Treasury Committee
Oral evidence: SME Finance, HC 27
Wednesday 28 February 2024
Ordered by the House of Commons to be published on 28 February 2024.
Members present: Harriett Baldwin (Chair); Mr John Baron; Dr Thérèse Coffey; Dame Angela Eagle; Stephen Hammond; Drew Hendry; Danny Kruger; Keir Mather; Anne Marie Morris.
Questions 240 - 330
Witnesses
I: Bim Afolami, Economic Secretary to the Treasury, HM Treasury; Alanna Barber, Deputy Director, Banking and Credit, HM Treasury.
Examination of witnesses
Witnesses: Bim Afolami and Alanna Barber.
Q240 Chair: Welcome to the Treasury Committee session about access to finance for small and medium-sized enterprises. We are very pleased today to have the Economic Secretary to the Treasury giving us evidence, reflecting on what we have heard so far in our inquiry. Could I ask you to introduce yourself for the record and your official as well?
Bim Afolami: My name is Bim Afolami. I am Economic Secretary to the Treasury. I am with Alanna Barber, who is—
Alanna Barber: I am deputy director of banking and credit at the Treasury.
Bim Afolami: I did not want to get her title wrong.
Q241 Chair: Before we get into the topic of small and medium-sized businesses’ access to finance, I wanted to ask you a few questions if I may. You wrote to us last week with your response to our report on the Edinburgh reforms. We sent you a fairly chunky report in December—actually, I think that it was to your predecessor—with 18 conclusions and recommendations. We have published the two-page letter that we received in response. We wondered whether that is your style and whether you think that that is the right way that you should respond to 18 recommendations in a report from us. You have also said, “I disagree with a number of the report’s conclusions, some of which appear to be inconsistent”, but the letter did not really have enough space to elaborate on those.
Bim Afolami: I am happy, if it would please you and the Committee, to come back with more detail. I thought that, in the interests of responding quickly, it was better to get the response back. If you would like more detail, we can come back with more detail on each of the conclusions, if you would like.
Q242 Chair: Yes. I do not think that we are asking for anything at all unreasonable here, because it is generally accepted practice that, when Select Committees come up with reports and write a range of recommendations, the Government then respond to each and every conclusion in that Select Committee report. What I am hearing you say is that you have now agreed to send us a further response to our Edinburgh reforms report.
Bim Afolami: Yes, I am happy to do that.
Q243 Chair: I am going to leave it there. We hope that that will answer some of the further questions I had on that report. Moving on to the subject of access to finance for small and medium-sized businesses, you have been in post now for a few months. I wondered what your general feeling was about access to finance for these businesses in the UK at the moment.
Bim Afolami: That is a good question and a very interesting one. I have enjoyed thinking about it and working on it. I would say two main things. The first is that the way we—when I say “we” I mean as a country more broadly—have often thought about finance for small businesses is always about debt finance. We have often thought about it in terms of banks providing debt to small businesses to grow, expand and do the things that we want them to do. Of course, that is absolutely critical. In addition over the last few years, because of broader changes in the macroeconomy, particularly around tech and the growth of service industries, the need for equity finance has grown and grown. We need to think about equity finance a bit more as a country, as a Parliament, as Government and more broadly in the industry, and recognise that change.
Then the second thing I would say is that the growth of provision of finance, away from what you would describe as the big five traditional retail banks towards either small and mid-sized banks or alternative lenders, has been pretty significant over the last few years. It is an open question that one could debate and discuss as to whether that is inherently good or bad. I do not think that it is inherently either one of those things. More diversity and competition is something that the Government have had as a longstanding policy over several years in the banking sector. That should also apply to lending for small and medium‑sized businesses, so I would recognise that as well.
The third thing, to conclude, is simply that there have been gaps in the provision of finance, whether it be debt or equity finance, for small and medium-sized businesses. That is where the British Business Bank and various things that sit under the British Business Bank come in. The Government have tried to strike the difficult balance between not wanting to intervene unduly in ways that distort the market in an unhelpful way and at the same time filling gaps where that is necessary. That is why the British Business Bank is a very important institution doing important work, supporting, I think, almost 100,000 businesses since its establishment.
Q244 Chair: We have heard from them during the course of the inquiry and I am sure that there will be questions today. For you personally, with this area as a priority this year, what are you tasking Treasury officials to work on?
Bim Afolami: The main thing that is important to me in this area is very simple. That is more equity and debt finance being provided affordably to small and medium-sized businesses that need it and, where it can make a difference, clearing off unnecessary regulatory burdens that those financial institutions feel prevent them in certain instances from doing those things, but doing that very mindfully of the broader macroprudential difficulties that the banks, in particular, have to live with.
They have to live with those, quite rightly, because we have to operate a very rigorous and robust framework around capital requirements and various other things. We recognise that, in areas such as money laundering regulations, where they appear to be too onerous in certain instances, they are putting off financial institutions from lending for certain types of small businesses. In those instances, for example, we need to make it simpler and easier to provide finance to businesses that deserve and need that money.
I do not say this out of some ideological predisposition. I say it because small and medium-sized businesses are the lion’s share of the businesses in this country. It is where most employment is and most growth comes from. If they do not have the access to finance that they need, whether it be debt or equity finance, our economy will not grow. It is a clear public and economic good that that happens.
Q245 Chair: We wholeheartedly endorse where you want to get to. My question was more about what you are tasking your officials to do this year that would make a difference to that goal.
Bim Afolami: Primarily, it is the regulatory aspect and making sure that we are taking away all unnecessary barriers that finance institutions have, or feel that they have, that prevent them from lending where lending would serve an economic and good purpose for those companies.
Q246 Chair: These are independent regulators. What are Treasury officials and you, as the Minister, asking? Obviously they would have to then decide independently to do those things. What could we expect them to be doing in 2024 that we have not yet seen?
Bim Afolami: I mentioned the money laundering regulations. They are very important in relation to provision of accounts for businesses. Those need to be improved and we will be consulting on those as soon as we possibly can.
Q247 Chair: That is one thing.
Bim Afolami: That is one key thing.
Q248 Chair: Is there anything else you want to highlight, or is that the one thing?
Bim Afolami: That is the main thing I want to highlight in this regard.
Q249 Chair: Are there any other things that we should be aware of that we have not yet been told about that you will be asking your officials to do and change so that we can achieve the vision that you set out?
Bim Afolami: It is in a slightly different context. I only mentioned it tangentially, but there is the work that the Chancellor announced at the autumn statement around the growth fund that is being worked on presently within Treasury and with a lot of work with Downing Street and other Departments as well. The growth fund will provide significant opportunities for small businesses to access finance, again equity finance. That is something that we are working on very hard at the moment.
Q250 Chair: On the subject of debt finance though, which often is more appropriate for the smaller businesses and the growing medium-sized businesses, we last looked at this as a Committee back in 2018. We have heard from the Impact Investing Institute that the success rates for these businesses seeking finance has now dropped from 80% success back in 2018 to 50% today, which suggests that the climate has gone backwards since 2018. Do you accept that characterisation?
Bim Afolami: The figures as you set them out are clear. The bit that is difficult is to understand why that is the case. My instinct is that that is for a combination of reasons. The first is the regulatory, which I touched on in my previous answer. The second is changes to the macroeconomic climate post-Covid, which have been significant. We all understand the economic difficulties of that and banks feel that like everybody else in the economy. Those two things combined may well have contributed to those numbers going downwards in the way that you set out.
Q251 Chair: It does not sound as though there is going to be enough happening this year for that to have shifted by the end of this year.
Bim Afolami: I am not sure about that. When you look at the data, even over the last 10, 15 or 20 years, when the economic climate improves, there broadly is more demand for finance and more lending that follows that demand. This is not about the wider economy, but I will just make the point that, if the economy improves as we hope it will do this year, those numbers will start to increase.
Q252 Chair: To be clear, this data is people who have decided that they want the finance. It is their success rate in obtaining that finance.
Bim Afolami: Yes.
Q253 Stephen Hammond: Economic Secretary, good afternoon. Thank you for coming to speak to us. Can I ask you a little bit about how you see that the Basel III changes that the PRA is proposing will affect SME lending? As you are aware, it is proposing some further changes in terms of the treatment of exposure of SMEs with a new corporate SME exposure. I have two broad initial questions. When he talked to us about this, the Governor said that he thought that this proposal to remove the supporting factor was an acceptable balance. I wonder whether you could tell us what the Treasury’s view of the plan to remove the SME supporting factor is. Do you think that the proposal is an acceptable or appropriate balance, looking at implementation?
