House of Commons Business and Enterprise Committee

Financial support for small and medium- sized enterprises

Oral and written evidence

Tuesday 16 December 2008

Ordered by The House of Commons to be printed 16 December 2008

HC 90-i Published on 23 March 2009 by authority of the House of Commons London: The Stationery Office Limited £0.00

The Business & Enterprise Committee

The Business & Enterprise Committee is appointed by the House of Commons to examine the expenditure, administration, and policy of the Department for Business, Enterprise & Regulatory Reform.

Current membership Peter Luff MP (Conservative, Mid Worcestershire) (Chairman) Mr Adrian Bailey MP (Labour, West Bromwich West) Roger Berry MP (Labour, Kingswood) Mr Brian Binley MP (Conservative, Northampton South) Mr Michael Clapham MP (Labour, Barnsley West and Penistone) Mr Lindsay Hoyle MP (Labour, Chorley) Miss Julie Kirkbride MP (Conservative, Bromsgrove) Anne Moffat MP (Labour, East Lothian) Mr Mark Oaten MP (Liberal Democrat, Winchester) Lembit Öpik MP (Liberal Democrat, Montgomeryshire) Mr Anthony Wright MP (Labour, Great Yarmouth)

Powers The Committee is one of the departmental select committees, the powers of which are set out in House of Commons Standing Orders, principally in SO No 152. These are available on the Internet via http://www.parliament.uk/parliamentary_committees/parliamentary_committees

Publications The Reports and evidence of the Committee are published by The Stationery Office by Order of the House. All publications of the Committee (including press notices) are on the Internet at http://www.parliament.uk/bec

Committee staff The current staff of the Committee are: Eve Samson (Clerk), Emma Berry (Second Clerk), Louise Whitley (Inquiry Manager), Janna Jessee (Inquiry Manager) Anita Fuki (Senior Committee Assistant), Eleanor Scarnell (Committee Assistant) and Jim Hudson (Committee Support Assistant).

Contacts All correspondence should be addressed to the Clerks of the Business and Enterprise Committee, House of Commons, 7 Millbank, London SW1P 3JA. The telephone number for general enquiries is 020 7219 5777; the Committee’s email address is [email protected]

List of witnesses

Tuesday 16 December 2008 Page

Mr David Frost, Director General, British Chambers of Commerce, Mr Andrew Cave, Head of Policy, Federation of Small Businesses, and Mr Michael Izza, Chief Executive, Institute of Chartered Accountants in England and Wales Ev 1

Mr Steve Cooper, Managing Director, Local Business, Barclays Bank, Mr John Maltby, Managing Director, Commercial Banking, Lloyds TSB, Ms Lynne Peacock, Chief Executive Officer, Clydesdale Bank, and Mr Peter Ibbetson, Chairman, RBS Small Businesses, Royal Bank of Scotland Ev 11

List of written evidence

1 Department for Business, Enterprise and Regulatory Reform Ev 26 2 ACCA Ev 30 3 Barclays Plc Ev 34 4 British Bankers Association Ev 37 5 British Chambers of Commerce Ev 40 6 British Marine Federation Ev 41 7 CBI Ev 42 8 Civil Engineering Contractors Association Ev 46 9 Cleaning and Support Services Association Ev 47 10 Clydesdale Bank Ev 48 11 England’s Regional Development Agencies Ev 52 12 Finance and Leasing Association Ev 55 13 Forum of Private Business Ev 55 14 Growthwire Ev 63 15 The Institute of Chartered Accountants in England and Wales Ev 65 16 Lloyds TSB Ev 75 17 Mayor of London Ev 79 18 Specialist Engineering Contractors’ (SEC) Group Ev 81 19 The Survey Association Ev 87 20 Roger Williams MP and Mark Williams MP Ev 88

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Business and Enterprise Committee: Evidence Ev 1 Oral evidence

Taken before the Business and Enterprise Committee

on Tuesday 16 December 2008

Members present

Peter LuV, in the Chair

Mr Adrian Bailey Mr Lindsay Hoyle Roger Berry Miss Julie Kirkbride Mr Brian Binley Anne MoVat Mr Michael Clapham Mr Mike Weir

Witnesses: Mr David Frost, Director General, British Chambers of Commerce, Mr Andrew Cave, Head of Policy, Federation of Small Businesses and Mr Michael Izza, Chief Executive, Institute of Chartered Accountants in England and Wales, gave evidence.

