Treasury Committee

Oral evidence: SME finance, HC 27

Wednesday 8 November 2023

Ordered by the House of Commons to be published on 8 November 2023.

Watch the meeting

Members present: Harriett Baldwin (Chair); Mr John Baron; Danny Kruger; Dame Andrea Leadsom; Anne Marie Morris.

Questions 1-76

Witnesses

I: Dr Rachel Doern, Institute of Management Studies, Goldsmiths, University of London; Alex Veitch, Director of Policy and Insights, British Chambers of Commerce; Paul Wilson, Policy Director, Federation of Small Businesses; Professor Eric Yeatman, Enterprise Committee Member, Royal Academy of Engineering.

Examination of witnesses

Witnesses: Dr Rachel Doern, Alex Veitch, Paul Wilson and Professor Eric Yeatman.

Chair: Welcome to the first session of our Treasury Committee inquiry into access to finance for small and medium-sized businesses. I would like to start by asking our witnesses to introduce themselves.

Paul Wilson: Good afternoon. I am Paul Wilson; I am the policy director at the Federation of Small Businesses.

Professor Yeatman: I am Eric Yeatman; I am here representing the Royal Academy of Engineering as a member of its Enterprise Hub and fellow.

Dr Doern: Good afternoon. My name is Rachel Doern; I am a reader in entrepreneurship at the Institute of Management Studies at Goldsmiths, University of London.

Alex Veitch: Hello. My name is Alex Veitch; I am the director of policy and insights at the British Chambers of Commerce.

Q1                Chair: Thank you so much, and thank you for sending in some really good written evidence. We have had over 1,000 pages of written evidence to this inquiry, which we are publishing simultaneously with this session.

As a Committee, we feel that this has turned out be a very timely moment to be re-looking at the issue of access to finance for small and medium-sized businesses. Our predecessor Committee last looked at it five years ago, but we feel at the moment that we are at an inflection. All of the additional help that was given to small and medium-sized businesses through the pandemic, with initiatives like the future fund and the loans, seems to have been firmly put in the past now. The fact that interest rates have gone up so much is impacting consumer spending.

So many different Government initiatives have been announced over the years. The British Business Bank, the UK Investment Bank, UK Export Finance, Help to Grow, Innovate UK, the future fund—there has been no end of different initiatives announced by Government. From our written evidence, it would seem that not all of these are very well known to the people running small and medium-sized businesses, which are so important to our economy because they are absolutely the engine of growth and job creation.

I want to start with a very big, open-ended question for each of you. What three things would you like to see change, assuming that you agree with the premise that the landscape for small and medium-sized businesses is obscure and confusing and that there is no longer much help from your high street bank?

Paul Wilson: The first thing is that we would need to remove any barriers that are putting off small businesses from applying for finance. There is one in particular that we at the FSB think needs a closer look: requesting personal guarantees when businesses apply for finance, which can deter businesses from taking on the finance that they need in order to invest in the next stage of their business. Alternatively, if they do give a personal guarantee, perhaps for a very low amount, it can lead to subsequent risk-averse behaviour. There is one example that we have in a recent report, where someone was asked, in respect of a £5,000 loan, to put their house up as security. It was a young working mother and she decided not to go ahead and do that, so she did not take on the finance and grew the business more slowly. Looking at personal guarantees and other barriers like that is important.

Secondly, we would like to see all lenders looking at their application processes and trying to make them as simple and straightforward as possible. I was really surprised that, for things as common as bank loans, the majority of small businesses do not find them easy to navigate. Only 37% found them easy to navigate. Things that put them off are being asked for information that they do not have, a very long application process, and being unable to talk to a human to resolve something if they run into a dead end. We need more innovation and constant improvement in those processes.

Thirdly, because not everything does go well in the relationship between a bank or a lender and a small business, we need an expanded FOS.

Chair: For the sake of those viewers out there who do not know what FOS stands for, would people mind spelling out the acronyms?

Paul Wilson: My apologies—the Financial Ombudsman Service. We need to expand the scope of the Financial Ombudsman Service. We called on the FCA to do that recently and we were very disappointed when that did not go ahead, because there are 55,000 businesses without access to redress. If we can expand the scope of FOS and upskill it to deal with the more difficult cases, that would be really helpful. Those are our three.

Q2                Chair: We should note that it does cover businesses up to £25,000, so there is a route, is there not, for smaller businesses?

Paul Wilson: FOS will apply to businesses with up to 50 employees and up to about £6 million in turnover. We would call for that to be expanded up to at least £10.2 million in turnover, because it is being eaten away by inflation.

Q3                Chair: I would not want you to leave people listening with the impression that there was not a route for a smaller business.

Paul Wilson: The smallest businesses can use FOS at the moment. It is those 55,000 that are caught between being at the very smaller end and being sensibly able to take legal proceedings against a bank that are being left out.

Professor Yeatman: The academy is primarily concerned with technology businesses, so the small businesses that we deal with are high-growth, high-tech businesses. I would say that, largely, bank finance is nearly an irrelevance to small, high-tech businesses, which are financed almost entirely by equity, not by debt. While they use banking services, of course, the most important things for us are those that support the provision of equity finance to growing technology businesses. Examples include certainty around the EIS—the enterprise investment scheme—and related schemes such as SEIS and VCT. The EIS is due to expire and there is some discussion about extending it, but there is uncertainty around that, so we would emphasise providing certainty and extending those schemes, which have been very beneficial throughout the country to high-growth technology businesses.

I would also point to the Mansion House reforms, which will be very beneficial even to quite small businesses, so we would encourage the speedy adoption of those reforms.

Q4                Chair: Does that need legislation?

Professor Yeatman: I believe it does. This is to do with easing the use of large pots of money, particularly in insurance companies, pension schemes and so on, to allow them, at least up to a certain level, to make investments in unlisted securities.

Chair: Does that need legislation?

Professor Yeatman: I am not a legislative expert, but I believe that it does need at least secondary legislation, because pension funds, for example, are highly regulated in terms of where they can make investments and the kinds of investments they can make, with an obvious and justifiable concern about risk. These are very large funds, and the Mansion House reforms propose to make it legislatively possible for a portion of these funds to be applied to higher-risk investments.

Chair: You should assume that the Committee are familiar with the reforms. I am just wondering if you have heard that it requires legislation.

Professor Yeatman: That is my understanding, yes.

Chair: Thank you. You get a third one, Professor.

Professor Yeatman: Because equity investment largely comes through, for example, venture capital firms and venture capital trusts, there is a lot of informality and word-of-mouth contact that plays a part in bringing the funds to people who are trying to start and build small companies. That creates a lot of inequities—for example, regional and gender inequities—because a lot of very good start-ups are led by people who do not have access to those networks. There may be a place for Government to do more, and this is one of the things that the academy works quite hard to do. I should acknowledge the Government support of the academy in this mission to try to make access to equity funding more systematic, more clearcut and less subject to the kinds of interpersonal networks than it is at the moment. That would expand the opportunities to a wide range of firms and bring more diversity into the ecosystem.

Dr Doern: The first priority for me would be inclusive financing and ensuring that there is a level playing field for businesses in relation to size, so that microbusinesses—those without employees or with very small employee numbers—have access to and are aware of capital. From our research, we see that the smaller the business, the less it is aware of alternative sources of funding and the more likely it is to be rejected for more traditional sources of funding in relation to bank loans or venture capital.

We also need to ensure more of a level playing field in relation to sectors. We see that entrepreneurs operating in less capital-intensive areas such as personal services, accommodation, catering and certain craft trades are finding it more difficult to access financing. Women and other minority groups also face all sorts of difficulties, in part in relation to size, sector and profile.

Q5                Chair: What are the solutions? Are there any solutions that you would like to see?