Bim Afolami: I was wondering who was going to ask me first about Basel III.
Stephen Hammond: You know that I am a nerd on these things.
Bim Afolami: It does not surprise me at all, because of your deep knowledge and understanding of this area. I will start by saying that I was in the US a couple of weeks ago and I was surprised at the extent to which there was an open public debate. I do not mean just among politicians, regulators, bankers and things. I mean a public debate about the impact of Basel 3.1 on the lending climate for small businesses, underprivileged communities et cetera. That debate here is a more insider, closed debate, but it is a debate that is very lively between the Treasury, PRA, banks and Parliament, as you have set out.
The Treasury has, and I myself have, made very clear to the PRA that it is a matter of priority that we support the lending of finance to small and medium-sized businesses. We should be very careful if that is going to be made harder. The PRA has not finalised its response on this yet, so it is a matter of live debate. What you should know and the Committee should be clear about is that it is a real priority that we keep the provision you mentioned, which used to be in the place of the European Union, as you know, that we do not make it materially harder for banks or finance providers to lend to small and medium-sized businesses. That is not quite the same thing as saying that we should keep the status quo, but it is saying that it matters a lot to the Government and the economy that we keep the provision of finance to small and medium-sized businesses as strong as possible.
Q254 Stephen Hammond: You are right that the live discussion is an insider discussion. The insider discussion, which I was slightly alluding to in terms of the acceptable balance comment, is this. There has been a proposal to remove the supporting factor and put in place the new SME exposure class and another mitigating factor, which Sam Woods has laid out. The issue is whether we think that that mitigating factor is enough to make sure that the quantum of lending to SMEs will continue at the level we have seen before, or whether we think that it is going to fall as a result of these changes on the implementation of Basel 3.1 in the UK?
Bim Afolami: The short answer is that we are not sure yet, but it is something that we are looking at. There is one thing that is worth pointing out to the Committee and it is something that I have had to understand and appreciate. When one is speaking to banks, for example, and asking, “What will be the impact of X regulation on your balance sheet and what does that mean in terms of your lending?”, you get different answers from different banks because their balance sheets are all different, their internal controls are different and the way they think about things is different. Trying to get a corporate view from the Treasury is not always entirely straightforward.
Q255 Stephen Hammond: No, that is true. Clearly, every bank will take a different risk-weighted asset view on the structure of its lending to SMEs. I take all of that. In evidence that we have had to this Committee, from one of the major big banks, NatWest, through to a smaller, more SME finance-oriented bank, Allica, they are suggesting that, at a macro level, if we are not careful, this change to the supporting factor could lead to a diminution of £44 billion of finance being available. Is that a figure that you would recognise, or do you have a similar figure in mind in terms of how it might affect lending?
Bim Afolami: I have heard that figure. I have read that figure. It is not mine. The key words that you said there, in addition to the figure, were “if we are not careful”, so we should be careful. We should watch this very carefully indeed.
Q256 Stephen Hammond: I take that point. What I am also trying to ask therefore—and it is absolutely not your figure—is whether you have a figure.
Bim Afolami: No, because it is very difficult to come up with something that is robust, bearing in mind all the different changes of different banks that I outlined earlier.
Q257 Stephen Hammond: The Treasury recognises that there is a risk.
Bim Afolami: I do not want you to have the impression that I think X number or Y number is okay. No. The reason why I am here, and why this Committee is doing all this work that you have been doing and speaking to all these people, is that we know the importance of providing finance to SMEs for growing our economy. We know the importance of that, so we do not want to make it harder to grow our economy by lending less to them and making it harder for them to access finance. That is what, from the Treasury's perspective, we are very mindful of.
Q258 Stephen Hammond: I absolutely take the point that you do not think that X figure or Y figure is acceptable. You also make the point, as I made the point, that, in extremis, this might be the number. I hear that you have spoken to the PRA. If that were the number, what would the Treasury’s view be to the PRA about what a greater mitigating factor might be to make sure that that number did not become reality?
Bim Afolami: It is difficult, because there are a lot of hypotheticals in there. The important thing is that the PRA has not finalised where it is going to get to. There is been a huge amount of discussion between the Treasury and the PRA, and this is the moment now where, if we feel, once the finalised package is there, that there is an issue, we will be talking to the PRA and trying to understand how we are going to deal with that issue. I repeat that that does not mean necessarily restoring the EU version of the support to SMEs, but we need to make sure that we keep the provision of finance to SMEs as strong as possible.
Q259 Stephen Hammond: We all understand that we have left the EU and therefore we are changing to the UK system. I guess that what I am trying to get at is what the Treasury’s thinking is around what might be more mitigation to ensure, when we implement the UK-based changes, that there is not an impact on the SME-financing sector.
Bim Afolami: I am not theological or too rigid about how one deals with the problem, if one were to exist, at the point when the system is finalised. There are lots of different ways you can do that, but the important thing is that we maintain an appropriate balance to financial stability, recognising, might I add, that the UK has taken a very small C conservative approach on Basel over several years and that certain other jurisdictions that we compete with, for example the European Union and certainly the United States, have taken a less small C conservative approach to such capital requirements.
It is not just about today or the judgment of this year. It is recognising what has happened in the past as well to see how we make sure that we have the right balance and that we are not going too far, and therefore damaging the provision of finance to small and medium-sized businesses. It is important not to put a figure on it, because it is difficult at this point to know what that figure could be.
Q260 Stephen Hammond: My final question is one that is a question of historic record. Under the existing SME lending under Basel, was there a calculation in the Treasury of what level of support was needed?
Bim Afolami: I do not know.
Q261 Stephen Hammond: I wonder if you could ask your officials and let us know whether there was, one way or the other.
Bim Afolami: Okay, I am happy to come back to you. I do not know.
Stephen Hammond: That is fine. Thank you very much.
Q262 Chair: Further to that question, if I may, I think I heard that the Treasury and you do not want to end up in a situation where we are non-compliant according to Basel, which is what they have said about the European Union. What if you end up with the US also taking the decision to be non-compliant and the UK is the only major jurisdiction that has decided to be compliant? Is that something that you would be happy with, Minister?
Bim Afolami: That is a very interesting question. It is very difficult to have these international agreements if lots of our competitors are not cleaving to them as strongly as we are, but I am hopeful. One thing I heard in the US from regulators was that they were quite keen to be compliant materially in a range of ways, though in the US they have their own system. They have their own political and regulatory challenges, as we do, and they are not at the point where they have presented a final proposal.
I got a very strong sense that, from a US perspective—I cannot speak for the EU—they are keen to take a more British approach in that regard, because they know that it is important. Capital requirements being at the right levels is really important and these numbers are not plucked out of the air. They are done through a huge amount of work with very clever people spending a lot of time trying to think about what the right level is.
I hope that we get to a point where the UK, US and EU are broadly in a similar place materially on capital requirements. That way, you are competing on the right things, rather than competing in ways that might lead to financial stability problems down the line, even if that could be decades from now. We would like to get to a point where all of the jurisdictions are broadly in a similar place on capital requirements, but we cannot control other jurisdictions.
Q263 Dame Angela Eagle: Minister, I want to ask a few questions about dispute resolution. We had Mark Grimshaw in to see us and I think that we all found that hearing quite frustrating. I described the system, after he had given us some of his opinions, as if it sounded like it was run by the banks for the banks. This is because the eligibility criteria to qualify have been set so tight that a lot of the small businesses that have problems are not able to enter the scheme. What are your observations about it? Does the Treasury have a view about whether these criteria are too tight?
Bim Afolami: It is difficult, because we should not forget that the Financial Ombudsman Service is there, and I think it covers—you will correct me if I am wrong, Alanna—99% of small businesses. You have 99% covered there. You then have very big businesses, which are not the ones that are the subject of today. They have their own arrangements. They take people to court and they are very big. Then you have a very small number of businesses that either do not fit in the Financial Ombudsman Service, FOS, or are very big. It is not a huge audience anyway. As to my view, it was set up, I think, by seven participating banks. It is run privately. The Treasury does not run it.
Q264 Dame Angela Eagle: No, I was not accusing you of running it. It is likely that it is going to close in 2024, having dealt with only a very small number of the complaints that came about that caused it to be created in the first place. The observations of those who have been denied access to it who have disputes is very much that it has been set up and run by the banks for the banks and has not really resolved very many of the disputes that it was set up to deal with.