Q1 Chairman: Good morning. Thank you very not what it should be; I think it is a lack of much indeed for coming before this Committee confidence. There is the money there and I think it is today to give us evidence ahead of our session later the confidence that we need to see return. this morning with a representative group of the Mr Izza: I would just add to the point Andrew and banks. Can I begin, as I always do, by asking you to David have made that I see the problem slightly introduce yourselves for the record. diVerently because I think, on the one hand, banks Mr Frost: David Frost, Director General of the are being asked to rebuild their capital position and British Chambers of Commerce. that is something they are being asked to do through Mr Cave: Andrew Cave, Head of Policy at the regulation. That is causing the banks to de-leverage, Federation of Small Businesses. which means they have less capacity to mount. On Mr Izza: Michael Izza, Chief Executive of the the other hand, the Government are asking them to Institute of Chartered Accountants in England and lend more and to make more available. Both of those Wales. aims are perfectly laudable, however they are not exactly easy to reconcile. I think that pressure to rebuild the capital base is actually a very real one. Q2 Mr Binley: I want to ask a general background question. It has been suggested that the banks are being stretched and pulled in two very distinct ways. Q3 Mr Binley: I agree with that. We have a situation Y On the one hand they have got the problems of libor, where the banks are facing sizeable di culties from around 3.3 still, I think; at least three of them have those conflicting pressures, and we need to bear that 12% to pay back to government each year for the in mind when we move on to ask the next question injection of liquidity; and they have got the whole I have in mind. The banks say their lending has not fixed saver scenario, where people are still being paid decreased, yet government and business organisations say that access to credit is getting 5% and 6% on those fixed term accounts; and so they harder not easier. Can you tell me what is going on? have got a lot of money they have to pay in that Mr Frost: It is a very diYcult picture and it is an direction, and yet they are expected to pass on base emerging picture. We are carrying out research at rate cuts in full and cut rates generally on lending. the moment over Christmas and into the New Year Do you think that those conflicting areas of activity to get a real fix. All I can say is that we have a are hindering the banks, or do you think they are V substantial amount of evidence on an almost daily handle-able and should be handled more e ectively basis arriving in our oYces from businesses which than they seem to be at the moment? are facing a more diYcult relationship with the Y Mr Frost: It is a very di cult issue for the banks— banks. Let me start by saying, if we are to get V clearly being pulled in a number of di erent ways through what is clearly a very, very diYcult V and a number of di erent tasks that they have to economic time at the end of it we will require a balance. My own view would be that it is not a cohort, a substantial group of businesses who are in question of “can it be managed” it has to be a fit state to drive us forward and drive us out of this. manageable, because if we are to get through this we The British Chambers of Commerce, whilst we need an eYcient and eVective banking sector represent from the very largest to the very smallest, working with business. at our heart are medium-sized, often family owned Mr Cave: Clearly everybody is in a very diYcult businesses, businesses of some very real substance, position at the moment and the position you have frequently exposed to global competition, described the banks in is not dissimilar to the frequently involved in international trade. These will position that small businesses find themselves in, be the businesses that will have to get us out of this being pinched at every quarter. I do not think that mess that we are in now. If we do not find a way of those problems are the core reason why lending is supporting what are at the heart good quality Processed: 19-03-2009 18:38:36 Page Layout: COENEW [E] PPSysB Job: 419071 Unit: PAG1