Dr Doern: There are many solutions. In terms of broad strokes, we may need to reconsider what we view as success and what it means to project it. We still very much operate in a world of entrepreneurship whereby, to be successful, you have to have a business with physical premises, to have already received external financing, to have registered trademarks and patents, and to have the presence of a leadership or C suite team, a broad product or service range, and an established and large customer base. A lot of female-owned businesses, for instance, are operating much smaller, home-based businesses, and so, according to those standards, are seen as being less successful and less scalable. That is one issue. Should I move on?

Chair: I asked for the top three things that you would want to see change.

Dr Doern: Another is tackling bias, for instance within the investment industry in relation to VCs. I can cite many examples of studies, perhaps now or perhaps later, on where these biases might stem from. Women are acutely aware of the fact that fewer than 2% of female business owners are able to acquire funding. That awareness is problematic in and of itself, and so tackling investor bias is essential. They might not be aware of all the biases involved.

I can give you an example of one study that looked at Crunchbase data in the United States between 2010 and 2018, where it was found that female-owned businesses backed by female VCs were two times less likely to acquire another round of funding from other investors.

Q6                Chair: We published on this at the end of July and made some very strong recommendations. What I am trying to tease out of you, Dr Doern, is what you would change to address this. We totally buy into the problem that you have identified. We understand that. What we would love to be able to put in our report are some evidence-led recommendations of how this could change; I don’t know if I can tease any of those out of you.

Dr Doern: Then I will go back to my original points, thinking about where women and other minorities are successful or where they seem to be present and targeting support more to those areas: very small businesses, businesses in less capital-intensive sectors, and home-based businesses. I would also target support to social enterprises, because, whereas we see that only 20% of SMEs in the UK are led or founded by women, when it comes to social enterprises, women are more equal to men, and so we should provide more support to those kinds of businesses as well.

Alex Veitch: You asked for three of the issues that we are concerned about and what we would like to see. I will perhaps break it down a little bit. There is a role for industry, there is a role for Government policy, and there is a role for that third sector space, leading on from Rachel’s comments.

On the industry side, there are now more choices for business lending from banks. There are more banks out there. Our impression is that SMEs are not particularly aware of those options. Perhaps we can come on to this later, but, when you break it down within the SME sector, you do see quite a substantial difference in where businesses go to finance growth or where they would prefer to go, and the businesses that are 50 to 250 are less likely to want to go to a face-to-face discussion. Businesses smaller than that are more likely to.

Q7                Chair: Is this employee numbers?

Alex Veitch: Yes. Sorry, those with 250 or more employees are much less likely to want to go face-to-face. The other types of SME still prefer face-to-face. That is a blocker, because we have lots of fantastic new options about lending and new lenders coming through, but the efficiency for the banking sector is to do it online. That is great, but, when going for finance, there is still a preference for face-to-face on the smaller side.

Just to cover off the other two main issues, on the Government side, something that has not been mentioned yet but where I would like to put a marker down is the Basel 3.1 reforms, the outcome of which, if the PRA goes through with its proposal, would make it more expensive to lend to SMEs.

Q8                Chair: So you would not make those reforms.

Alex Veitch: No. That is quite a technical piece of regulation, but that would be the outcome of it.

Thirdly, we would like to see more interaction, especially with the British Business Bank, but at least more thought and profile given to social enterprise lenders, which perhaps leads on from Rachel’s point. There are some great examples of lenders who really support these third sector or social enterprise companies. They seem to sit a little bit outside the constellation of advice and support that is promoted, and we would like to see organisations with a Government stamp do more to promote them as well. I have some more, but I will leave it there.

Q9                Chair: That is a really helpful overview to get the top three things out of you. I will bring in some colleagues, but I just want to ask one question about the personal guarantee. That has been the fundamental way in which small businesses have started and raised funds for a long time, has it not? Are you saying that you would want to make that illegal?

Paul Wilson: No, I am not suggesting anything that strong. What we are concerned about—and more data needs to be gathered, potentially, by the FCA on this before it can decide what the next step is—is that they are being disproportionately used for loan sizes that are so small that personal guarantees should not be needed and are, therefore, deterring access to finance.

Q10            Chair: What would the threshold be that you would like to see?

Paul Wilson: It would depend on the evidence, but, for example, you could look at personal guarantees for loans below, say, £25,000. There is a question mark then over whether it might be excessive to be asking individuals to provide a personal guarantee. It might also be sidestepping the regulatory environment if it is unregulated, because it is to a company, but they are being asked to provide a personal guarantee. In effect, that becomes a personal loan. There is a question about regulation there, but what I am certainly not saying is that those should be banned. We just need to look at whether they are correctly regulated.

Q11            Chair: Can I ask whether anyone disagrees with my opening statement that since 2018 we have been through this tough period with the pandemic, where a lot of extra measures were taken to make sure that there was access to finance for small businesses, but now it feels like those have come to an end? Things are tightening up—the Bank of England has tightened and so on, so it is a tighter environment. Do you all recognise that, or does anyone want to rebut my opening premise there?

Alex Veitch: I would not rebut it at all. Just as an observation in preparing for this, we are coming out of this really unusual period of business finance. If you look at the way in which UK Finance and its stakeholders do their quarterly SME finance report, they have recalculated what they call permanent non-borrowers, down from about half to about a third, because they have stripped out covid lending. Some businesses see that covid support not as financing to grow, necessarily. The figures have got very messy and you see bankruptcies—

Chair: I think the technical phrase is “distorted”.

Alex Veitch: Yes, distorted. “Messy” is the non-technical phrase. We will have to see, in the next few quarters, whether it will be comparable to pre-covid.

Chair: That is a really helpful starting point.

Q12            Mr Baron: First of all, my business interests are placed in the register of interests here. I would like to focus on the issue of cash management, interest rates and accessibility to funding. Luckily, both microbusinesses that I am involved with are cash-generative, so can I start there and direct my question to Paul and Alex in particular, at the Federation of Small Businesses and the chambers of commerce?

Why is it that particularly microbusinesses struggle to get decent interest rates on their cash, particularly when dealing with the five big banks? That is our experience. Why are your two organisations not being more proactive about this when confronting the big banks? There seems to be little movement.

I will give you a personal experience. Trying to place cash on treasury deposits and trying to get hold of the relevant department within the main bank was difficult. They would not return calls. Eventually, persistence paid off and somebody phoned our accountants back, and we finally placed some money, but it was something like 2.3%, when interest rates are 5.25%. Why are you not doing more about this?

Paul Wilson: This is something that we would like to see, and we have commented to that effect recently. We would like to see small businesses get better rates on their savings, and that is partly about the banks and the institutions making small businesses aware of where those possibilities are and nudging them to perhaps move some money across from a current account and into a savings account.

Unfortunately, a lot of small businesses are not in the position where they have large levels of reserves in which to deal, so this will help some, but I would agree with your point. It should also be easier to get in touch with the right person and the right department at the bank to do it, so I would agree with that.

Q13            Mr Baron: I am not going to let you off the hook lightly, if you do not mind. I would be very surprised if you did not agree with me, particularly given the interest rates that I have suggested to you. But why are the FSB and the British Chambers of Commerce not doing more about it? I am not hearing much from these organisations. At the end of the day, you represent smaller businesses, and yet I am not hearing much about this at all.

Paul Wilson: All I can say is that this is something that we are calling for and would like to see. The one downside, potentially, from the banks’ perspective is that it could then increase the costs that they apply to lending for small businesses if they are paying higher interest rates on the cash deposits. None the less, we would like to see more regular reminders for small businesses and an improved ability to move things across from current accounts into savings accounts. I take your point. It is something that we agree with and take seriously.

Alex Veitch: We are in a similar place to that. You make a good point that you have not seen much from us on that. I will reflect and take that back to the house, because that is something that we should pay more attention to.

Q14            Mr Baron: You need to be making more noise. Are there any comments from Rachel and Eric on this?