Bim Afolami: I am not here to defend or condemn the BBRS. I will say that it is important that, if the banks run something like that, the people who go to it have trust and faith in it. If they do not, it is up to the participating banks to change it in such a way that they do. That is not something that I can impose from the Treasury, nor would it be appropriate for me to do so.
Q265 Dame Angela Eagle: Does the Treasury have a view on whether the resolution service should close in 2024?
Bim Afolami: No.
Q266 Dame Angela Eagle: Would you be happy for it to close, because it is likely to close?
Bim Afolami: No, it is not up to me.
Q267 Dame Angela Eagle: There are 55,000 SMEs that are above the turnover threshold for the Financial Ombudsman Service that will not have a dispute mechanism if they fall out with banks. If the resolution service closes, would you be happy with that? Do you think that it is right that, for that number of businesses, their only option is essentially to suck it up or go all the way to the High Court, which will be prohibitively expensive and not a practical proposition for a lot of them?
Bim Afolami: I would, of course, not be happy with a position where people do not have access to a simple dispute resolution service. That is not a good outcome for anybody. Going back to the economy, where I started at the beginning of this session, that is not good for the economy either because it stops people taking risks. It stops people taking finance. That is not a good outcome, but there are all sorts of other ways of skinning that cat. I should say, for the record, that I happen to know about this because my wife is a commercial mediator. I should put that on the record.
There are all sorts of other ways of alternative dispute resolution that should be signposted and made available in addition to the BBRS or anything that may in future replace it if that was what the sector chose to do. We should always make sure that there is provision for appropriate alternative dispute resolution, because that is good for the economy and the sector. I will support any industry initiatives to make that work better and encourage people and businesses to use broad alternative dispute resolution mechanisms that are available to anybody in the economy.
Q268 Dame Angela Eagle: Should the Government establish an independent body to handle dispute resolution for firms that are over the FOS thresholds and too small to be able to finance large expensive actions in the High Court, which is currently their only choice?
Bim Afolami: As I said, it is not quite their only choice, though I recognise the difficulty.
Q269 Dame Angela Eagle: Are you suggesting that somehow a small company that was above the Financial Ombudsman Service threshold should try to get the bank to agree to go to arbitration? That would depend on the bank wanting to. If the Government are hands off, why should it?
Bim Afolami: If you look at the architecture here, you have the FOS with the 99%. The very big companies go to court. As you say, you have this 55,000 in the middle.
Q270 Dame Angela Eagle: It is the gap in the middle that we are talking about.
Bim Afolami: The FCA did a review on potentially expanding the remit of the FOS. I think it was last year, but somebody correct me if that is wrong. It chose not to expand the remit. I take from that that it did not necessarily feel that the argument to expand it was strong enough. It would be the obvious way in which you would do that if it were necessary. It chose not to do that, so we are in the position that we are in today. We will keep how it is working under review. I repeat, if the sector sets up a resolution service that does not have confidence from the people who it is meant to be resolving it with, that is a problem and the sector needs to work with them to do that. That is not something that is being run through the Treasury.
Q271 Dame Angela Eagle: You are very “Government hands off”. You are not interested in facilitating an agreement on that. You are quite happy to have this gap persist. That seems to be what you are saying to me with your answers to the questions I have asked so far.
Bim Afolami: It is more a case that we have looked at—I say “we”, but the FCA has done a very detailed review. Trust me, it is very thorough.
Q272 Dame Angela Eagle: We have seen it in evidence. We know how thorough it is. I am asking what the Treasury’s view is.
Bim Afolami: I am trying to say that that it has looked at whether it is desirable to expand the remit of the FOS that covers 99% of the businesses already. That would be the obvious place if there were to be something from a Government perspective. It chose not to do that, so we are left with the situation we are in now. What I think is the best thing to do—I do not know whether this is the Treasury view, but this is just my personal view—is to make sure that what is there works as effectively as possible, rather than set up new things. That is the best way to move forward and indeed, working with independent organisations that support small businesses, particularly the 55,000 that you mentioned, to highlight all sorts of alternative ways that we can resolve disputes with banks as well.
Q273 Dame Angela Eagle: What alternative ways? There is a gap. At the moment, once the disputes resolution service closes, which is going to be imminent, there is a gap. The only choice that a small business that feels it has been very badly treated by a bank has is to go to the High Court, which is prohibitively expensive. There is no incentive in the system with a gap like that for the banks to do anything about it. The Government are hands off, as you have just explained, so that gap persists and you are happy with that.
Bim Afolami: I have said that we need to make sure that what is currently there, the BBRS currently, works as effectively as possible.
Q274 Dame Angela Eagle: It is just about to close.
Bim Afolami: We need to make sure it works as effectively as possible. The philosophical answer to your question is that the Government do not always have to intervene in all circumstances when anything goes wrong. If things have gone wrong, people have been poorly treated and it has not been covered properly, we need to call on the sector, working with small businesses, to take responsibility for making sure that works more effectively. I suppose that that is my answer to your question.
Q275 Dame Angela Eagle: That is fairly clear. Would you tell me the role you think that the British Business Bank plays in providing finance to SMEs?
Bim Afolami: It is a really important role. From the top of my head, the British Business Bank has supported British business to the extent of about £12.5 billion or something since its establishment. It has supported business in a range of ways. It has really innovative, interesting, new, world-leading things such as the future fund as part of it. It supports it with equity. It has British patient capital sitting underneath it as well. It plays a really important role and we are very lucky to have it as an institution.
That is not to say everything about it is perfect—far from it—but it is important and does good work. We should be seeing how it can improve the work that it does, particularly around the provision of equity finance to fast-growing businesses and supporting other businesses that are maybe less fast growing in other ways as well.
Q276 Dame Angela Eagle: We received 120 evidence submissions for the inquiry, but fewer than a third of them mentioned the British Business Bank at all. Are you concerned about the awareness of the capacity that exists in the British Business Bank supporting small businesses? Are you concerned that it seems to be not very well known?
Bim Afolami: That is a fair criticism for certain aspects in some sectors. That is clearly the case. It is very difficult, right? If you take different aspects, one thing that I did not mention is what I think they call the finance hub, so signposting and information. There has been a complaint from many small businesses that they do not feel that they know where the information is. They do not know what type of bank to go to. They do not understand what type of finance they might need and they need advice and support. The British Business Bank, though it provides that service, can definitely highlight it more.
I would also highlight things such as the chambers of commerce. I would also highlight that there are all sorts of other institutions in the country that also can help provide information and that are also not very well known. The short answer to your question is that, yes, there are areas of small businesses that do not appear to know the British Business Bank very well and we need to help it get better known.
Q277 Dame Angela Eagle: Do you think that the recovery loan scheme that the British Business Bank maintains, especially coming out of CBILS and Covid, ought to be extended beyond June 2024, when it is due to exit?
Bim Afolami: The work the recovery loan scheme has done has been very significant and positive. For every pound that has been spent, we have generated £4 of positive economic growth and activity. It is great work. It is very important and it has served a purpose over the difficult last few years, in economic terms, that the Committee and the whole of Parliament will appreciate. It has done very good work so far and we will see what happens.
Q278 Dame Angela Eagle: All of our witnesses, including the CEO of the British Business Bank, have argued in favour of extending the recovery loan scheme. Will the Treasury commit to extending it beyond June 2024?
Bim Afolami: I am not going to commit to that today. I will say that we recognise the importance of the work that it has done. That point has been made by many different people and institutions at many different times. That is fully recognised by me and the whole Department.
Q279 Dame Angela Eagle: Are you hinting perhaps that there might be an announcement in the Budget?
Bim Afolami: I am not hinting anything. I am not subtle enough to hint. I will say that I recognise the good work that it has done.
Q280 Dame Angela Eagle: You would also recognise that, if there is uncertainty, with announcements not happening as June arrives, that creates a great deal of uncertainty for those that rely on the recovery loans. Perhaps March might be a good time to make one of those announcements.
Bim Afolami: Uncertainty can be very difficult, but it has played a very positive role over difficult economic times. We are coming to a point where the economy, hopefully, this year will improve. It has done a good job thus far.
Q281 Dame Angela Eagle: I wanted one more update, which is on the Greensill Capital loans that the British Business Bank made. When last heard of, the £400 million of loans that Greensill Capital made to companies linked to Sanjeev Gupta had had their guarantees suspended, but there has been litigation in Germany, where the bank that advanced the loans was. The person who is trying to deal with the collapsed company is suing for return of the money. Does this have implications for the British Government, which lent the loans in the first place? Is there an update you could give us on where we are?