Ev 2 Business and Enterprise Committee: Evidence

16 December 2008 Mr David Frost, Mr Andrew Cave and Mr Michael Izza businesses over the next two to three years, then I of your second question of how to fix it, I would go personally find it very diYcult to contemplate how back to the point about confidence. A lot of what we we can get out of this. What we have seen is are hearing from the banks at the moment is very substantial job losses; unemployment is expected to good. There are some very interesting ideas and rise very substantially in 2009; it is the private sector measures coming forward, but at the moment it is which has taken the hit from that; we are seeing a lot words; that is not a criticism of the banks, it is just a of money factoring capacity; we have seen a huge simple fact that they, like us and everyone else, are increase in the number of public sector jobs over the looking for solutions but until there is that last eight years which is now unsustainable; and we confidence at grass roots level you are still going to have seen the financial service sector and business have these behavioural inconsistencies between service sector being hit. If we are to come out of this, what you are told by bank chiefs here today and as I say, we will need these good quality businesses what is actually happening on the ground. That is which rely on, and have relied on often for why I think the one single measure that is extremely generations, good relationships with their banks. So useful is the Government’s proposal for the Small we have to make this relationship work; we have to Business Finance Scheme or rather, as we would make it better. Clearly from the evidence that we prefer to see, something on a much larger scale that have coming through it is not all that it should be. has been proposed elsewhere, which will in the short- term get things moving, oil the clogs and get confidence back into the system. Q4 Mr Binley: Let me hit you with: how would you make it better? Mr Izza: In the evidence that we submitted to this Committee we provided you with some figures that Mr Frost: I do not think there are any simple Y solutions. What I would say at this stage is there are said 30% of businesses were finding it more di cult three messages that are coming through to us: firstly, to access capital than a year ago. I do not know how the cost of money is going up—businesses are being that squares precisely with the data from the banks. charged for things they were not being charged for I do not know whether on a sector basis they are in the past, for example, arrangement fees; secondly, lending more to particular sectors and whether other when it comes to future loans or investment they are sectors are being starved of capital. That is being asked for a much great level of personal something I think we should wait to hear the banks guarantees, which frequently they are not prepared explain. In terms of: what would I do; what are the to do; and, thirdly, it is taking a lot longer to get solutions? I think a number of things have happened deals cleared, and therefore when an opportunity recently that are very positive in this direction, but comes up for a business to perhaps buy the stock, the small and medium-size enterprises have to help assets have gone down and it needs a quick decision themselves as well. They need to get their working and it is not easy to do that. If we can get that capital under control, and traditionally this is a relationship to work, if we can have an sector of the economy which is not great at that. I understanding, then I think that will happen. I have welcome a number of the proposals that were in the to say, I am encouraged on a number of fronts by pre-Budget Report; we need to see those come this Government’s establishment of the Small through, but some of them have the potential to Business Finance Forum; I am encouraged by the help. I think it is very important that if banks are stream of announcements that are now coming out going to treat small and medium size businesses in from the banks that you are making clear pledges to the best possible way, those small and medium size support business. To be quite honest, it is going to businesses need to be as well prepared as they take a lot of time and a lot of eVort to make this possibly can be to take evidence to the banks of their happen oYcially. future viability, presenting business plans, cash Mr Cave: Going back to your original question flows and taking professional advice where possible. about the inconsistencies between what the banks Mr Binley: Finally, when the Minister was are saying and what small business and the questioned he intimated that he was monitoring the Government are saying, if you look at the data that relationship between SMEs and the banks. In terms the Government have collected I think there is a of lending he was monitoring the whole of that slight question mark over that data; I think it process. When pushed for figures he was unable to probably needs fine-tuning, and that is something give figures. This is one of the problems, is it not, that that the banks pointed out during the last meeting. we just do not have the facts. Would one of your One thing I would say is, from the last Finance messages be: we really need some quick, real and Forum, where the data was shared, there was no meaningful information? data there that spotted an increase in the cost of Chairman: I am actually going to leave that question finance—that was not available. At the same time, to to one side because Adrian Bailey is going to ask that run along with that, the FSB set up its Bankwatch later on. programme which uses polling but also the Miss Kirkbride: I just want to go back and probably collection of case studies from around the country. Mr Izza would be the best person to answer this On 1st December our data revealed that 30% of small because I think all on this committee do very much businesses have seen an increase in the cost of blame the banks for a lot of the trouble that we are finance. We will wait and see what the data that the in today, but we are in this trouble and now we need Government collects says and see how that fits them to get us out of this trouble by lending more. together in the New Year. It is clear from that, and What you were saying earlier is of course one of the from the case studies, that that is the case. In terms principal reasons why they are not lending more, Processed: 19-03-2009 18:38:36 Page Layout: COENEW [O] PPSysB Job: 419071 Unit: PAG1