Professor Yeatman: From our point of view, as we are dealing primarily with tech start-ups, they often do have substantial deposits, but these are mainly in the case of equity or share investments, which can come in quite large lump sums.

Q15            Mr Baron: You rely less on the debt markets, presumably.

Professor Yeatman: Yes, exactly. In that case, there is a big treasury issue, but we have not heard a lot from our companies about having difficulty with getting decent exchange rates.

Mr Baron: Not exchange rates, but treasury cash deposits.

Professor Yeatman: Sorry, that was a slip of the tongue—interest rates. That may be partly because the sums are quite large—typically, hundreds of thousands to millions of pounds—and there are often contacts into other holders.

Q16            Mr Baron: I am going to leave this line with my colleague Danny, who is going to pursue it in a little bit more depth.

May I turn to access to funding? It is something that Rachel mentioned particularly, but it was almost a common theme in your answers to the Chair. You have said yourselves that the smaller the business, the more difficult it is to access funding, and yet it is many of our smaller businesses that require that funding as they kick off. We heard a bit of a wish list as to what you would like to see, but could you just flesh out a little bit what concrete reforms you would want to see introduced to put this right?

Alex Veitch: Like I said, this is partly an industry thing and partly a Government thing. There is a decline in the number of bank branches, and we can understand the banking sector’s business case to do that, but the fact is that surveys show quite clearly that, in order to seek financing for growth, SMEs with up to 250 employees—and even quite larger ones—still prefer to do that kind of thing face-to-face, and so we do have a disconnect here about the trend in the banking sector and the ability to access face-to-face advice.

I do not know that this is something that a regulatory intervention can fix. We would naturally tend away from the Government stepping in, unless there is a very strong case to do so, but that certainly is an issue. I mentioned the Basel 3.1 regulation, which is something that will also be a problem going forward.

Q17            Mr Baron: That is very complex. Rachel, can I bring you in? You mentioned this specifically. What would you want to see? What recommendations would you want this Committee to make on this particular issue?

Dr Doern: Lower interest rates.

Q18            Mr Baron: Yes, lower interest rates, but it does not necessarily then follow that lending is going to increase. We know that the bank presence in the high street is in decline, but we have technology now connecting us. I find it a little bit of a weak excuse that, because there is not a high street bank, funding to microbusinesses and smaller businesses is particularly difficult. Take microbusinesses. Roughly 95% by number are microbusinesses if you look at the smaller business category, but they account for only 40% of smaller business GDP. There is a disconnect there, so how would you put that right?

Dr Doern: We sometimes refer to different supply and demand-related issues. From a supply perspective, is there funding available for very small businesses? Again, I would go back to the issue that I raised before around scalability. A lot of these very tiny businesses without employees, or with fewer than 10 employees, have issues with asymmetries in the information that they can provide to a lender.

There are issues in terms of whether they are able to meet performance indicators. I mentioned other issues around scalability. Do they project that they can grow and develop? A lot of lenders are very cautious around SMEs and raise interest rates in relation to lending to them because of that. At the same time, there are demand issues. A lot of very small businesses do not want to be beholden to banks or investors; they want to retain control. Some businesses even maintain what we refer to as a maximum size threshold. They do not want to go beyond a certain size, because they want to be able to grow slowly and carefully, and to manage their employee numbers as well as the development of their customer base.

If I could just make another comment around the difficulties that small businesses are facing in terms of accessibility, most very small businesses would, on the whole, prefer grants, for obvious reasons, because they can retain more control. There is less dilution of ownership in that domain. We are then also finding that we are in an environment whereby grant funding has become very competitive and also costly. If we think about organisations like Innovate UK, for instance, only 5% to 10% of submissions to those grants are successful.

Q19            Mr Baron: I take on board what you are saying, and I think that we are all agreeing. What I am struggling with here is trying to get concrete recommendations as to how we put this right. The FSB came out with some figures recently and said that according to your small business index, Paul, 2.3% of total finance applications were for venture capital finance, and yet we know that we have a very strong venture capital industry in this country. It is not the lack of availability of finance, but the fact that smaller businesses, for some reason, cannot seem to access it on the scale that they wish to. That is what your conclusion is from the FSB. I do not mind who comes in on this, but how are we going to put this right? There seems to be a disconnect here, which is not serving the British economy well.

Dr Doern: That is what I am trying to explain in part. We can provide all the funding in the world, but we also have to consider some of the demand-related issues around whether small businesses, especially micro enterprises, feel comfortable putting themselves in a position where they are going to be carrying a load of debt or sharing equity in their businesses with investors.

It is also very costly these days to apply for grants. Within the start-up community, it is well known or believed that to get a grant from an organisation like Innovate UK, you have to pay a third party to write your bid for you, which can cost you several thousand pounds.

There are many challenges across these domains. First of all, is there funding available, but also is it the kind of funding that small businesses want access to? If we look at scale-up schemes, in Canada, for instance, the ecosystem is quite conducive to supporting and growing small and young businesses, and we see that they are looking for more patient forms of capital. They are looking for investors who are going to stick with them for periods of longer than three to five years and then to exit.

Q20            Mr Baron: Very briefly, if you had to make one change or introduce one measure that could improve the situation when it comes to this disconnect, what would it be? Does anybody have any bright ideas?

Paul Wilson: I would go back to where I started. The FCA needs to look at whether personal guarantees are being overused, which is a deterrent to getting finance. I could add a few other specifics, if that would be welcome. We like the bank referral scheme. That is a good idea for businesses that get their initial application for finance rejected, and you could encourage more banks and more alternative finance platforms to join the scheme, which would help.

In terms of reaching different groups that typically have not received their fair or proportionate share of the funding, getting banks and other lenders to be more transparent with the reason, if they are rejecting an application for finance, and the proportion of their lending that goes to different groups, whether those are female-led or ethnic minority-led businesses, will build trust and transparency and should encourage more businesses to come to them for finance. I also agree with Alex on Basel 3.1. Do not remove the SME support factor.

Q21            Dame Andrea Leadsom: I would like to talk to you specifically about the issue of diversity in SME finance. We have some dreadful statistics around female-led businesses in particular really struggling to get finance, as well as those from different ethnic backgrounds. As a general question to each of you, is it harder for female small business owners because they are women or because their businesses are smaller? Can you just respond in general terms? What are the principal causes for women-led businesses struggling?

Alex Veitch: There was a very significant review of female entrepreneurship that the Committee is no doubt aware of—the Rose review—which really put some numbers around the fact that, as you have just said, there is a massive opportunity for diverse businesses in the round, not only for women. If you look at the numbers on the equity side, they are far lower.

On our side, we have launched a one-year commission looking at equity in the workplace to try to unpack some of the issues with the disparities that we see in the workplace around progression, pay and other issues related to diversity. I am afraid to say that I do not have much more detail than other people’s research—I have alluded to the Rose review—and some work that we are looking at in terms of the causes and solutions, but the problem is no doubt there and is wider than only on the gender side. We might see that there is, unfortunately, a lower representation of other diverse groups in our business community as well.

Q22            Dame Andrea Leadsom: I am specifically asking about access to finance, but you do not have any specific figures on or any specific rationale for whether it is because it is women or because the businesses are smaller. Is it a structural reason or is it misogyny, basically?

Alex Veitch: Just for the record, we survey businesses with their business hat on, so we do not collect that kind of personal data. Unfortunately, I cannot provide that, because we do not have it.

Professor Yeatman: I can provide maybe a third possibility in addition to the two that you mentioned, which is that it is not just the size but the nature of the businesses that influences the outcome. We are primarily concerned in the academy with technology, engineering and science businesses, which are fields where women are not very well represented, particularly in some sub-branches. The academy is very explicit in its aim to provide support through mentorship and our own entrepreneurship schemes in order to bring in a diverse range of candidates, particularly in terms of gender diversity. Over the last five years, we have seen some improvement in that. If we look at female-led businesses, it is has gone from a rather shocking 0% in 2016 to 13% or so now. This is female-led and, while still very low, at least there is some change happening.