Bim Afolami: I cannot give you an update on that, but I will write to the Committee and give you an update in detail on that. I do not know the answer to that.
Q282 Dame Angela Eagle: Is there a final position on the amount of fraud in CBILS that happened that the British Business Bank handled during Covid? Do you have a figure for that that you could give us?
Bim Afolami: I do not have a figure that I can give you.
Alanna Barber: I do. It is £0.02 billion at the moment. That is the figure on CBILS fraud.
Chair: What is that in millions then?
Alanna Barber: That would be £20 million.
Bim Afolami: It is £20 million.
Q283 Dame Angela Eagle: That clearly does not involve the guarantees that were given in Greensill, so I would welcome an update on where we are with that.
Bim Afolami: We will give you an update on that.
Dame Angela Eagle: Thank you.
Q284 Mr Baron: Welcome, Economic Secretary. Can I turn to what more the Government can do to better assist businesses accessing banking facilities generally? You rightly recognised the importance of SMEs to the economy and the importance of finance, but I put it to you that last year something like 140,000 business bank accounts were closed, often with no notice, explanation or recourse. There is a feeling in the SME sector that banks tend to, if anything, be anti-business. We have had figures suggesting that two-thirds believe that banks are less willing to lend to them today and this increases further for SMEs with lower turnover. Access to business bank accounts is terribly important. What are you going to do to try to turn this round?
Bim Afolami: It is a very important point. SMEs have made the point to me. I feel strongly about it. It is really important that banks are always straight with people about what is going on. By the way, that is businesses as well as individuals. I know that we are talking about businesses but it is of critical importance and it definitely frustrates me when I hear these stories.
When I have spoken to those in the industry, they have said that, broadly speaking, where bank accounts have been closed it is for two principal reasons. One is a perceived financial crime risk and the other is the lack of information being provided upon request. Taking that as read, I think that we all know that the perceived financial crime risk is very serious and all of us take that seriously, but I suspect the majority of the closures are due to lack of provision of information. I know that that is something that I have spoken to UK Finance and the banks individually themselves about. We need to make sure that we are not inadvertently, or deliberately, closing accounts unnecessarily for businesses that may just not have opened emails at the right time.
What am I doing about it? The answer is twofold. First, I am having conversations such as the ones I am having, saying, “I am hearing these stories and you have to act”. Secondly, going back to something I said earlier on in the session, one thing that definitely comes from the banks is the regulatory requirements that they are under and the severe problems if they are seen to breach any of these requirements, particularly money laundering regulations, that come in terms of financial crime, which affect certain sectors of business, particularly businesses, for example, that handle a lot of cash, compared to other sectors that do not.
I mentioned the money laundering regulations. We need to make sure that those regulations are simpler, easier and less onerous. Otherwise you end up with a scenario where the lives of legitimate, decent business owners are made very difficult. That is not good for the economy, it is not good for them and it is frankly not good for banks if they do it, because it damages their reputation.
Q285 Mr Baron: I am pleased to hear you say that. It is certainly not good for the economy. It seems to be a scenario, once again, where we are coming back to the regulators, which may be overregulating, and the banks reacting to that. It is the poor SMEs and customers at the end of the line that are having to pay the price. You have a planned consultation into de-banking going on. Can you update us on the progress with regards to that? To what extent will it also look at SMEs?
Bim Afolami: It is my understanding that the FCA is doing further work on the back of what the Chancellor commissioned in relation to this. It is doing the work and we are in touch with it on that. I hope that soon we will have an update that we can share with the Committee.
Q286 Mr Baron: The Treasury is not doing its own consultation on this.
Bim Afolami: We are doing one on threshold conditions and account termination rules.
Q287 Mr Baron: In other words, you are looking at this. Within that scope and remit, there will be SMEs featuring large.
Bim Afolami: Yes, because that applies to individuals as well. When I was saying that the FCA is doing work, it was on the Chancellor commissioning it specifically in relation to SMEs.
Q288 Mr Baron: Yes, I am aware of that, but I am also aware—or I thought I was anyway and you have now confirmed it—that the Treasury itself is looking at this issue, which is very welcome. Can I come back to this business about banks overreacting? There are 140,000 accounts closed last year alone, which is a very large number of accounts.
Bim Afolami: It is a lot.
Q289 Mr Baron: I cannot believe that all of those are cases of smaller business people not responding quickly enough. There is very often no recourse at all with regards the closures. We have heard evidence from various sectors, including amusement machines, the National Pawnbrokers Association and various others, which state in evidence to us that banks often blacklist and withdraw services from businesses and sectors such as theirs because of worries about money laundering, which they would maintain, particularly when it comes to amusement machines, is a little laughable, given the size of the prize and so forth. Do you actually, philosophically almost, believe that SMEs have a right to banking services, whatever their business, as long as it is legal? Why is this happening?
Bim Afolami: I believe that SMEs have a right to banking services. What it is not up to me to do is to tell any particular individual bank that it must bank a particular company, and that is the difficulty. What I hope we are going to see very soon in the market, a bit like when there was an issue several years ago about the lack of provision of finance and you had a rise of alternative lenders, is that particularly other new institutions seek to take the great business opportunity of taking on businesses because of the risk aversion—I would put it this way, gently—among some in big banks, feeling that banking certain sectors may be risky from a money laundering perspective.
They say that they have made a business decision that they think that that is maybe onerous unless the businesses are of a particular size. You mentioned the size being relevant in relation to closing the accounts. I can see certain banks maybe doing that. It is not up to me to tell those banks to change their business strategy, but it is up to me and the Government to make sure that we have the conditions where alternatives are provided that are serving a good purpose in terms of people having access to bank accounts. SMEs definitely have a right to be banked, as long as they are not doing legal activity and are not suspected of such. That is absolutely critical, a bit like individuals have a right to be banked.
Q290 Mr Baron: Bim, you see the problem here. Government have a role when it comes to setting regulations. Arm’s-length regulatory bodies take that on board. The steer comes from Government. The trouble is, at the end of the line, it is the individuals and in this case SMEs that pick up the tab if banks overreact. Yet I think we are saying that that is a purely commercial decision at the moment. Do you think that there is a bigger role for Government to ensure that all businesses have enhanced rights to a bank account, if only to encourage banks to think again before taking this rather arbitrary action of simply closing accounts, often without notice?
Bim Afolami: It is an interesting one and it definitely makes me think that you, John, are calling for an enhanced role for Government, which is interesting.
Q291 Mr Baron: Yes, in certain cases, if it is defending SMEs.
Bim Afolami: I know. I am only teasing you.
Mr Baron: I know you are.
Bim Afolami: This is what I think. The best way to make sure that people are banked appropriately and properly is to make sure that the regulations—particularly the application of the regulations when they come on to the financial institutions—are proportionate, simpler and easier to do. That has not been the case for too long and that is something that we are actively looking at. I am very committed to that. I have made numerous decisions, speeches and comments to that effect and I will continue to do so. That is the best way of doing it.
The almost more fundamental point, though, is whether we should get to a position of saying to every single bank, “You must take on any business that satisfies A, B or C basic requirement”. I do not think that that is what Government should do. I do not think that Government should be mandating to a business, “You must do that”, because I think that that is overreach. What we should do is not just on the regulatory requirements, the broader economic environment or the primary legislation environment. We need to make sure we provide the right context for the right competition and the right providers to take a fantastic business opportunity.
Let me finish by saying this. The difficulties of Silicon Valley Bank were resolved over, what, about 72 to 84 hours over the best part of a weekend. There were lots of people saying, “Oh gosh, what is going to happen to all of these people who bank with Silicon Valley Bank?” What happened was that you had a very big bank, HSBC, that took the decision because, in addition to being good corporate citizens and wanting to help, it saw a great business opportunity of lots of quite small businesses often that previously were not banked with it and that it did not really know. It has taken them on. Frankly, it is a business opportunity as much as anything else.
There are great business opportunities in that 140,000. I think that the market will find its level and make sure that they are properly dealt with, as long as the regulations are done right. That is where I come back to and that is the role of Government.
Q292 Mr Baron: That is the logical consequence of what perhaps you and I are agreeing. We do not really want Government to get involved in commercial decisions at the frontline. If that is the case, we must make sure that the banks do not have any reason to overreact to the regulations.
Bim Afolami: I agree.
