and given those witnessed to date, it is all the more important for Banking Competition Remedies Ltd to administer the Alternative Remedies Package in as timely a manner as possible.
Innovation and alternative finance
The rise of alternative finance
39.Alternative finance is typically thought of as funding that does not involve traditional financial institutions. The term covers a wide variety of financing models that have emerged outside of the traditional financial system. The sector has grown considerably in the UK in recent years, albeit from a low base. The Economic Secretary said of the sector:
We see a number of options around peer-to-peer lending; we see invoice financing, we see more asset financing.
[…]
I see it as a growing segment. I think the alternative sources of funding will become more popular, but it is from a small base that is growing rapidly.54
Keith Morgan discussed the recent growth in alternative finance, saying:
… there has been the growth of some alternative forms of finance, which I see as encouraging. The biggest item to point out is probably asset finance […] That has been growing at, roughly speaking, 10 per cent to 12 per cent a year over this period. […] We have also seen a growth, from a small base, in peer-to-peer and other marketplace lending.55
40.There are a number of reasons behind the growth in alternative finance. James Meekings, Co-Founder and UK Managing Director at Funding Circle, told the Committee what attracts SMEs to his peer-to-peer lending platform:
We continually hear stories that it takes months for them [SMEs] to get finance through a bank. Through us, it takes 10 minutes to apply online. […] We then get a decision to them within 24 hours
[…]
They get to do it any time they want. What we typically find is that 50 per cent of the initial registrations from businesses happen in hours when they could not get a meeting with their bank manager. The traditional experience through banking does not really meet with the modern world that small businesses are looking for. There are then some secondary things around transparency of fees. There are a lot of different fees that banks may charge. We are trying to be much clearer.
[…]
The last thing on customer experience is pricing. We use data and technology to make sure that we price risk appropriately. That means that we think we can price better than banks on some loans, and therefore that is a better experience as well.56
41.James Meekings also suggested that alternative lenders are filling a gap in the market created by banks pulling back from certain types of lending, noting that “banks do not really do cash-flow lending to small businesses”.57 He also highlighted the opportunities presented by partnerships between alternative finance providers and banks:
What you actually need is nonbank solutions to complement banks […] We have partnerships with RBS and Santander, and they want to keep that banking relationship. They want to sell the insurance. They want to sell the foreign exchange. They want to crosssell everything, but if they cannot do the lending, they do not want to lose all of the other stuff. The biggest advantage that they have is the plumbing, and how tiedin to them SMEs are.58
42.Certain types of alternative finance, however, target a different customer base to the banks. Luke Lang, Co-Founder of CrowdCube, said:
… equity crowdfunding satisfies a different demand to banks. It is for those aspirational, ambitious, startup, earlystage businesses that really want to grow quickly and rapidly, and maybe they do not have the assets to back it up with debt finance, or they do not want—or are unable to meet—the interest repayments from a bank loan.59
43.Equity crowdfunding and peer-to-peer lending are popular forms of alternative finance, and both are regulated by the Financial Conduct Authority (FCA) as “regulated activities” under the Financial Services and Markets Act 2000.60 Regulation provides those using the platforms with a degree of comfort, and may have contributed to the sector’s strong growth in recent years. Luke Lang praised the regulatory regime for equity crowdfunding in his oral evidence:
The regulation on our side is actually pretty good and balanced. […] It has certainly enabled our industry to go from a very nascent industry to really flourish and become a mainstream source of capital for British entrepreneurs. We are genuinely leading the world when it comes to alternative finance. Peer-to-peer lending and equity crowdfunding is at the forefront of that. That is something we should be proud of. It pains me to say it, but we should give the FCA some credit for that.61
44.The FCA launched a post-implementation review of its regulation of equity crowdfunding and peer-to-peer lending in 2016. Its findings were published in July 2018—significantly later than intended—alongside proposed changes to its rules for peer-to-peer platforms.62 Luke Lang, Co-Founder of CrowdCube, told the Committee of his disappointment in the delays to concluding the review, saying: “It is now over 18 months late. That is not particularly helpful”.63
Government initiatives
45.The Government has taken steps to promote the growth of the UK’s alternative finance sector. Funding Circle’s written submission, however, notes that “banks continue to hold some competitive advantage, predominantly due to the fact that they hold large amounts of historic data such as current account information on small business customers”.64 Nevertheless, it goes on to explain that “the government has helped to significantly level the playing field” between banks and alternative finance providers.65
46.One measure designed to improve competition is Open Banking, which may provide significant opportunities to innovative alternative finance providers with existing date-led operating models. James Meekings predicted that Open Banking will “unleash more innovation and competition”, and that the “wealth of data” it will bring will allow Funding Circle to lend to more businesses and to price loans “more accurately”.66
47.Open Banking allows consumers and SMEs to securely provide regulated third parties with access to their financial information.67 However, recent survey data shows that only six per cent of UK adults would not be concerned about sharing their financial data with companies other than their main bank.68 Open Banking will allow SMEs to better demonstrate their creditworthiness to prospective lenders and to quickly identify services that best suit their needs, for example. The Treasury spoke positively of the potential of Open Banking, noting that it will be “quite transformative”, and will lead to “better products” that will be “extremely beneficial to SMEs”.69 A number of witnesses told the Committee that Open Banking will take time to have a noticeable impact on the market, however. Katrin Herrling warned that Open Banking “is going to take a little while to bear full fruit”.70
48.A number of other Government schemes have been introduced to encourage the growth of the UK’s alternative finance sector, and the SMEs that make use of it. The introduction of the Innovative Finance ISA—which allows peer-to-peer lending agreements to be included within an ISA tax wrapper—was described by James Meekings, Co-Founder and UK Managing Director at Funding Circle, as an example of the Government being “very successful in helping get more money into small businesses”.71 The Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) also received praise from witnesses, with Luke Lang noting they have made the UK “the envy of Europe”.72
49.The UK’s alternative finance sector has demonstrated impressive growth in recent years. This is beneficial for SMEs seeking funding, and is in part down to measures introduced by the Government to encourage the sector’s development. However, it still accounts for a relatively small portion of the overall SME finance market, and it is likely that potential for further growth still exists. The Government must not rest on its laurels; further work will be required to ensure the UK’s alternative finance sector fully realises its potential while maintaining appropriate standards of protection for consumers.