This is relatively anecdotal, given the amount of evidence that we have had, but we are hearing not so much that it is overt misogyny, but that it is other, more subtle factors, one of which is that the nature of the kinds of businesses that women start and promote does not fit neatly into the mindset of some funders.

Q23            Dame Andrea Leadsom: You have helpfully said that we have gone from zero women-led businesses in your tech engineering space to 13%. Are those 13% of women-led businesses finding that they are able to access finance at the same rate as their male counterparts?

Professor Yeatman: It may not be a statistically large sample, but, to the extent that we could say, it seems to be reasonably equitable in that population.

Q24            Dame Andrea Leadsom: So the statistic that women-led businesses are struggling to raise finance does not apply in your tech sectors to the same extent.

Professor Yeatman: Our evidence does not show this.

Q25            Dame Andrea Leadsom: That is very interesting. And yet the businesses that you are engaged in are tending to be looking for equity capital rather than debt.

Professor Yeatman: Yes.

Dame Andrea Leadsom: Does that suggest that this is a banking issue for women-led businesses rather than a VC issue? Separately, we have taken advice that shows that only 1% of EIS money goes to women-led businesses. It was of that order, was it not? It was quite significant.

Chair: I think it was 2%.

Q26            Dame Andrea Leadsom: That would seem to fly in the face. Can you shed any light on why that might be?

Professor Yeatman: This may be partly to do with the time periods involved. You would have been looking not at ancient history but at historic EIS investments, probably in the period from two years ago back to about 15 years ago. It is during that period that we have seen some improvement. What we are starting to see is, to some degree, even some quite focused investment programmes and investor events that are women-focused.

The other factor that I would point to is that the women-led tech businesses that we look at are at a very early stage, relatively speaking. Male-led businesses are larger and, therefore, the equity investments that they are getting are larger.

Q27            Dame Andrea Leadsom: That is interesting. Do you have any reason for why that might be?

Professor Yeatman: The optimistic thing is to say that we are on a curve upwards and that, if we continue along the path that we are taking, women-led businesses will grow, but that is probably more of an aspiration than a prediction.

Q28            Dame Andrea Leadsom: Would you describe your academy as optimistic about women-led businesses in the tech space and their ability to fund and scale up their businesses, or is there work that needs to be done?

Professor Yeatman: Both. There is work to be done, and we are one of the organisations that are trying to do it, but I would say that we are optimistic about it.

Q29            Dame Andrea Leadsom: Dr Doern, what is your perspective on this? Why are female-led businesses finding it so much more difficult to get lending specifically?

Dr Doern: It is both reasons. It is because of the nature of their businesses. They are running very small businesses. They are working mostly in less capital-intensive sectors such as the ones that I mentioned—personal services, catering, craft industries and so on. A lot of them are running home-based businesses as well. More than double the number of women are running home-based businesses as compared to their male counterparts. These are issues.

Why are they running home-based businesses? It is in part because they are trying to cut costs, and because they are trying to create a more flexible family life. Claudia Goldin, the economist who won the Nobel award recently, looking at the gender pay gap—which, in the UK, is around 8%—attributes it to a lack of flexibility in the workplace after having families. The UK has taken a lot of positive strides in this direction with the flexible work legislation and also with shared parental leave. That is important, because we should give women opportunities to work outside the home if they so choose, but we should invest in people who are running home-based businesses as well, if that is what they would like to do. It does have to do with the nature of the businesses that they are running. Again, they seem to be less scalable, and banks and investors want to invest and put money towards more scalable businesses.

Q30            Dame Andrea Leadsom: That is interesting. My experience of banks is that they just want to get their interest on their bank loan and want a dead cert to lend to. They want to lend you an umbrella when it is not raining. Why would a bank have an interest in your business being scalable? Just to press you a bit further, are banks missing an opportunity here by wanting to lend only £10,000 rather than £2,000? Are they missing the opportunity to invest in businesses that would give them a very good return, in the way that some micro lenders in developing countries find that a tiny business can be a very good loan proposition?

Dr Doern: I absolutely agree that they are missing an opportunity and missing a step there. Also, female entrepreneurs are, historically, a little more conservative when it comes to lending, so they approach banks only when they really need to. We saw that, after the global financial crisis and during the pandemic, banks were keener to invest in female entrepreneurs as a result.

Going back to your other point about whether it has to do with sexism, there are examples of sexism when it comes to the investment industry. There are a lot of studies that suggest that, when it comes to questioning during and after pitches by VCs towards female and male entrepreneurs, women are getting different questions than men. They are more likely to focus on potential losses when it comes to women, so investor confidence there is already lower. When it comes to male entrepreneurs, they are more focused on potential gains, and so this is an issue.

As I mentioned, there are also issues around women backing other women. We know that representation could be an issue, of course. If we want more lending and more investing towards women, then let us see more female VCs and business angels. At the same time, I mentioned the study that suggested that, when a woman is backed by another woman, she is less likely to acquire further forms of finance, which is an issue.

I came across another study that looks at how women and male entrepreneurs present during business pitches. Some research has suggested that, when women exhibit traits associated with femininity, such as expressiveness, warmth and sensitivity, as opposed to more masculine traits, such as aggressiveness, assertiveness, standing your point and defending your ground, women are perceived to be less competent, less able to lead businesses, less prepared, and less likely to secure financing as a result. Sexism does exist.

Q31            Dame Andrea Leadsom: That is interesting. Mr Wilson, would you say that it is a lack of women doing the lending decisions as well as women who are being biased against in SMEs as borrowers, or is it broader than that?

Paul Wilson: I don’t know. What I can say from our evidence is that female-led businesses are more likely to perceive the lending environment negatively than male-led businesses, and are more likely to be rejected for certain forms of finance. The one that we had in our written evidence was overdraft facilities, where 21% of women-led businesses were rejected, compared with 8% of male-led businesses, which is quite a stark difference, so the negative perception is borne out by experience there. In terms of the reasons for that, I do not know enough to say whether that is overt or unconscious bias, or applying criteria in the wrong way, which is disproportionately prejudicing female-led businesses.

Q32            Dame Andrea Leadsom: Have you looked at any evidence around the likelihood that that was the right decision—in other words, the refusal to give a female-led business an overdraft was the right decision because it was less likely to be able to repay it?

Paul Wilson: In terms of the survey evidence that we collect, we cannot interrogate whether it is the right decision. We just collect the broad trends from a large sample of respondents.

Q33            Dame Andrea Leadsom: As a final question to anyone on the panel, are there the same issues for people from different ethnic backgrounds as for women, or are there different factors at play?

Paul Wilson: In the FSB’s view, there is some crossover, but we would say that you need a clear outreach strategy through different trusted community groups to reach different ethnic minority-led businesses. Of course, there are lots of ethnic minorities and you have to think very differently about how to reach them. Trust is part of it in both cases, but building trust for ethnic minority-led businesses is particularly important. It then comes back to being transparent as to why you are saying yes or no, and publishing data on the percentages of lending that you are doing to ethnic minority-led businesses.

Professor Yeatman: In terms of small tech businesses, I would say that, overall, minorities are strongly represented. In some cases, specific ethnic minorities are overrepresented statistically, but others are barely represented at all. It is quite a subtle issue and it goes down to individual communities and expectations, of course. Our businesses come from particular educational backgrounds, and so these things start quite early in life.

Dr Doern: Outside the tech sphere, it is even more difficult. If we are seeing that fewer than 2% of women are receiving VC funding, for instance, we are seeing even lower rates of all-black teams of founders receiving money. Especially when we look at intersectionality and bring gender and ethnicity into it—so black female founders—the rates are less than 1%, so there are many concerns in that direction.

Q34            Dame Andrea Leadsom: Does any of you have a specific requirement that the state should intervene and that there is some low-hanging fruit that we could get that would move the dial?