Q293 Mr Baron: The Government's focus should be on making sure that the regulations are commensurate with the task in hand and are fit for purpose. I will share with you, Minister, that there is a strong feeling that we are overregulated and it is leading to consequences. I have one final example and then I must stop: reputational risk. The FCA itself has concerns about banks using reputational risk as a reason for account closure. Do you share that concern and do you think that the FCA should tighten the definition of reputational risk so firms cannot use it as an excuse to close bank accounts?
Bim Afolami: It is a concern if that is what is happening. Once you start doing that, you go down a road that is quite problematic, but I do not think that that is what is mostly happening. I think what is mostly happening is a fear of a knock on the door from the regulator.
Q294 Mr Baron: The Government’s focus now is going to be on getting the regulation right.
Bim Afolami: Yes, and not just the regulation around money laundering. It is about, if things go wrong, how the regulators deal with the industry and making sure that that is not too onerous or aggressive. It is the experience of that that means that, next time, that institution does not feel that it even wants to go close to a particular sort of institution. That would be a mistake.
Q295 Chair: Can I clarify something? I think that I am actually more confused than I was at the beginning about the work that has already been done on de-banking by the Treasury, your predecessor and the FCA. Did that cover exclusively personal bank accounts, or did it cover business bank accounts as well?
Alanna Barber: The account termination rule changes, so extending the notice period to 90 days and giving a clear reason except where it would be unlawful to do so, applies to business and personal accounts. The Department is going to be publishing regulations soon. It covers both.
Chair: A business of any size is going to be covered by these new regulations that you will be publishing soon. We will look forward to seeing that.
Q296 Dr Coffey: Building on that, it seems that there are, necessarily, banks not having a particular taste for certain kinds of businesses. The written evidence provided by the National Pawnbrokers Association refers to what it calls the “letter of death” from banks. It normally gives notice of 30 days’ closure. It sounds like this will be changing to 90 days. The National Pawnbrokers Association suggests that, in nine years and the closure of more than half of its members’ accounts, there has not been a single occasion when the bank has reviewed the closure and changed its mind. That is written evidence given to us.
The other thing is coastal, or not exclusively coastal, but comes from Bacta, the trade association in the amusement machine sector. About 30,000 people are employed in the industry, largely SMEs. They have their own concerns about the closure of high street branches, then the restriction of what can be put in post offices and some of the risks in terms of handling quite so much cash. We have done a lot on consumer access to cash in bank branches. I have already called Barclays shameful and shameless in this Committee and will continue to do so. Are we forgetting the role that branches play for SMEs?
Bim Afolami: That is a very good question and we are in danger of doing so. Bank branches do not just play a role for individuals. They play a really important role for SMEs. Banking hubs are a really good innovation that developed over the last few years as a way of making sure that there is access to cash in areas where you used to have several banks and there is not the need for them because the drive online has gone so quickly, while making sure that there is a hub where banking can take place. I was actually at a banking hub on Monday in Cumbria and speaking to the members of staff there. I was talking to them and customers about the importance that that has to the local area. It is really important.
As I referred to when I was speaking to Mr Baron earlier, SMEs that use a lot of cash are facing a double whammy. On the one hand, you worry about the letter of death, as you put it, from the bank. On the other hand, you worry that there are fewer opportunities for you to put your cash in a local bank. We are in danger of forgetting that. I am not forgetting it, but it is something that I speak to the industry about frequently. Making sure that we roll out banking hubs more quickly is absolutely critical, as is working with LINK and Cash Access UK to do that in a way that helps support isolated communities in isolated parts of the country where banking services have fallen away.
Q297 Dr Coffey: It feels like the Government have delegated responsibility for access to cash to the FCA. Is the Treasury monitoring the impact of the loss of bank branches beyond just the access to get to an ATM to take money out?
Bim Afolami: The short answer is “very closely”.
Q298 Dr Coffey: That is good to know.
Bim Afolami: I am slightly obsessed by bank branches.
Q299 Dame Angela Eagle: Can I have some of mine back then?
Bim Afolami: Anything for you, Dame Angela.
Q300 Dr Coffey: There is one in Leiston, Minister, that needs saving.
Bim Afolami: Okay, good. That is fine. Bring in your orders here.
This is really significant. Access to cash is really important. That is why my predecessor, the Member for Salisbury, when he was in post, was very hot on this when he was in this position. I am sure that members of the Committee remember. It is absolutely critical and that is why we have legislated for it.
In addition to that, we need to make sure that, where the commercial decision is that so much has gone online so quickly that there is not a need for bank branches, and we need to be honest about that, banking hubs, in the right way, are brought quickly, so that there is not a gap between all the banks leaving and then a vague promise of something coming in the future. That is not good enough. Shortening that to make sure that there is no gap, which is where we are now, which is the policy from how the industry is operating, is critically important.
I would take up a tiny thing that you said in relation to delegating responsibility. I do not see it like that. The way I see it, the industry is a private industry that the Government do not run, but we have set a framework. The FCA’s job, as it has done recently when it comes to access to cash, is to implement that framework, working with the industry to do that. What I can do is make it very clear to the industry that this is something that matters. It matters to Members of Parliament, and it matters to people. That is why access to cash and this whole area of bank branches is really important for SMEs, particularly those that handle a lot of cash on a day-to-day basis.
Q301 Dr Coffey: The Government’s response tends to be, “Go to the Post Office”. We know that banks have different rules. Do you think that that is the appropriate default solution? I am really encouraged by what you have just said about hubs. There is a town that is just about to lose its last bank—the nearest Barclays is now about 40 miles away—yet that town has been turned down for a hub more generally. I am interested to see how you are going to get a grip of that.
Bim Afolami: I am very happy to talk to you about that, because it is an area of real importance. I know that many colleagues from across the House feel very strongly about it.
Q302 Dr Coffey: If you find that the FCA’s solutions—I appreciate that you are saying they are not delegated, but they are helping to install a framework for the Government—do not end up providing the access to services that SMEs require, will you think again about a cash deposit network that can cope with cash depositing and access on a commercial basis?
Bim Afolami: Let us just see where we get to. The statement that the FCA made recently in relation to this was helpful. As I say, the industry has understood the desire to roll out the promised banking hubs as quickly as possible. LINK and Cash Access UK are also apprised of that. Let us see where we get to. I do not want to get ahead of myself, though I often find that a bit difficult.
Q303 Dr Coffey: I might encourage you to speak to the Small Business Minister Kevin Hollinrake.
Bim Afolami: I do, frequently.
Q304 Dr Coffey: He has concerns that some of these hubs are overspec’d. I have one final thing. At the moment, through the new rules, which are welcome, the FCA reviews when a bank says it is going to close a branch. Those documents, either what gets submitted or indeed the FCA’s assessment of them, are not open to the public to look at. Would you like to open them? Should they be transparent?
Bim Afolami: I do not know. I did not realise that.
Q305 Dr Coffey: Would you like to think about it?
Bim Afolami: I am happy to think about it. The question is really about making sure the right decisions are made on clear criteria. I do not know whether transparency always is the silver bullet that people think it is, but I am happy to look at it.
Q306 Anne Marie Morris: The access to cash issue is one that I share. I have the same passion that Dr Coffey has because we have coastal constituencies. Those coastal constituencies are very cash-based. Therefore, my SMEs have very similar problems and experiences to Dr Coffey’s.
Let me ask you this. The question that was asked by Dr Coffey was, “Is there enough focus on the needs of businesses?” You said, “Could do better”. Having talked to different business groups, it seems to me that only the FSB has been involved and consulted in what the rollout looks like. The chambers have not been.
Bim Afolami: I did not realise that. Forgive me.
Q307 Anne Marie Morris: It is important that Government work with all the bodies that represent businesses.
Secondly, I love the word “delegation”. It is delegation and abrogation. “No, no, no”, says Bim. Effectively, the Government have set the framework and then they have let the banks get on with it. In a sense, because the rollout started with the guidelines before the FCA rules came in—and they are still not in place because it is still consulting—you have a bit of a patchwork quilt of experience.
It seems to me—I put this to you—that, because all the parts of that framework are controlled by the banks, it is quite hard for Government, let alone the FCA, to ensure there is some control and some proper balance to make sure the right decisions are being made.
LINK is regulated, but it is owned wholly by the banks. Cash Access is wholly owned by the banks. The consequence of all of that is that it is the banks that decide, with regard to establishing the hubs, what size they will be, how much money they will invest in them and the services that they will offer.