50.Open Banking has the potential to bring significant benefits for SMEs seeking finance. Its impact on the market to date, however, has been muted. As an initiative based fundamentally on the sharing of private financial information with third parties, its success will depend heavily on the willingness of consumers and SMEs to trust those firms. Perhaps understandably, given the frequency of high-profile IT failures and data breaches, that trust appears to be seriously lacking. The Treasury told the Committee that it expected the impact of Open Banking to be slow to materialise, but the Committee urges it to take a more ambitious stance. Working with the Competition and Markets Authority, the Treasury should provide an assessment of the initiative’s effect on the market to date. The authorities should also set clear and challenging milestones for the industry in relation to the timely development of Open Banking services, and deliver a comprehensive strategy for combatting the clear public trust issues that threaten to undermine the initiative.
2 BDRC, SME Finance Monitor Q4 2017 (15 March 2018), p 62
3 British Business Bank, Small Business Finance Markets 2017/18 (20 February 2018), p 15
4 British Business Bank, Small Business Finance Markets 2017/18 (20 February 2018), p 7
5 Q128
6 Qq4–5
7 Q2
8 British Business Bank, Small Business Finance Markets 2017/18 (20 February 2018), p 16
10 Business, Energy and Industrial Strategy Committee, First Report of Session 2016–17, Access to Finance, HC 84, para 45
12 “P2P industry must look outside of London”, Peer 2 Peer Finance News, 23 July 2018
13 Q137
14 Q214
15 Q213
17 Qq246, 299
20 Q248
21 Q248
22 Q15
23 “Chair of new Industrial Strategy Council appointed”, Department for Business, Energy & Industrial Strategy press release, 8 October 2018
24 British Business Bank, Small Business Finance Markets 2017/18 (20 February 2018), p 53
26 Q127
28 Qq212–213
29 Competition and Markets Authority, Retail banking market investigation final report (9 August 2016), p xxvii
32 Q215
33 Q246
34 British Business Bank, Small Business Finance Markets 2017/18 (20 February 2018), p 56
35 Q264
36 Q246
38 Q220
40 Q264
41 “PRA launches consultation on Pillar 2A capital framework”, Bank of England press release, 24 February 2017
42 HM Treasury, RBS State aid: alternative remedies package, 18 September 2017
43 “State aid: Commission approves alternative to divestment commitment for Royal Bank of Scotland”, European Commission press release, 18 September 2017
44 HM Treasury, RBS State aid: alternative remedies package, 18 September 2017
45 HM Treasury, Capability and Innovation Fund terms and conditions
46 “Starling to recruit head for SME banking as it targets RBS fund”, Starling Bank press release, 24 April 2018
48 CYBG, Interim Financial Report 2018, p 6; Metro Bank, Q1 Trading Update 2018 (25 April 2018), p 5
49 Q250
52 “Banking Competition Remedies Ltd (BCR) market update”, Lansons press release issued on behalf of BCR, 16 July 2018
53 “RBS £775m competition scheme setback blamed on executive hiring delays”, The Telegraph, 16 July 2018
54 Qq311–312
55 Q127
56 Q4
57 Q4
58 Q12
59 Q3
60 Financial Conduct Authority, “Crowdfunding”, Accessed 7 August 2018
61 Q46
62 Financial Conduct Authority, CP18/20: Loan-based (‘peer-to-peer’) and investment-based crowdfunding platforms: Feedback on our post-implementation review and proposed changes to the regulatory framework (27 July 2018)
63 Q46
66 Qq12, 57
67 Open Banking, “What is Open Banking?”, Accessed 9 August 2018
68 YouGov, “Three quarters of Britons haven’t heard of open banking” (1 August 2018)
69 Q327
70 Q58
71 Q21
72 Q66
Published: 26 October 2018