Professor Yeatman: Being self-interested, I would say keep supporting the academy’s good work in this area, which we are doing quite a lot of.

Dame Andrea Leadsom: That is a good pitch.

Alex Veitch: Within the chamber of commerce network, there are various initiatives to reach out to different communities, particularly in London and Birmingham. What I might do is provide an input to the Committee, based on their feedback. I will ask some of the questions that you have been asking about lending in particular, and see if they have any evidence or shared experiences to bring in.

Dame Andrea Leadsom: Thank you.

Dr Doern: Continue promoting alternative sources of funding. As you mentioned, micro lending is really key for a lot of different groups. With women especially, we are seeing crowdfunding. If we look at platforms like Kickstarter, for instance, a third of founders on those platforms are women, and even more—around 44%—are investors, so there has been some success in that direction.

Dame Andrea Leadsom: That is interesting. If anything occurs following this session, it would be very interesting to hear any other ideas that you have.

Q35            Danny Kruger: I have a question for each of you, and 10 minutes to get through them. Rachel, I will start with you. I want to carry on that conversation. I was really struck by what you said earlier, as well as by Andrea’s point, about the opportunity for lending in very small amounts to businesses that do not have the premises or turnover and so on that traditional lenders are looking at. Relating that to the earlier point that Paul made about the opportunity for suspending the requirement for a personal guarantee, I wonder whether there is the opportunity for dropping the requirement for a personal guarantee for loans that are made to social enterprises.

I am conscious that the definition of a social enterprise differs, but if the definition that we are using is one that is not distributing profits, or is reimbursing the profits in the social purpose of the enterprise, there is a case for saying, “Why should that entrepreneur have to put up a personal guarantee, seeing as they are not going to be receiving the upside of any growth in the business personally?”

The argument coming back from the banks would be, “But the failure rate may be higher with those businesses,” so I want to ask you whether that is the case. I recognise the point that Andrea was making, which is that the repayment rate, particularly when lending to women and particularly in these projects in the developing world, is really high. What can we say about the repayment rate or the failure rate of social enterprises in order to justify making the case to the banks that they should not be requiring any kind of personal guarantee?

Following on from that, I appreciate that everybody keeps asking you the same question: what we can do about it? Is there a role for Government in trying to help the banks suspend that requirement or to help social enterprises get loan finance in other ways?

Dr Doern: I am not sure. I would need some time to consider the point.

Q36            Danny Kruger: Is anybody else thinking about the particular point about whether social enterprises would be particularly appropriate for loan finance that does not have such strict requirements?

Paul Wilson: I can agree with the in-principle argument that you make, in the sense that the individual is not going to benefit from it themselves, so why should they need to put up their home or whatever it is? We need better data to be gathered on this by the regulator in order to understand the scale at which these personal guarantees are being offered to all business types.

Q37            Danny Kruger: Eric, we have been talking about debt there. You make the point that in your sector, it is mostly equity finance, which is encouraging. A general problem with the British economy is that we have too much debt finance and not enough equity, which is something that really holds us back. In your high-tech industry space, of course, you are blazing the trail.

I would like to expand on something that you talked about. You did not use the word “nepotistic”, but you implied that there is a club of investors who know each other, or rather know the businesses, and it is easier for certain people to get access to equity than others. Is that the problem? Borrowing costs are rising with rising rates and there is the threat from Basel that could make it even harder, so we need to be looking at equity finance for a broader range of businesses. It is the right thing to do anyway. How are we going to achieve that?

Professor Yeatman: Leaving aside the old boys’ network aspect just for a moment, there are a couple of things that we spoke about before. Tax-incentivised schemes, and particularly the enterprise investment scheme, have been extremely beneficial. There is uncertainty about those schemes and their future, which is quite an impediment, because people do not necessarily want to set up a fund if they are not sure that they are going to have the visibility of that tax relief going on, so dealing with that is certainly something.

Unlocking some of the enormous amounts of money tied up in pension funds and insurance companies that are highly restricted to listed equities and to other relatively low-risk investments, even if it is just a small proportion of those funds, would be quite beneficial.

Q38            Danny Kruger: How do we achieve that? Is it in the gift of Government to enable that?

Professor Yeatman: It is my understanding that the Pensions Regulator determines the degree of risk that pension funds can take on, with, clearly, the very important motivation that they must keep the pension fund stable. Because there has been such an enormous shift from defined benefit to defined contribution pension schemes, allowing a higher proportion of risk in those portfolios is much easier to do now, since it does not destabilise the pension fund. It merely creates some added uncertainty for the eventual benefit that the individual pension holder receives. The expectation is that the overall effect would, on average, be an improvement, but there is some risk of some decline. If you restrict that to 10% or 20%, as is done in some other countries, the amount of risk that you place on the individual pension is relatively modest. Even at that level, it would unlock huge resources to growth companies and innovative companies.

Q39            Danny Kruger: Would those investors be inclined to look at the SME market and not just at big businesses?

Professor Yeatman: I think they would look at the higher end of the SME market, where the institutional investors typically play, but I do believe that there will then be a push-through effect. It will encourage angels and venture capital investors at the lower end, because they will then see a clearer track to the larger investments later in the business, if it is successful. At the moment, since that mid-stage scale-up investment is so much more difficult to find than early-stage investment for tech companies, people usually have a forecast of unloading the business in some way relatively early on, usually through a trade sale or acquisition of some kind, in order to get their investment back, because they are not confident enough about growing the business. That is not positive for the UK economy as a whole. It would make a significant improvement quite far down the chain in terms of company size.

Q40            Danny Kruger: I agree that more long-term, patient, confident capital going into the sector would be tremendous, rather than this in-and-out investment.

Professor Yeatman: Another thing, which is within the Treasury’s gift to a certain extent—and we can shift over to yet another kind of financing—is procurement. The US uses this very effectively, and has done so for a very long time, in getting Government Departments—the health service, the MOD and so on—to devote a small percentage of their procurement to innovative domestic businesses. There is not much of that here, and it is very beneficial to small companies, because it is not just money; it also helps them to grow a customer base and to develop their skills.

Q41            Danny Kruger: That is a huge topic that we should look into as a Committee, because the procurement budget is so enormous. We have the social value rules, but I am not sure that they are working sufficiently, and I am sure that we could do a lot better.

Alex, just picking up John Baron’s earlier point about the savings rate that businesses can get on their deposits, we had a submission from Allica, which is a small challenger bank that offers savings to SMEs. It makes the legitimate point that it can offer 3.5% and points out that other challenger banks can do likewise. Why is it able to offer such decent rates when high street banks cannot?

Alex Veitch: It is a great point. In our surveys at least, there is a really interesting difference between where SMEs go for banking versus where they seek finance. We see much more willingness to adopt online banking, but it has not yet filtered through to seeking finance. Maybe this will come. I do have a percentage in here somewhere about how many in our surveys are picking up doing their banking online, but I do not know if it is a time lag.

Q42            Danny Kruger: Do you mean that they are more prepared to use these new, innovative banks?

Alex Veitch: Yes, for day-to-day banking. If the challenger banks are offering high rates of interest, they perhaps have fewer costs. Their business models are totally different, which is great. I just do not know if it is taking time for these other offers, whether it is savings from the business or, indeed, seeking financial help. That is something that is well worth us looking at, and perhaps it is also a question for the banks. It is hard for us to comment on the commercial activities of banks in offering their savings. That is not something that we have tracked prior to this, I must admit. We have looked at this inquiry more as in a business seeking finance and not just as, “How does that work?”

Q43            Danny Kruger: It is pretty significant. According to Allica’s research, there is a 2% difference in the bank offering savings rates for large and small businesses, so there is a huge inbuilt disadvantage for a small business when it is depositing at the same bank as its larger competitor.

Alex Veitch: We will look at that.

Q44            Danny Kruger: We would appreciate that. Thank you.