Business and Enterprise Committee: Evidence Ev 3

16 December 2008 Mr David Frost, Mr Andrew Cave and Mr Michael Izza because they are caught in a cleft stick of having to Mr Cave: I would like to answer that in two sections. rebuild their capital bases whist at the same time First of all, it is an extraordinary suggestion that I being beaten over the head by the rest of us to lend am partisan in some way. If you actually look at the more money for very, very important reasons to way this process has evolved, the Federation of businesses. I just wonder what your observations are Small Businesses came forward with a proposal for on the Government’s rescue of the banks and how it a £1 billion survival fund for small businesses which was structured. For example, Brian mentioned that was, we were delighted, adopted in the pre-Budget although it is very welcome from the taxpayers’ Report; and, from meetings we have had with point of view—a 12% interest rate—is that really oYcials, is likely to be implemented in remarkably realistic when the Fed is asking 5% in America for its similar ways to the ways we proposed. When we return on capital for the injections put into the proposed that billion pound fund we were pretty banks? much laughed at by everybody for it being excessive. Things are moving very fast, and I think we have since seen, yes, a proposal has come forward from Q5 Chairman: This is the preference shares. the Conservatives which is very, very similar to what Mr Izza: Chairman, I am not here as apologist for the Government have proposed but actually banks but I do understand that the business involves more money. A billion pounds is great, it environment we are in today has changed markedly gets the oil in the cogs working, but it is likely only from a year go, it has changed markedly from three to last for a matter of two months we are told by months ago, and banks are re-pricing risk: the banks. businesses that perhaps are seeing a decline in their trading activity, or perhaps have seen asset prices and values fall, are going to be looked at diVerently Q8 Mr Hoyle: But it can be reviewed, can it not? Mr Cave: It can be reviewed. We would like to see it by banks seeking to lend. On your specific question, reviewed and expanded. That is what I am referring I think that the recapitalisation of the banks was not to there. When it comes to late payments, yes, this is necessarily in the first instance to promote lending, a big problem. One of the reasons why so many of it was to bring stability back to the market because our members are looking for help from the banks is there was a massive crisis of confidence. It actually because they are waiting for payment. This is a very succeeded in doing that but one of the characteristics diYcult issue to tackle—other countries have tried it of this crisis is that we are moving through diVerent and failed, but there are a couple of things we would phases. We started with sub prime loans; we moved like to see proposed from the outset; that the through into liquidity problems; then the Companies Act is actually enforced as