Banking StandardsWritten evidence from British Chambers of Commerce

Introduction

1. The British Chambers of Commerce (BCC) represents 104,000 companies, who are members of 51 accredited Chambers of Commerce in every region and nation of the UK. Many of these companies are small- and medium-sized businesses. In turn, many of these companies have reported serious concerns regarding access to finance issues—concerns which the BCC has raised with various government departments and Parliamentary inquiries in recent years.

2. The comments below are a synthesis of business views on the wide range of issues covered by the Commission’s remit. If members of the Commission would like further detail on any of the points raised below, we will be happy to elaborate.

SME Concerns Regarding the Standards and Culture of British Banking

3. The access to finance issues faced by small- and medium-sized businesses across the globe over the past five years are well-known. Yet, as the Breedon Review, Eurostat and others have noted, the situation in the UK is unique. No other country has seen a bank deleveraging on the same scale as the UK. SME loan rejection rates in the UK are higher than in other European countries. And UK small- and medium-sized companies, are overwhelmingly reliant on debt when they seek external financing. Breedon suggests that UK SMEs alone face a finance gap of up to £59bn within five years.1

4. These constraints are borne out by the BCC’s own research. In a recent survey, fully 42% of businesses said that access to finance issues would have either “a strong influence” or “a significant influence” on their business during 2012 -- this is an astonishingly high number during a period when many businesses have de-leveraged.2 And as BCC research and the independent SME Finance Monitor show, many of the remaining companies are “happy non-seekers” of external finance, funding their business principally using their own resources.

5. Chamber of Commerce members seeking business finance have reported a number of increasingly-acute problems since 2008.

6. It is more difficult for businesses to access external finance now than it was before the financial crisis. Banks require more information before approving credit facilities, and are more likely to use imperfect information as a justification for rejection rather than incur the cost of assessing risk more fully; certain sectors (such as construction and hospitality) seem to suffer from a negative bias, tending toward swift rejection; and there are greater security requirements when facilities are offered. Many businesses are realistic about the cost of finance, and understand that it will be more expensive than the years leading up to 2008, but still report increased obstacles to securing finance in the first place.

7. Failure to address business concerns around access to finance is undermining the transition to a “new model economy” driven by exports. The continued difficulties faced by business act as a drag-anchor on the UK’s export performance by hindering those looking to trade internationally for the first time.3 Seeking out and growing new markets involves upfront costs and additional risks: over a third of potential exporters say that resource levels and access to finance are “highly influential” in deciding if, when, and where to export.

8. There is a lack of trust between lenders and businesses, damaged when the original credit crunch occurred, and not repaired since. The BCC has summarised this as a gap in relationships, transparency, and trust—which has been further exacerbated by the LIBOR and mis-selling scandals. This has led to the phenomenon of “discouraged demand”, which translates as businesses that want finance, but will not approach banks to try and get it because of the assumption that they will either be rejected or that they will have other facilities re-evaluated. Fully 12% of companies—one in every eight—surveyed in the largest independent survey of SME finance conditions, represent “discouraged demand”.4

9. There is a fundamental lack of competition within the highly concentrated UK banking sector. This was discussed extensively by the Independent Commission on Banking, which noted that fully 85% of SME accounts sat with the “big four” high street banks.5 The ICB’s recommendations for increased competition are moving ahead, but businesses in the real economy still often view banks as being “all the same”, both in terms of their attitudes toward business and their internal cultures. This viewpoint, combined with the perceptions that switching between finance providers is difficult and that some banks will only lend to certain sectors, leads to a lack of choice for businesses attempting to obtain external finance.

10. Smaller, younger, and higher-growth businesses find it much more difficult to access finance than more established firms. Statistical evidence backs this up—with the SME Finance Monitor’s results showing renewals more likely to be approved than new applications, and that businesses trading for less than five years were more likely to face declines.6 Many of the oft-mentioned “gazelle” firms, who create a significant proportion of all employment growth, have noted access to finance as a key barrier to further expansion as far back as 2008.7 Some firms also report that they are discouraged from accessing finance due to a lack of clarity, knowledge, or skills.

11. Regulatory changes, including the Basel III rules and the Independent Commission on Banking’s recommendations, will affect both the cost and the availability of SME debt financing. Higher bank capital ratios and liquidity requirements, the separation of investment banking and high street banking, and other shifts in the regulatory environment will have a further effect on banks’ willingness to lend to SMEs over the long term.