Lastly, Paul, can I ask you about the Business Banking Resolution Service? I do not know to what extent you have looked at this, but it seems to have been an enormous failure. It cost £40 million but has managed to pay back only £1 million to businesses. You claimed in your evidence to us that it has not been effective. Do you blame the banks themselves for that? They seem to be behind it and control it, so is it their fault? Is it fair to say, as somebody said to us in their submission, that it is as if it has been set up in order to restrict pay-outs rather than to facilitate them?

Paul Wilson: The eligibility criteria have been drawn far too tightly. The banks have had too much control over that. We are disappointed that the SME liaison panel has not been listened to in the way that it could have been. For me, it comes back to the point that I made at the start. That is why you need a bigger ombudsman service that is genuinely independent resolving disputes.

Q45            Danny Kruger: Would you roll the BBRS into the ombudsman?

Paul Wilson: I would not necessarily roll the infrastructure in. I would raise the size threshold. Then you would not need the BBRS.

Q46            Danny Kruger: It is going to end anyway at the end of this year, is it not?

Paul Wilson: Yes.

Q47            Danny Kruger: You would approve that and you would expand the scope of the FOS.

Paul Wilson: Yes.

Chair: We are seeing the Business Bank Resolution Service as part of this inquiry at a later point.

Q48            Anne Marie Morris: On innovation, scale-up and growth, I think you are all saying that there are some good options out there, but some of these very small businesses are finding it awfully hard to find them. In a sense, what you are saying is that, particularly in the tech sector, venture capital is the way forward. It is all about equity. Clearly, there are some issues for other sectors that are not tech where venture capital might be appropriate.

Is there any way we can create some sort of go-to place where venture capitalists can advertise or put on a portal what they have, particularly that which is available for smaller-size SMEs? Is there something we can do to simplify this and make it accessible, a bit like clearing for university degrees? What could we do?

Professor Yeatman: It is certainly something we have looked at quite a bit in the academy. Recently, we have started setting up regional hubs, given the difficulties around knowledge and accessibility. In London, the south-east and Oxbridge there is quite good knowledge, particularly as the tech companies tend to be connected in some way to the main universities in those areas and so they have access to information. In return, those organisations have a lot of good contacts through the investment community.

In other parts of the country, there is not so much of that, so we are trying to build out our human and physical presence more broadly around the country. Certainly, support for those kinds of initiatives is welcome and is helping.

Dr Doern: We need to create a central database. I totally agree. This issue of awareness around financing is ongoing for a lot of small businesses, especially for the really small ones. The smaller they are, the less they are aware of the options available.

The British Business Bank has found that there is also variation depending on where you are in the UK. There is less awareness of funding and alternative sources of funding if you are in London or Wales and more awareness if you are in Yorkshire, the south‑west or the south-east. If there were one place to go that hosted a number of different options available to small businesses, that would be very valuable.

Q49            Anne Marie Morris: We now have two solutions. We have your hubs, which we need to give more support. We have your database, which we need to—

Dr Doern: It is your database.

Anne Marie Morris: We have a database, but we need to find a way of making it happen. Mr Veitch, there is another place that some of these small businesses go, which is the banks. As you rightly said earlier on, the number of bank branches is shrinking and we are being left with these business hubs. Might this be an opportunity? Business hubs are currently perceived as offering a lesser service than a bank branch. Yet as a small business, if you go into the average bank branch, unless it is a big one, what are your chances of seeing a financial adviser? It is many weeks away; you have to make an appointment. It is all complicated.

There are going to be more of these hubs. We are still trying to tease out what sort of services they could offer. Is there an opportunity for them to act as a kick-starter? They could be somewhere central where a small business can go. Every one of these hubs could have a specific microbusiness or SME person. Maybe somebody should be appointed across all the banks. I accept that there will be three, four or maybe five banks that are effectively funding this.

This is a new thing. It is still being baked in terms of the rules. We are still looking at exactly what services should be offered. Is this an opportunity? These are going to become much more visible. Within that, we could advertise the hub and we might even access the database. What do you think?

Alex Veitch: It is a great point. It follows the flow of our evidence around where businesses like to go until they reach a certain point. That is what our evidence seems to be saying. Once you get over 250, you are happier going online. That needs a little bit of investigation.

As representatives of the chambers of commerce network, we think there is a very important role for place-based organisations to provide support. If people want to go and talk to someone, having a hub, co-funded by banks, as a place you can go to get that advice would seem like a good option.

The question in my mind is, “Where is this going?” If we come back and do this in three years’ time, are businesses of a smaller size going to be happier getting advice online? Are we perhaps going to see online services by banks becoming a little bit more personalised? That is what I do not have evidence on. Where is the direction of travel? Are businesses going to be more comfortable seeking financial advice and support applications online in the future, just as they are happier now doing their day‑to‑day banking online? That is my only hesitation about setting up infrastructure. Right now, for today, it would be very useful.

Q50            Anne Marie Morris: I think it is a great idea. Mr Wilson, expanding this to the whole tech issue, clearly the younger generations are going to be much more comfortable. The flipside of that is that these tools have to be simple and easy to use. The point that many of you made earlier is that there is stuff you can do online, but it is jolly complicated. There is too much data and we do not have it to hand.

In terms of this tech bit, there might be another bit about trying to encourage new and innovative tech solutions—I mean IT rather than Professor Yeatman’s type of tech—that are user-friendly, easily accessible and could be accessed in the new banking hubs. What is it that we need to do? Is it about setting a framework? How do we motivate the people who write these things and provide these things to make it easy? Should we be looking at new entrants to the market or should we be going back to the banks and saying, “Write this in a different way”?

Paul Wilson: We should be doing lots of those things. We need more competition in the markets. You do need new entrants coming in. None the less, picking up on Alex’s point, no matter how many more businesses become comfortable with online, there will still be a core that need banking hubs and things like that, not least because they just need to deposit the cash they are being paid within their business. Banking hubs can form part of that.

Bodies like the FSB, presumably BCC and others can provide a role in helping our members with this and keeping it as simple as possible. It is about building trust in new tech solutions such as open banking and open finance, reassuring small business owners about how their data will be used and how they can be confident it is not being misused, as another key part, and encouraging the majority to make the most of what is a great opportunity.

Q51            Anne Marie Morris: Open banking was a key point that one of the credit card companies made. That is something that will enable simplicity and make it much easier to sort credit references and so on. Do you see any blockage to making this more of a reality that needs to be unblocked?

Paul Wilson: It is about raising awareness and addressing that point about how data will be used, which could be a residual concern for some small businesses. Fundamentally, they are opening their data up to other trusted third parties. Providing that clarity and reassurance would raise awareness and encourage greater use of it.

Q52            Anne Marie Morris: It seems to me—forgive me; I am going to do what Mr Baron did—that it is probably something that you, Mr Veitch and Mr Wilson, could help do. You absolutely have the audience and you would help them understand.

One of the challenges we talked about is some of these very small enterprises, which are much more like social enterprises. They are not necessarily going to grow hugely. It is often something that is a business at home. How are we going to help them in terms of funding?

Is there something that could be done with regard to the ESG agenda? The ESG agenda effectively requires companies, as part of corporate governance, to set out what they are going to do in terms of environmental, social and so on. It would probably be too strong to have mandatory requirements, but could we look at a way of ensuring that part of that obligation is to provide money to local small businesses that are social enterprises? Is there a way of linking the ESG agenda with this problem? Dr Doern, this is your area.

Dr Doern: Social enterprises specifically are not. I am not sure.

Paul Wilson: Could I make a point that is very closely related to ESG? Nearly half of the applications for finance that small businesses make are for cashflow reasons. A heck of a lot of those cashflow problems are caused by the lack of prompt payment that we see in the economy. There is data from FSB and Xero to back this up.