it was first commercial paper market dried up; we potentially intended—it has never been fully enforced; and also have got a going concern issue; and as we look Companies House, which is essentially a filing forward into 2009 there are some other icebergs that agency at the moment, be turned into a proper are sitting there that, unless we are careful about it, enforcement agency. Companies have to register we are going to encounter. I think that the their payment terms with Companies House, but in Government’s rescue plan was appropriate for what recent years that has fallen slightly to the wayside for was intended to do, but perhaps we need another some companies. We would like to see that much solution and other actions now to deal with the more in evidence. We would like to see Companies specific issues. House have the proper resources to actually enforce that, and for Companies House to be able to name Q6 Miss Kirkbride: Just out of interest, what are and shame those companies that are not playing by the icebergs? the rules because essentially this is antisocial Mr Izza: One of them might be that we understand behaviour and it leads to job losses. It is something in the next 18 to 24 months there is £200 billion of we feel very strongly about. private equity, senior debt, and mezzanine financing that is going to have to be replaced or renegotiated. Q9 Mr Hoyle: ASBOs for companies. That is a new There is not enough capacity in the system to do that line but I quite like it. Anything that will work—I at the moment. That is a problem for another day. will take ASBOs! The second part being that of course the Government, quite rightly, has insisted that government departments wherever possible pay Q7 Mr Hoyle: Mr Cave suggested that somewhere between 10 and 15 days; and they have requested the else there were better suggestions. The trouble is it is same of local authorities; but I have heard of where we are at, and he has got to put his partisan evidence that says local authorities are dragging views to one side and look at the situation as it is. I people out for 90 days. Is this true? think you are hinting at the Party you are a member Mr Cave: We have heard that that is the case. We of, but let us look at the situation now. It is about have also seen evidence where a local authority will liquidity; it is about inter-bank lending, which is send a letter to a small business that has already taking place; but it is about bringing other monies provided a service saying, “We will pay up within a into the market. Are big businesses part of the certain time if you meet this criteria relating to problem where they are just not paying their bills something else”. That particular letter was then and demanding that small businesses wait but also, withdrawn after an outcry and a bit of attention if you want to be paid early, they have to be from the local media. I will be honest with you, it is discounted? Is this not one of the problems? a bit early to tell. We are still talking to our Processed: 19-03-2009 18:38:36 Page Layout: COENEW [E] PPSysB Job: 419071 Unit: PAG1