Maybe the FCA, after the consultation, will do more in this space. I worry that there is a bit of a conflict of interest here. Of course, I appreciate that banks do not want to end up with a lot more freehold than they had before. That is one of the reasons they are cutting these costs. If you look at the constraints that have been set for these hubs, they have to be 1,000 metres or less. There is one hub that is in a public lavatory.
Bim Afolami: Really? Where is that?
Q308 Anne Marie Morris: Yes. I can give you the detail later. It seems to me that the figures and the budgets have been set without any recourse to what that means in practice. They have to be leasehold, not freehold; they have to be 1,000 metres or less. This has led to a lot of constraints.
I think there are thirty-something that have been rolled out, which is very good news, but there are another 100-plus still waiting. From what I can see, there is absolutely no way those are going to be rolled out for the benefit of SMEs or domestic consumers in the timeframe that is set, which is 12 months after a bank closes. It simply is not going to happen.
I put it to you, Minister, that there needs to be more Government as well as FCA oversight about what is going on. If the rules are entirely being made by the banks, because they are the ones deciding how much is spent, we are going to land up in a big muddle. Would you agree?
Bim Afolami: Let me go back to the first thing you said about not involving other small business institutions or organisations. The FSB is consulted, but nobody else is. That is something I will definitely take away. I did not realise that. That is something I will take away.
To your second point, what is the role of Government here? It is a partly philosophical but also practical question. It is important that we do not get to the point where Government Ministers, much as I would be tempted to enjoy this, determine exactly where in the country bank branches will go. That is not a sensible way to govern an industry.
Q309 Anne Marie Morris: I would agree with you, Minister. I would not want you to do that. That is not what I am asking.
Bim Afolami: No, I know that. I am presenting a slight strawman to make my point. It is important that we do not get there and that there is not even the perception that that is where we want to be. It is also important that we do not just have absolutely no rules at all about access to cash.
Anne Marie Morris: Yes, absolutely.
Bim Afolami: What we are talking about is where the balance lies in between these two points. It is my view that, broadly speaking, the issue we have is less about the overarching framework, though I do take the point about the 1,000 metres and the detailed criteria.
We should always consider those and work with the industry to make sure those are appropriate because the technology that is driving all of this is itself changing. It is also important to recognise that the individual’s use of online banking is different from the use of certain SMEs in certain sectors as well.
Where does the balance lie? Broadly speaking, we are in a sensible position. We have a set of rules that it is up to the industry to perform to in that regard. The FCA does its work at a more detailed level as well. That is broadly the sensible place to be.
I am frustrated with the speed of rollout. I am frustrated about that. You mentioned that there are 100 waiting. That needs to be done as quickly as possible. I have questioned this. It is worth saying that, when I have asked, “What is going on?” the answer has been that the difficulties around planning in town centres are significant. The difficulties around timings and when leases become available are also important. It is not just a lack of money or will. There are often practical difficulties to doing it more quickly. It is not beyond the wit of man to sort those things out, and we do need to try to sort them out.
I will finish by saying that what I have taken from this Committee—I am sure all the banks are watching, if they are not doing something else—is that we need to make sure SMEs are fully considered as part of the broader access to cash discussion and policymaking both at bank level in the industry and in Government. I have taken that very strongly from this Committee, and I am sure the banks will have too. I will raise it in my private conversations with them as well.
Anne Marie Morris: You made a very good point there, which is that there is a big difference between the way SMEs and individuals need access to cash. If you are an SME, you need a lot of cash and you need to be able to deposit a lot of cash. That becomes a challenge because we have different rules for different banks. There are limits that may be appropriate for a domestic consumer, but they are not for an SME.
I would suggest to you that we need a very different approach in terms of the limits for SMEs. We also need some consistency. Different banks offering different levels, because they have different views about money laundering, is not helpful for the small business community.
I would also say that businesses often want documents to be able to be prepared and printed. At the moment, these hubs are challenged. They cannot print documents. They cannot have one printer that can produce documents for all the different banks because of the different technologies that are used. For an SME that wants to go in and sort out its bank statements or whatever, that is a real challenge. With your indulgence, Chair, may I ask one more question on this before we move to guarantees?
Chair: You may.
Q310 Anne Marie Morris: One of the things that the Government wanted to do in the Financial Services and Markets Act was clearly to deal with access to cash. At the same time, they recognised that there needed to be some teeth to ensure that the services that banks normally provide also remain provided. Therefore, the Government introduced the consumer duty of care.
My concern is that, when we are rolling out these hubs, the focus is entirely on cash. The reality is that it would be irresponsible for businesses to be left with cash and no advice. When I talk to banks, their view is that SMEs are now so IT-literate that they do most of their advice online.
That is not true for the sorts of businesses I have, in a seaside resort. That needs to be thought through because it seems to me that the consumer duty has not been properly recognised in the construction of the hubs. That is particularly pertinent for SMEs. Without that, businesses land up without the sort of help and support that we were talking about earlier with regard to access to finance. That needs to be addressed. I do not know whether you have any comment on that.
Bim Afolami: You make some very sensible points. I will reflect on them and make sure we act on those points where necessary. It is very important to the health of our economy, the health of rural areas and the health of seaside and coastal regions, as we have discussed, that the right SMEs have the right access to cash and services.
I do not want you to have the impression that everything is set in aspic. As more banking hubs roll out more quickly and things develop, and indeed as the technology develops and how people bank online develops, there will inevitably be changes as to how banking hubs operate.
I did not recognise the point you made about printers. Again, that is the sort of thing I will take away. We need to iron out all those little problems to make sure that banking hubs do what they really can do, if you see the potential of them, which is to be the 2020s update to what was a long-term legacy system of bank branches. For that to work, SMEs as well as individuals need to have confidence in them. That is very important.
Q311 Chair: Before we move on to a different topic, I would just like to clarify something. It is our understanding as a Committee that it is for the Treasury, and therefore in your in-tray, Minister, to designate which firms the FCA’s regulation of cash access will apply to and to designate the co-ordination bodies. You are hearing from this Committee today that we think that is really important. We would like to see you do that ASAP. I wondered whether you could tell us when you are going to do it.
Bim Afolami: I am going to take that away. I will consider and act as quickly as—
Chair: Urgently?
Bim Afolami: Yes, urgently and soon.
Q312 Anne Marie Morris: Minister, can we move to personal guarantees and the challenges that a number of SMEs have when they are trying to access finance? Do you feel—I am sure your finger is on the pulse—that there is a fair balance between security for the lender and burden on the borrower when we look at personal guarantees and, indeed, charges on houses?
We have had some submissions with some requests for very small sums, £5,000, to support which a personal guarantee was required as well as a charge on that person’s home. What is your view? Do you monitor it, as I assume you do? Have we got the balance right in terms of what sort of security lenders can demand from small SMEs?
Bim Afolami: The answer is that it depends. In some instances, the balance is right because the bank is making a reasonable decision about the risk.
There will be instances where it is not right. Where it is not right, the question is, “What do I or anybody else seek to do about that?” If the balance is not right, it is important for us to have enough provision of finance in a variety of ways and from a variety of types of lenders to give options to that person that are not solely guarantees, if they do not feel able or willing to do so.
What is also worth saying—it is not always a popular thing to say—is that sometimes you lend money to a business, it goes wrong and the money is lost. That is the nature of a capitalist system. It is through that that we end up growing the economy more fundamentally because it is through that allocation of capital and the understanding of where risk lies that over time capital migrates to where money can be made and businesses do not survive in areas where money cannot.
Q313 Anne Marie Morris: Minister, in a perfect world, as you describe, SMEs would have all these options; they would effectively have a lot of choice. I appreciate that is one of your objectives, but today, if we are honest, that does not exist.
If there is a borrower and a lender, it is a two-way transaction. Both parties are taking risk; both parties are getting some benefit. The borrower is getting the money to go and build his or her business, but the bank is getting a nice hefty piece of interest. It cannot be reasonable to say that lenders, because they are lending and taking risk, therefore should have all the cards stacked in their favour. It has to be balanced.
Bim Afolami: Of course, yes. The truth is that they do not necessarily have the cards stacked in their favour, and this is why.
Ultimately, there are situations where personal guarantees are requested and the SME has no other access to finance. I am not saying that cannot be the case; of course it can be. We spent time earlier on in the session talking about where there is not enough access to finance. I know that can be the case.
Then the question is this. If a lender, because of its assessment of the risk of a borrower, is not willing to lend either without such a personal guarantee or unless the interest rate is jacked up to a point that would be much higher and therefore probably punitive or excessive, that is a transaction that both parties have to consider and think about.