If you could address this by embedding it in ESG, small business owners would not be spending so much time doing fiddly little applications for the finance that they need in order to get from week to week, and could think more about big strategic applications and things that would really improve their productivity.

Professor Yeatman: I was going to make that point. It is also quite an important thing for tech companies. Their first customers tend to be huge companies. The Treasury has already done some very good work on cashflow and prompt payment, but we could do with it going further. We have companies paying on 120 days, even if their own policies say it is 30 or 60 days. It can really cause serious cashflow difficulties to young and small companies.

Anne Marie Morris: That is very fair. Mr Veitch, you look like you want to come in.

Alex Veitch: I just want to draw your attention to the fact that there are two social enterprise non-profit lending organisations that were set up by chambers of commerce. They lend to social enterprises. One of them, the business enterprise fund, which started in Bradford and now lends outside the Bradford area to all parts of England, focuses on areas that are deprived economically. The social impact of the lending is substantial.

There is a similar scheme called the Acorn fund in Hull, which was set up with the Hull and Humber Chamber of Commerce. That has been going since 2004. Similarly, it looks for social value and social enterprises in its space. This is non-profit lending. We certainly think there is scope to expand that whole way of lending in the UK. It could be mutually beneficial.

Q53            Anne Marie Morris: We should absolutely support everything that chambers are doing in that regard. I am going to go back to my hubs. The purpose behind them is not only to replace the basic banking piece; they are also supposed to provide some sort of social role. Every time I have sat down and spoken to Cash Access, it always wants to meet the social enterprises in the area. If that is part of the agenda, surely what you are talking about can be baked into that to leverage your idea.

Alex Veitch: That is a great point. It is not something we have considered, but it could be really valuable to bring that different type of lending with a social purpose.

Q54            Anne Marie Morris: I look forward to seeing that. In terms of what the Government can do, we heard from the Chairman earlier a whole list of schemes the Government have, but none of them is really geared towards social enterprises. The very small and microbusinesses get lost in the whole SME piece.

Is there an argument for creating a special pot? We would have to work out what the criteria were to access it, and it would have to be simple. We would have to look at things like—to your point, Dr Doern—whether we need to define what success means. It does not mean making lots of money. Do we need a specific pot that is not the British Business Bank but the social enterprise bank? We can set out, “These are the criteria. This is what success looks like. This is how the thing gets operated.” Should the Government be doing something like that?

Dr Doern: Yes.

Q55            Anne Marie Morris: There we are. We have one solution. Moving forward, Professor Yeatman, while you agreed that the Mansion House compact was great, you thought we needed more legislation to make this real. What can do to get the pension funds to engage? Let us put the legislation to one side, because I know you are not a legislative expert.

It is one thing for the Chancellor to say, “Pension funds, you are now going to do much more in terms of venture capital and so on. You are going to look at investing in many more businesses that are not listed and that you have never looked at before.” One of the challenges is inevitably a cultural one. Pension funds are very risk-averse. They have been told forever not to invest. Now they are being told, “You will invest.” What do the Government need to do to make sure the investment happens, quite apart from the legislation? Does there need to be a link with the ESG agenda of the pension funds?

Professor Yeatman: I would avoid the link at the end that you specified because it might give the impression, mistakenly, that the reason for doing this is for the societal good, whereas they should be doing it in their own interests because these are good investments to make in their own right.

Whether allowing them to make such investments will be enough to encourage them to make these investments is a very good point. We are in a difficult moment for doing that now because of the big increase in interest rates recently, which has pulled money back from higher risk. There is a lot of appetite for risk if you cannot make more than 0.5% on bonds and cash holdings.

How do we encourage them to take it up? I am not sure I have a ready answer to that. Let me give that a bit of a pass.

Q56            Anne Marie Morris: I am going to ask Mr Veitch because he is absolutely the man. It must be your members who want some of this cash. What do we need to do?

Alex Veitch: Some of it is about the businesses seeking the funding. Some of what we hear from businesses in the lending space is that they need to be able to justify the returns on their capital. I would not necessarily put this at the Government’s door. I would see it as something the lenders and lendees need to do together.

If there is a real prospect of returns in the business, comparatively high interest rates may play the other way. Interest rates have been very low for a very long time. The return on the capital may actually be substantial enough to make pension funds want to invest.

Q57            Anne Marie Morris: Do we need to set up a small working group, which would have pension funds, your members, undoubtedly Mr Wilson’s members and the equity houses? What is the group that needs to sit down and knock heads together to work out what we can do to make this happen?

Alex Veitch: That is right. In our membership base, we have pension companies. We are talking to them. It is not something I have come to this Committee to talk about because I am not sure it is in the legislative space.

We like the approach of the voluntary part of the Mansion House reforms, which I think is for 5% to go to non-listed companies. I might be slightly wrong on the detail there. That approach is very appealing, but the pension funds do need something to invest in, which they can bring to their stakeholders. Professor Yeatman is right: it has to be seen as a real commercial opportunity that is good for them and can bring them a return. Watch this space. Those conversations are kicking off now.

Professor Yeatman: If I could add to that, no matter what we do there is not going to be a lot of investment from pension funds into very small businesses, simply because the amounts are too small. If you have £10 billion that you have to disburse somewhere, you cannot do it in chunks of £50,000. It is just hopeless. There needs to be a layer in between. It is more likely that the pension funds will invest in venture funds, for example, which in turn will invest in small businesses.

Q58            Anne Marie Morris: What that says is that there is a much bigger conversation that has to be had to make this a reality.

Professor Yeatman: Yes. I know you have just done a VC consultation. There are some very interesting things in your report that came out in July. There is a role for them as well in this, which is to provide an aggregator to make sure that funds flow from the very big investors to the very small businesses.

Q59            Dame Andrea Leadsom: Let me come on to a slightly different topic, which is de‑banking and blacklisting due to political views or—fill in the gaps—any other view. I just wonder whether any of your members have talked to you about such sensitive issues and what their experiences have been.

Paul Wilson: Yes, they have. It predates the attention this has got over recent months. Members frequently come to us to report that their bank account has been closed or frozen at very short notice and they simply do not understand the reason for that. They might have suspicions. They are also incredibly reluctant for that to become public knowledge, because that is a major risk for them as a business. They are very reluctant, unfortunately, to put their name to examples, which I absolutely understand.

One member of our tax committee had this happen recently. She is a solicitor. She helps companies set up as part of what she does. That was raised by the bank in a questionnaire. All of a sudden, her bank account was frozen. She was able to take legal action against that bank to get that decision reversed. She had the legal knowledge and expertise to do so, but unfortunately hundreds of thousands of small businesses do not.

We would like to see the FCA playing a much more active role in this space. You are not going to get the data from the small businesses. It is not enough to say, “You can go to the ombudsman afterwards,” because the damage might well have been done by then. We think the FCA needs to collect data on a quarterly basis, not just as a one-off, on the reasons for bank account closures and the key demographics, and then publish that, so we can start to understand this.

I understand that the anti-money laundering rules are important and they mean that there are things banks cannot say, but our members feel they are somewhat hiding behind those at times and are not giving proper reasons when it may well not be an anti-money laundering thing. We would like to see that as a solution.

Q60            Dame Andrea Leadsom: Would you like to see the banks themselves publishing quarterly data on who they have de-banked, with some headlines as to why that is?

Paul Wilson: Our suggestion is very slightly different: it is that they send that data to the FCA, and then the FCA aggregates it, looks at it and maybe publishes aggregated data. If they could do it themselves, that would be even better, because it would build that trust and add to that transparency.

Q61            Dame Andrea Leadsom: That is very interesting. Just to be clear, you think this is a widespread issue

Paul Wilson: This is something that members have been getting in touch with us about on an ad hoc basis. It is not something that we can survey people on for a long time. Small businesses having their bank accounts frozen or closed and not understanding why has long been an issue for FSB members.