Ev 4 Business and Enterprise Committee: Evidence

16 December 2008 Mr David Frost, Mr Andrew Cave and Mr Michael Izza organisation on the ground. It is very positive that Mr Frost: I would be pretty worried if banks did not local authorities have taken this step, and police understand small businesses. We really would have forces around the country, but I think it is early in a problem. I have no evidence that they do not, but the New Year when we will see the results. I think there are two issues that come out of it. Many businesses have not experienced the economic times Q10 Mr Hoyle: The NHS and everybody else? we have now in their lifetime. The point was made earlier, when they do get into diYculties or start Mr Cave: Exactly. Y Mr Frost: The question goes to the heart of the getting into di culties it is important that they are matter. Businesses rarely go bust because of lack of taking proper advice, and not just rushing to the orders; they go bust because of lack of cash. At the bank and saying, “Help I can’t pay the wages on moment what is happening is they are caught in the Friday”, because I think I know what the response crossfire. You talk about the relationships with the to that would be. I think the second thing is there is banks but, on the other hand, we now have issues evidence of banks making certain sectors no-go with credit insurance; and then, of course, you have areas. I think, for example, anything to do with property and development, from the evidence we this whole issue about payment terms both with V customers and suppliers. Everybody is putting the have, appears to be o -limits at the moment. Those of us who have been around a bit—and this is my screw on and the poor guys who are caught in the Y middle are these small businesses. If we do not third recession—would know that even in di cult resolve this and, as I say, cash becomes king at the times there are companies that do very, very well moment, then you are going to see a wave of indeed. There are companies that are able to take unnecessary closures during the next 12 months. advantage of opportunity. I think therefore that the banks need perhaps to be cognisant that not every business in certain sectors is essentially a no-hoper— Q11 Mr Clapham: Is there not another side to this there are opportunities. though? We heard, for example, Mr Frost say quite clearly that the way out of this mess is to get the small and medium size enterprises really working; and Q12 Mr Clapham: I hear what you say but let me that, of course, means engagement with the banks; it give you an example. I will not name the company means a responsibility on part of the banks to but I went down to see one of my small and medium respond in a way that is going to facilitate that, and size enterprises, a printer, who prints the forms that yet that is not happening. Does it not suggest that the banks use, and yet the business was rolling in but the credit was not and that was causing a real the banks really do not understand the small and Y medium size enterprises? di culty. That suggests to me that there is a lack of Mr Cave: That is a very interesting question and it is understanding somewhere. We come to the statistics that Mr Izza referred to that 30% of small and one that we are asking and are having conversations Y with our own members and with the banks about. I medium size enterprises are finding it di cult. That was having a conversation with someone in the suggests that there is a misunderstanding corridor about this—there is a problem at the somewhere; and if there is a misunderstanding has moment that there is fear on both sides of the divide. that occurred before the crises; was there a Branch managers are scared of making the wrong disengagement with small and medium size decision and, from our part, a lot of the small enterprises before the crisis came about leading to a business owners are scared about going and talking greater misunderstanding in the crisis? to their bank managers; they just want to get on with Mr Izza: Chairman, all I can add to what has been their business and hope that everything will be okay. said already before is that the evidence we have is It is human nature that if you think there may be a entirely anecdotal; but there is frustration among the problem there will be. We are always advising our small and medium size entrepreneurs that they are members to go and talk to their banks and to their not able to build a relationship with people because accountants at the earliest possible time to avoid they do not stay around long enough; and because problems. Equally, there are the behavioural banks rely on automated credit-scoring systems to inconsistencies that need to be ironed out in the evaluate whether or not a loan can be made that does banks so that branch managers have the confidence not necessarily allow for human intervention when from their line managers to make the right call. That someone really does understand that this business is an issue. With regard to the second point to your has prospects. question—is there a lack of understanding on the part of the banks as to what is a viable business and Q13 Mr Clapham: Just turning to the situation as it how to lend to businesses—a lot of our elder is at present. We have heard, for example, Mr Frost members and elder businesses they do say that, give three points where he thinks the banks could be because they remember a time when there were more much more responsive to the current situation. Are branch managers and there was a better relationship you satisfied with the measures that have been put in on a personal level. I think those personal place by the banks to actually deal with small and relationships made a big diVerence, because you had medium size enterprise, or are there other things that that trust and a much better understanding, rather they could do? If there are other things that they than relying solely on a business model which does could do, what should they be doing? not always reveal everything. It is interesting—the Mr Cave: If you look at the measures that have been current crisis has shone a light on a problem in announced over the last few weeks there are some that area. very interesting things there. 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Business and Enterprise Committee: Evidence Ev 5