It is very difficult for me, any Minister or anybody in Government to say, “We are going to outlaw personal guarantees”. That would not be appropriate either because sometimes they are appropriate. The most important thing we can do is to make sure there is enough choice and variety of alternative lenders.
Something like 55% of finance lent to small businesses now comes from outside the big five banks. This trend is happening. If you look at the data over the last few years, there are more and more people coming into the market. We have to support that.
There will be people who do not necessarily offer and require personal guarantees. Guess what? They will maybe be making a very good business decision. That is where the finance will be provided. Maybe that will force a change of behaviour within certain institutions about the instances when they require personal guarantees.
We should not be getting to the place of saying, “We are now going to ban personal guarantees somehow” because that is not the right answer and it is not the role of Government.
Q314 Anne Marie Morris: I would not suggest that, but there is a question mark—it certainly has been floated—about whether there should be regulation that gets this balance right. You do not outlaw, but you set limits on whether it is appropriate for there to be a personal guarantee given the size of a loan.
The sorts of businesses that I am talking about are the very small start-ups. They are probably one-man bands. They probably are not able to access some of these new—you are right; it is a great opportunity—banks online. They would not necessarily understand or have the knowledge.
It is those very small businesses, where it is a very small amount of money for a relatively small project. What you are describing is a world up here for bigger businesses and those with far more experience in the lending world. I am thinking about the ones at the bottom end of the food chain.
I just wonder whether there should be some sort of limit because the recourse these small companies have is relatively small. The FOS applies only to sole traders. It does not apply if you are a limited company. It is often small businesses that decide to set up as limited companies. That is when they are asked for a personal guarantee. That is very often where the challenge is. Is this something that it would be worth the Government getting a better understanding of to see whether there is abuse?
We have to remember that the lender is always going to be in a stronger position of power than the borrower. Do we need to look at a regulation, light touch—I would not ban anything—to enable those very small businesses to start trading with the initial start-up loan that they need?
Bim Afolami: You have made a very fair point about ensuring that one is always thinking about the smallest business. Of course, that is a significant number of our constituents in our constituencies. They are the people who send us here, and that really matters. I do not want to give you the impression from my previous remarks that I was not thinking of them.
You make a good point that we should make sure there is an appropriate balance for those businesses in particular. If I were to paraphrase, you accept my broader remarks for slightly bigger businesses, but you do not think it works for some of the very smallest ones.
The Lending Standards Board is reviewing its approach on personal guarantees. I would expect it to focus on these sorts of businesses. It is unlikely to focus on businesses with £10 million turnover. There is not necessarily a problem there. You have more options for finance, equity and debt when you are bigger because more people are interested in lending to you. The Lending Standards Board’s work is interesting. You are right that I should keep abreast of it, and I will do so.
Q315 Anne Marie Morris: I appreciate that. I have one final point, and then I will leave it at that. It is not just the personal guarantee; it is the security on your own home. That is quite frightening. If you are a very small start-up, that is all you have got. The idea that you might lose the roof over your head for your kids and your wife is quite terrifying.
I do not know whether those sorts of charges on people’s homes could be looked at in the review that you describe.
Bim Afolami: I do not know, and I will check. I will add one thing, though. Going back to the economy, without sounding like a broken record, the reason why all of this matters is the economic growth and sustainability of our country. That does not just matter in terms of GDP statistics. It matters in terms of individuals in communities.
One of the difficulties that our economy has right now is a chronic risk aversion, whether that is in regulators, Government, big businesses or small businesses. We could be talking about all sorts of different aspects of this. I am very committed to changing this dynamic as best I can in the time that I am in this position. With regulation, there are levers that we have. With pressure on industry, there are other levers that we have to try to change this dynamic.
In relation to finance, one of the reasons why there are requests for personal guarantees, security on homes or various other things that seem onerous is precisely because of a worry about what happens when something goes wrong. Why are you worried about something going wrong?
This comes not just from a regulatory perspective but from an economic perspective. If you are a bank manager in Dorset, the capital requirements come from your head office. They have been set during the Basel process over the last 12 years. Those all cascade down to the person making that decision. It is a risk aversion that is baked into the whole structure and system.
These things are all entirely connected. I want you to know that I appreciate that. In relation to the smallest type of businesses, let us see what we can do to loosen that a bit and to make people realise that, unless we allow more finance to go to some of the smallest businesses in certain forgotten parts of the country, we are not going to get the economy that all of us on all sides of the House want to see.
Chair: It is because we feel very strongly about access to finance for small and medium-sized businesses that we are spending a lot of time on this. We have a lot of interest in this. In fact our colleagues have further questions.
Q316 Mr Baron: I welcome what you have just said. At the end of the day, it is not just about GDP growth and economic growth; it is about people’s lives and livelihoods.
I sense from our questioning and your answers, Bim, that you are going to take on the regulators with your resolve stiffened, which is a good thing. There is certainly a feeling among some of us that they are overegging it. You and I have had conversations with regards to the regulators, the FCA, and investment trusts.
Can I bring you back to de-banking very quickly? We have had the Financial Ombudsman Service in, as you know. The chief executive made the point that last year the FOS received 360 complaints about de-banking from businesses. This year in the first half that is 250-plus. It is increasing substantially. The FOS mentioned in its evidence to us a little while ago that it was working with the Treasury to ensure that everybody understands the appropriate treatment of a business in that situation.
In your dealings with the regulators—I know you are going to talk to the FCA, the FOS and all the rest of it—can you keep that in mind? Is that ongoing at the moment?
Bim Afolami: In what particular way?
Q317 Mr Baron: The FOS, when it was in, said it was having ongoing discussions with the Treasury to ensure people—we are talking about businesses here—are dealt with in an appropriate manner that befits the situation when a bank suddenly closes a business account. Are you conscious of that conversation with the FOS or not?
If not, could somebody look at it to see whether it is taking place, given our emphasis on ensuring that regulators regulate appropriately and do not completely de-risk and make life difficult for the small businesses at the end of the chain?
Bim Afolami: I will take that away.
Alanna Barber: We have had conversations with the FOS about ensuring that it has appropriate resources in place. It has not raised any concerns about that in relation to de-banking cases.
We are also making sure it has access to the information it needs when somebody is complaining about their account having been closed so it can then make a determination. Particularly where the account has been closed perhaps for money laundering or other financial crime concerns, some of that information is not usually widely shared for entirely understandable reasons. We have been having conversations with the FOS to ensure it has systems in place for that.
It has upheld about 38% of the bank account closure complaints that it has had, which is about the same as the usual uphold rate. It has also told us that, where it receives insufficient information from a bank about why it has closed somebody’s account, if someone has complained and the FOS has not had much information back from the bank, it will rule in the complainant’s favour because the complaint is considered uncontested. It has not raised concerns with us that it lacks the resources or ability to deal with those.
Q318 Mr Baron: Very briefly, if it upholds 38% of those closures, 62% are presumably overturned in favour of the SME.
Alanna Barber: It upheld the claims, so 38% of people who complained were considered in the right. It is the other way around.
Mr Baron: That is still a significant number.
Bim Afolami: Yes, it is very significant.
Q319 Dame Angela Eagle: I just wanted to come back, Minister, on the British Banking Resolution Service. I was quite surprised at your hands-off attitude, in saying that the Treasury does not really have a view. Of course, the British Banking Resolution Service was set up in order to deal with a slew of complaints that about unfair treatment for companies of that size.
Philip Hammond, who was Chancellor at the time, suggested that questions of dispute resolution and regulation would be revisited if the British Banking Resolution Service failed to resolve a meaningful number of the complaints before it. It has not even really allowed most of the complaints to be considered. Given the dire performance of this so-called resolution service, which has ruled most of the complaints as out of scope, is it about time to revisit what Philip Hammond said when he set up the system?
Bim Afolami: The performance has not necessarily been dire. It is regrettable that more businesses have not used it.
Q320 Dame Angela Eagle: They have tried, and they have had their claims ruled out because the criteria for using it set by the banks are so tight that most of the complaints, which are unsolvable by the Financial Ombudsman Service, have not been dealt with. That is what has happened. The banks have set up a system that is so tightly organised that most of the complaints that were in the system prior to the setting up of the resolution service have not qualified for the resolution service.
Bim Afolami: My point was simply that I have listened very carefully to your questions. I did not realise that Philip Hammond had said that, by the way. I have listened very carefully to what you have said. I will consider it after the Committee because I do recognise that we need some provision. I was simply questioning whether it is Government’s job to put in a Government scheme there.