Q62            Dame Andrea Leadsom: Very specifically, the pawnbrokers association and amusement machine sectors claim that banks are refusing to provide their members with service due to value-based judgments about the type of work that they do, which is very different from de-banking because of anti-money laundering or whatever. Is that also the experience of your members?

Paul Wilson: Again, they do not necessarily have an explanation from the bank saying, “This is why we have done it,” but there are members who have suspicions that it is to do with the sector that they are operating in. That is the impression that they are left with. Bank accounts need to be provided to all, so that would be unacceptable from our perspective.

Q63            Dame Andrea Leadsom: Professor Yeatman, would you say you have had a similar experience?

Professor Yeatman: In preparation for this session we looked into it a bit, but we have no reports, really, in our community of this problem. One small thing is the reluctance of some banks to work with American nationals because of the extraterritorial provisions of US banking and tax law, but that is a totally different issue from the one you are addressing.

Q64            Dame Andrea Leadsom: That is interesting. Did the whole Silicon Valley Bank issue with tech companies have any bearing on that?

Professor Yeatman: We do not really have experience of debt financing from US banks for very small and early-stage start-ups, again because of the legal complexities around that. That becomes very expensive for small businesses because they need to take specialist advice.

Q65            Dame Andrea Leadsom: Mr Veitch, what about your members? Have they been de-banked?

Alex Veitch: Like Professor Yeatman, I looked into this before coming today. I checked with my team who manage our research work. We are not having feedback on this in the way the FSB is. We are not seeing members contact the chambers and us about this issue.

Q66            Dame Andrea Leadsom: That is interesting. Dr Doern, do you have any experience with this?

Dr Doern: I do not have much experience in terms of doing research around the topic or speaking to people and hearing more anecdotal reports. From reading around the topic within the last few months or so, it does seem as though rates of account closures are going up exponentially. That is a concern.

I know people feel the FCA is not doing enough. Its role has been mostly to advise banks to provide explanations. It has also increased the period of advance warning they have to give their customers to three months. It does seem to be the case—like I said, there is some anecdotal evidence—that they may be targeting certain vulnerable groups as well, people with certain political opinions or from certain minority ethnic communities. That is a bit of a concern.

It would certainly be likely to impact on some minority entrepreneurs, if they lost their bank accounts. There is a lot of reputational damage that stems from that in terms of credit ratings and otherwise. It would be great if the Committee could look into that further.

Q67            Dame Andrea Leadsom: Looking at that in slightly more detail, are there issues around not just de-banking but the service levels that banks are offering to different SMEs? Are any of you aware of challenges over access to banking in your area, or indeed the services they are prepared to offer you? Is that differentiated according to political views or value judgments?

Paul Wilson: Members always want better service levels. We have discussed issues like banking hubs and high street bank branch closures, but nothing has been raised about the political space being taken into account in that context.

Q68            Chair: We have published the written evidence that comes from the pawnbrokers association and the amusement machine sector. They have particularly experienced de-banking or trouble getting access to a bank account. I wonder whether you would all agree with the premise that anyone who is involved in a legal activity in the United Kingdom as a business ought to be able to get someone to give them a bank account. Can we all agree that?

Paul Wilson: Yes.

Professor Yeatman: Yes.

Chair: Okay; that is a very sensible place to conclude that discussion. Anne Marie, you had one last question.

Q69            Anne Marie Morris: I did: it was the old chestnut about the bank compensation scheme. At the moment, the ceiling is £85,000. Should that be increased? If you have deposits and the bank falls on tough times, is that the right place?

Professor Yeatman: For our kinds of businesses, it would have to be increased so much to make a difference. It would have to go up to £500,000 at least, which I do not expect would be palatable to the Treasury. That would be entirely understandable.

We have to be quite careful with reputation when we have large amounts of cash that we hold in our businesses. That is done, in some cases, by distributing it around to different accounts.

Q70            Anne Marie Morris: Mr Wilson, what about your members? They might have payroll to pay. Without some sort of guarantee that the money is safe, there is a problem. Is £85,000 therefore the right place?

Paul Wilson: Funnily enough, this is not something members have particularly raised with us. Given the amount of inflation we have seen, there is naturally a case for looking again at the £85,000 threshold, as there is for many thresholds across many things. Beyond that, I cannot say it is something members have particularly raised. We do note that, if you raise it, it comes with a cost that falls elsewhere.

Q71            Anne Marie Morris: Mr Veitch, have your members raised it?

Alex Veitch: We are in a similar place to the FSB on this. With permission, I might come back to you on this one.

Anne Marie Morris: Yes, please do.

Q72            Chair: A couple of last questions from me. In their submission, the chambers of commerce were talking about how the last thing someone who is running a business wants to worry about is having to switch their bank account for a more competitive offer. Is there anything that could be done to make it easier for a viable ongoing business to switch to a more competitive bank?

Alex Veitch: That is a really interesting question. What are the impediments to switching banks?

Chair: It just seems to me that there is quite a lot of inertia in what we are reading in your evidence.

Alex Veitch: Yes, that is a fair point. As I said, we are seeing quite a quick adoption of day-to-day internet banking. I do not have the figures in front of me about where people are moving. There is competition, but it is perhaps not always out there in the marketplace in the way it could be.

Q73            Chair: People seem to be quite reluctant to move. If they have a good overdraft facility with their bank and they have been with their bank for a long time, they seem to accept that there is not a lot of urgency about switching because they have another business to run, do they not?

Alex Veitch: Yes. We just want to see competition in the market, fundamentally. We think it is getting there. We do not see a need to look at competition in the offers. One would hope that with increasing adoption of technology and comfort with online banking, there would be other options, including perhaps those offering good interest rates on cash deposits. Those kinds of things will help incentivise switching, but those really are commercial decisions. We just want to make sure that there is competition and choice.

Professor Yeatman: If I can add a point on this one, probably more of a concern than bank collapse, which is the issue of the guarantee, is bank fraud and online scams. If we make it too easy for businesses to change their banks, we may make fraudulent activity easier. That is something to think about.

Q74            Chair: One of the reasons people are deterred is the risk of fraud.

Professor Yeatman: Yes, that is likely. My fellow panellists will probably be more expert to comment on that than I would be.

Q75            Chair: That is helpful. My last question is about the point that has been made a couple of times from the chambers of commerce about Basel 3.1. Have you done anything to quantify the impacts of Basel 3.1 on small and medium-sized businesses’ access to finance? I know it has been postponed, as has the US implementation of it, until next year. It sounds as though you would argue for further postponement; I just wonder whether any of you have done any work on quantifying what the impact would be on access to finance for small and medium-sized enterprises.

Alex Veitch: This is not a direct answer to that, but one thing we have been calling for—the FSB may echo this—is the publication of the PRA’s own impact analysis on what this would mean for the market, which it has been quite reticent with.

Chair: You are calling for it to publish its analysis.

Alex Veitch: Yes.

Paul Wilson: Yes, I would agree. I believe the aforementioned Allica Bank has published some analysis, which we have seen and which looks very credible, that suggests it would reduce SME lending by up to £44 billion. It is exactly because of that significant risk that we want to see what the Government’s assessment is. Do they agree with the Allica analysis or not? Again, that is not FSB analysis; that is someone else’s analysis.

Q76            Chair: What is £44 billion as a percentage? Do you have an idea of what we are talking about? Our data is that small and medium-sized business finance is a multibillion-pound market.

Paul Wilson: I cannot tell you what £44 billion is as a percentage, off the top of my head. I can take that away.

Chair: I have it in my data here. Okay: we will study for a statistic, but you have heard £44 billion as an estimate from one source of the reduction of finance to the small and medium-sized sector in the UK.

Those are all the questions we have for you this afternoon. You have been great at sharing your insights; we really appreciate your engaging with this inquiry. We will be talking to some of the organisations that you have mentioned, and of course to Ministers, as we go through our evidence sessions. Thank you very much for joining us this afternoon.