16 December 2008 Mr David Frost, Mr Andrew Cave and Mr Michael Izza that was announced by RBS was very welcome, and Q16 Chairman: Is there any particular diVerence of we would like to see others move towards that. The patterns small businesses are experiencing between other interesting thing that RBS have proposed is loan funding and overdraft funding? It is overdrafts what they call the “grey beards”, the mentoring they want at present to get them through working service, which very much deals with the point you capital situations rather than loans. have raised. We have not discussed this in as much Mr Cave: We have anecdotal information on that, detail with RBS as I would like, and it would be but we do not have any detailed survey data on the interesting to see why they have taken that decision diVerences between the two. and whether that is a decision that should be looked at by the other banks as well. If you look at Q17 Mr Weir: You talked about the cost of finance behaviour, we had the Statement of Principles that and that businesses were suVering; but it is not so were approved last week which we were supportive much in many cases, certainly from businesses that of, but we did have concerns about that and we had have approached me, that the cost is rising but that those concerns adopted. In particular was the issue it is not falling in line with interest rate cuts. When of switching bank accounts. Our survey data from interest rates are being cut the banks are actually just last year reveals that 45% of businesses have trouble putting up their cut of the interest rate, so the interest switching their banks. If you have got a problem rate charged by the business is exactly the same as it with your bank it is an open marketplace and you was previously. Is that something you are finding should be able to go and move across but it proves and, if so, what is the point of the Bank of England Y very di cult for them. As of last week, there is a slashing interest rates if it has no benefit to their commitment with the switching of bank accounts business whatsoever? that if you wish to switch the process should take no Mr Frost: I think it is having some benefit and more than five days, and hopefully this will become feeding through, but clearly it is not falling at the legally binding. We are moving in the right direction, rate that business would expect it to. As regards the so I think progress is being made. other aspects of the cost of money, as I have said, the Mr Izza: We would also very much welcome the issue is charges being introduced, arrangement fees moves made in recent weeks, particularly by RBS for, say, £5,000 which last year would have had no and Lloyds TSB; but at the moment it is too early to fee attached to them. call whether or not that has actually produced a change in behaviour, and whether or not it will actually percolate through. The direction of travel, Q18 Mr Weir: Moving on to the Institute of certainly as far as those two banks is concerned, is Chartered Accountants, obviously you have raised very promising. concerns, Mr Izza, regarding the fact that many accounts may be in eVect qualified because the banks are not prepared to guarantee credit lines in the Q14 Roger Berry: Do you not think, although future. Can you tell us a little more about this and welcome, that these are incredibly modest measures the eVect that may have on businesses getting into a given the scale of the problems? The switching of vicious circle where they will be undermined because bank accounts in five days, does the crisis not require of the banks refusing to guarantee credit for any something a bit stronger as a response than these length of time? measures? Mr Izza: When the directors of a company prepare a Mr Cave: Yes, you are right, it does. set of financial statements they have to prepare those financial statements on the basis that the company is a going concern; so they look into the foreseeable Q15 Roger Berry: I am sitting here thinking there is future and they see there is nothing that might cause a degree of unreality about the whole of this the company, for example, to go into administration discussion so far. or liquidation. Taking into account all the factors, Mr Cave: You have got things moving on two tracks they will then prepare that set of accounts and the really. You have got things that have to solve the auditors will then look at it and decide whether or immediate problem, and you have also got the point not they agree with the assessment that the directors that a light has been shone on the problem in have made. This year end we had an extraordinary relationships between small business customers and set of circumstances. Normally when this exercise is banks. We need to deal with that, but that is more of being done it is the particular circumstances of the a medium-term thing. Sorting the medium-term company that are first and foremost. At the moment, issues out now will hopefully avoid this problem when people look at whether or not their business happening n the future. In terms of the short-term prospects are good, they are looking at the changes, yes, none of this is going to scratch the environment they are in, and that is actually a major surface of it; but that is where I would come back to factor. Being able to assess whether or not a bank is the issue of confidence. The recapitalisation process going to lend when a facility comes up for renewal in of banks has not been felt yet. We are not going to six, nine or 12 months, they just do not know now. see changes as we would like to see them until the We understand from conversations that are taking early to middle part of next year I would think. places that banks, perhaps understandably, are very When you talk about the immediate problems that is reticent to give a commitment six, nine or 12 months where you do need Government intervention in the out because of the uncertainty surrounding the form that we are now seeing to actually get things whole position. 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Ev 6 Business and Enterprise Committee: Evidence