As I say, the FOS was not extended after judgment by the FCA. There is clearly an open question as to exactly what is best to do with this quite small number, in overall terms, of companies that have disputes. I would like to look at some of the evidence more closely. I have seen the headline numbers, but I have not looked at the evidence. I would like to do that and to see what needs to happen. I have listened very carefully to what you have said.
Dame Angela Eagle: That is good. I hope you will revisit it because the then Chancellor Philip Hammond was trying to say, “If the banking sector does not sort it out, we will have to come back”. That was the strong implication of what he said. They have not sorted it out. It is about time—I hope you will do this when you review the situation—for the authorities to come back and say, “Okay, this has not worked. We have to set up something different”.
Q321 Dr Coffey: Minister, the start-up loans have generally been successful, but I would be interested to get where we are on the latest. This is a slight follow-up already, but, in particular, does the Treasury monitor how much is invested in women starting up business?
Bim Afolami: They have been successful, as you say. I am just double-checking so I do not get it wrong. Over 100,000 loans have been delivered with an average size of somewhere between £12,000 and £13,000. They have broadly been seen as a very good thing.
In relation to the specific point you made about female founders and women, just to be clear, almost 70% of loans have gone to businesses outside London, with 40% going to female founders and 20% going to ethnic minority backgrounds.
Q322 Dr Coffey: Is that 40% of the 70% or 40% of the total?
Bim Afolami: It is 40% of the total.
Q323 Dr Coffey: It would be useful to get a sense of what the average loan has been to entrepreneurs. You mentioned earlier that there is an aversion, though I am not saying you used that word. There does not seem to be quite so much equity finance.
An important part of the British Business Bank was the patient capital, to which you briefly referred. I just wanted to get a sense of that. It does seem to be late-stage funding and principally into other investors. How does the Treasury keep an eye on whether it is not just doing what everybody else would be doing anyway?
Bim Afolami: It is a good question. I have thought about this a lot. It is not always what you describe as late-stage funding. It is often helping to scale up a business. Though that is late in comparison with an early-stage business, the value of a lot of equity at the right point in a business’s cycle can be really significant, allowing it to make the jump from large business to very large business or from medium-sized business to large business. That is very significant. It is one of the Chancellor’s priorities to improve the environment for scale-up funding.
Why did we need to intervene? Are they, in the old term, crowding out what otherwise would have been the case? There is always a potential danger of that. The British finance ecosystem has been very good at start-up funding and providing finance to very big household name-type companies—they have no problem—but scaling up, moving companies from reasonably large to large, for example, has been a chronic weakness. Over the last 20 years in particular, that finance has increasingly come from outside the UK. It is increasingly coming from the United States, for example.
The reason why that matters is not just out of patriotism and wanting that to come from Britain. It matters because, if those companies want to really expand, for example, if a lot of your equity finance at the scale-up point is coming from the United States, guess what, that expansion happens more in the United States. If that company wants to list, where is it going to think about listing? It will think about listing in the United States. There is always a danger of crowding out, but I think we have got the right balance in that regard.
Just to talk about start-ups and what you might describe as underrepresented groups, for want of a better description, one of the difficulties that we have is that a lot of the data shows that, yes, though there are inequities around access to finance for founders and people starting businesses, whether it be women or ethnic minorities, it is also the case that there are not nearly as many women, in particular, coming forward as men. It is not just the inequities of the allocation. There is a sheer demand problem.
We have to make sure we promote, to all people of all different shapes, sizes, colours, et cetera, that starting a business is really important for them and that they are able to do that in the right way.
Q324 Dr Coffey: In terms of start-ups, you were referring to 20% of people being BME. That is higher than the national population.
Bim Afolami: It is.
Q325 Dr Coffey: That is very encouraging, even if 40% is lower in that regard. Just coming back to that patient capital fund that we taxpayers have put money into, tomorrow will be the launch of the report from the women-led high growth enterprise taskforce, which was under the chairmanship of Anne Boden. The Minister for Women briefly referred to it when we had her in on another matter.
The GEO and DBT set it up, but one of their principal focuses has been on venture capitalists and how they are going to get more venture capital to invest in them. I do not know what the report is going to say, but would you consider—I appreciate it has been underway for a few years now—including this as more of a proactive element in the criteria for what the taxpayer is investing in through the patient capital fund?
Bim Afolami: To think about this off the top of my head, there are a couple of different aspects. First, it is taxpayer money. This is not being given as charity. These are not grants for nothing back. This is part of a fund that we hope—evidence over the last few years shows this—will return to the taxpayer. It is important that we bear that in mind, first and foremost.
Secondly, you do not want to apply positive discrimination to what you are doing. That would be wrong. You also then get into very difficult arguments about who you are positively discriminating for and how much. What we can do is to focus the marketing, signposting and advertising on types of person, regions of the country and types of education that we know are underrepresented. If there is an overrepresented group proportionally, they are already so much more in that space. They are going to find out about it anyway. You can target your messaging to groups that are underrepresented. I definitely think you can do that.
I do not want to get to a point where we say, “We are going to have a target, which has to be met, that X% of the money must go to this person”. Once you start doing that, you end up with distortions that are not helpful.
Q326 Dr Coffey: I am not trying to catch you out. It is another Department that has led on this, but it would be useful to know whether Treasury has been involved in any of the interactions. You do not need to respond to that now. I am not trying to put you on the spot or catch you out, but, once the recommendations are out, it would be really useful to hear how collectively the Government might be able to respond.
As I say, we have chosen deliberately to use taxpayers’ money. We did not have to. I am not trying to be discriminatory in one way or another. We have leading people on this task force. It might be worth considering trying to understand some of the elements that they face into. The whole point is to try to make sure Government can intervene to help overcome some of those barriers.
Bim Afolami: I was saying that Government can intervene by targeting the messaging and focusing our approach and appeal. We should not get to a place where we are moving to a fully positive discrimination approach. Again, that is not quite what you were suggesting either. It is really about balance and where you sit on that.
There has been a lot of work on this. Alison Rose is no longer doing it after leaving NatWest, but she was doing a lot of work on this. This report is coming out tomorrow. I have not seen it. Frankly, there has been a huge amount of work in this area over recent years. It is important that we do not just understand but also do something about the difficulty. I just want to be very clear that we have to make sure we do not go into a space that is not helpful and that is distortive. That can create its own problems.
Q327 Dr Coffey: I do hear what you say. I appreciate, Minister, you will be very busy this weekend ahead of the Budget. I would encourage you to request your officials to put it in your box for the following weekend. Just have a read.
Bim Afolami: That is noted.
Q328 Chair: If I can just raise one last quick subject, what is your view on open banking? Could it be part of what is needed to help small and medium-sized enterprises access finance?
Bim Afolami: It definitely could. I have done a lot of work on this. In fact, tomorrow I am speaking at CFIT, the organisation set up as a result of the Kalifa review. I am going to be making some remarks about open banking and open finance.
Broadly, open banking has broadly been successful. We have the leading fintech sector in the world other than the United States. We definitely punch above our weight in that regard. That is in no small part down to the work done by the Joint Regulatory Oversight Committee, JROC, and others in relation to open banking, and working with the industry, to make sure data is made available in a sensible way, with appropriate privacy safeguards. That will give options to SMEs in particular, and indeed individuals, to get access to finance. It is really important.
The next step is moving towards open finance and looking at how we can go further along this track in different sectors. Again, this is not out of some intellectual fancy, but because more open data done in an appropriate way, with privacy at its heart—I want to put that on the record because that matters a lot to people as well—can provide huge new business opportunities and huge opportunities in terms of society for different types of person to get access to different types of finance.
It could not be more important. It is something that I am working on very actively.
Q329 Chair: “Watch this space” is what I should be hearing there.
Bim Afolami: Yes, definitely.
Q330 Chair: I have one final question. You were kind enough earlier on to tell us that the de-banking statutory instrument is imminent. Can you be more precise as to how soon “soon” is?
Bim Afolami: I cannot be more precise, but I hope to come back to you as soon as I can.
Chair: Unless my colleagues have any further questions, we have had a very thorough session on a topic that is clearly very wide ranging and one you are showing a lot of interest in.
This is the concluding session for this inquiry. We will start thinking about what recommendations we are going to be making. You have committed to replying to not only this report but also our previous one at greater length. Thank you for that.
Bim Afolami: That is noted very strongly, Chair.
Chair: Thank you very much.