12. The introduction of state-backed support schemes has been impeded by lack of coherence, poor roll-out, poor communication, and over-dependence on existing bank infrastructure. While the Government has made a number of attempts to increase the availability of finance to SMEs, including the Enterprise Finance Guarantee, the introduction of welcome new short-term export finance products, through to the most recent Funding for Lending scheme, these have been bedevilled by a capability-expectations gap.8 This has been commented on extensively by the BCC, and by independent commentators.9 Businesses expected swift availability, clear information, and efficient processes—but the reality on the ground has been far different, with coal-face bank personnel often unable or unwilling to facilitate access to what is a bewildering array of products. Inexperienced relationship managers and credit officers are still often incapable of explaining how state-backed products work, or how local businesses can access them. It is an open question whether this is down to incomplete information, difficulties in rolling out training, or the fact that banks’ incentive structures are geared to the sale of their own products, rather than helping companies to access government support.

Recommendations for Action

13. Chamber of Commerce members have three priorities for the financial system:

Immediate action by financial institutions to address the gap in relationships, transparency, and trust that arose in the wake of the credit crunch and deleveraging.

Action to increase competition in the banking system, to ensure real choice and to widen access to commercial lending.

The creation of mechanisms by government and the Bank of England to prevent future credit crises on the scale seen in recent years.

14. For the BCC, the first of these priorities is the principal responsibility of the banks. Some steps are already being taken through the Business Finance Taskforce to increase transparency, facilitate SME appeals, and widen access to information.10 The banks have a long road to travel to restore relationships with their existing customers, however, as the current situation is the result of long-term over-centralisation of decision-making and poor relationship management, in addition to the serious failings of the LIBOR scandal and the mis-selling of structured derivatives to SMEs. Given that these trends stretch back several decades, their reversal will take some time. While we are not in favour of “bashing” the banks, and work closely with lenders wherever possible to resolve individual companies’ concerns around decisions, trust, and transparency, we believe that the Commission is well-placed to recommend more permanent and systematic monitoring of relationship management in business banking for the future, perhaps by regulators.

15. Increasing competition, the second priority, is being addressed in part, through the implementation of the recommendations of the Independent Commission on Banking. The recent expansion of activity by SME lenders such as Handelsbanken and Aldermore is welcome news, as is the development of new peer-to-peer and alternative funding models, such as Funding Circle, Market Invoice, and Platform Black. But these are niche players. Regulators, including the successor to the Financial Services Authority and the further-empowered Bank of England, must ensure that mainstream competition continues to expand. For competition to have an impact on confidence in the “real economy”, businesses must see lower barriers to account-switching and more variety in the type and cost of facilities available. What’s more, business account holders should not be forced to cross-subsidise so-called “free” banking services for individual consumers through higher fees and charges.

16. The achievement of business’s third demand, however, will require legislative and policy action by government. Additional Quantitative Easing, which played a crucial role in stabilising the financial system early in the crisis, will not be enough as it does not reach the “real economy”. It is the BCC’s firm belief that only a state-backed business bank can play both a pro-cyclical and counter-cyclical role to encourage access to finance. As work by a wide range of commentators—including independent reviewers acting on behalf of government11 and think-tanks12—has shown, the UK is virtually unique in lacking a state-backed business finance institution of the sort of institution we would propose. The BCC’s paper on The Case for a British Business Bank—which would lend to viable new and growing businesses un-served by a risk-averse commercial banking sector—is enclosed alongside this submission.

Conclusion

17. To summarise, the BCC believes that concerted action to restore small- and medium-sized companies’ confidence and trust in the commercial banking system is required. This must sit alongside a concerted drive to expand competition, and the creation of a British Business Bank.

7 September 2012

1 Tim Breedon, Boosting Finance Options for Business, March 2012.

2 British Chambers of Commerce snap poll, June 2012

3 British Chambers of Commerce, Exporting is Good for Britain: Finance and Costs, June 2012.

4 BDRC, SME Finance Monitor, Q1 2012, p 10.

5 Sir John Vickers, Independent Commission on Banking Final Report, September 2011

6 BDRC, SME Finance Monitor, Q1 2012, http://www.bdrc-continental.com/business-sectors/financial-and-business/sme-finance-monitor/

7 BERR, High Growth Firms in the UK: lessons from an analysis of comparative UK performance, 2008.

8 The BCC’s 2012 International Trade Survey, for example, found that only 3% of over 2,500 exporters had used UK Export Finance assistance, many of whom were large companies.

9 See, for example, Breedon (op cit).

10 The 17 Taskforce commitments, which the BCC is actively working to implement and monitor, can be viewed at www.betterbusinessfinance.co.uk

11 See, for example, ongoing work by AFME and the working group on an “aggregation agency”, following on from the Breedon Review.

12 See, for example, work by NESTA, Civitas, and the Institute for Public Policy Research.

Prepared 19th June 2013