16 December 2008 Mr David Frost, Mr Andrew Cave and Mr Michael Izza made, they would issue a modified audit report. That supply chain this could percolate down and have a would say that the directors have disclosed in the significant eVect from large, to medium, to small, financial statements that there are potential issues to micro. and we agree, and we draw your attention to paragraph 22. If they do not agree with the directors’ Q23 Chairman: On this matter we talked about this assessment they issue a qualified audit report which privately a couple of weeks ago and it caused me says that the auditors have serious concerns about great concern. I would just like to know from the the company’s ability to continue. Historically, there representatives of the small business sector here have always been a number of modified and whether they share the concerns expressed by the qualified audit reports issued but we are talking in a accountants on this matter. normal year of that being a very low percentage— Mr Frost: Yes, we do have some concerns. certainly less than 5%. This year end we could be Mr Cave: We are certainly very concerned by the talking about double digits, and we are concerned figures that have been announced, yes. This goes recipients of these financial statements might back very much to what we were saying earlier that conclude, incorrectly, that this company was in we are concerned our members need to make sure trouble and take action there, which is unfortunate. that they are getting everything sorted now, talking to their accountants and getting things resolved. Q19 Mr Weir: It almost seems a Kafkaesque Yes, it is a matter of concern. situation, because presumably in the case of most small businesses the main people looking at these to decide whether they are creditworthy would be the Q24 Chairman: The only action we are able to do in banks themselves who are causing the problem by this Committee is talk about it and highlight the refusing to guarantee the credit line. What is the issue, but I think the CBI has called on the Financial point of it all? Surely if a small business is going to a Reporting Council to produce new guidance on this bank looking for credit and presenting their matter. Is there something the Council could do? accounts which are qualified, due to the fact that the Mr Izza: There are a couple of things. First of all, the bank would not give the guarantee in the first Financial Reporting Council produced this instance, it just seems slightly mad to an outsider? guidance in November, which is very good guidance Mr Izza: There is a certain amount of circularity for any director of any company. That explains the about it, as you say. It is not just the banks; it is issue for them. They are also at the moment looking investors; it is potential investors; it is landlords; it is at issuing further guidance before the year end for suppliers; and it is customers. They all use the auditors. I would say that they understand the issue, statements and they all might draw the wrong but it is about making sure that the £4.7 million inference if they have not been educated. small and medium size enterprises in this country have an awareness of it. Q20 Mr Weir: What is the way out of this circularity then? Q25 Chairman: Is there any other regulatory action Mr Izza: We have been seeking to raise the profile of which could be taken to help draw attention to this this issue so it does not become a train crash, so that issue or deal with it? people actually understand what these statements Mr Izza: In our view, no. mean. There have been a number of articles positioned in the media. We have been speaking to Q26 Mr Bailey: I want to explore the impact of the the Secretary of State at BERR to make sure that the pre-Budget Report and the measures in them. First Government understand this problem and are able of all, do you think the measures will help quickly to take whatever actions they see fit. It is principally enough? Andrew, earlier you mentioned the £1 one of education. billion fund and that this was likely to be used within two months—presumably that at least is being Q21 Mr Weir: Presumably the landlord, investor, utilised? whatever, would be seeking the advice of his or her Mr Cave: It is not being utilised at the moment accountant on this company before putting an because they are still working up the details. We investment into it. Is the first line of defence not with need this to happen now. It needs to have happened the profession itself, to be able to explain these a month ago. We would like to see it in place and qualifications to any potential investor? available through the banks for the 1st January. I Mr Izza: I would very much hope so, but we do not suspect is going to be more like the middle of want to leave any stone unturned. January. That is something clearly we are very keen to welcome. In addition, there is also the £25 million Q22 Mr Weir: Is this a real problem? Do you think that is going to be made available through RDA that sound companies may be undermined if there is funds. Again, that is a very small sum of money a misunderstanding of these modified audit when you consider the issues, but it is clearly certificates in their accounts? welcome. In terms of the impact it is too early to Mr Izza: I think there is a real problem. We have tell—we will have to see. The spreading of payments seen it in recent weeks, that as soon as a concern, for and the situation with HMRC is something we very example, was raised about Woolworth’s all sorts of much welcome and will give some breathing space to suppliers to Woolworth’s turned oV the credit and members; and also the changes to oVsetting are started asking for cash on delivery. All through the particularly welcome. Processed: 19-03-2009 18:38:36 Page Layout: COENEW [O] PPSysB Job: 419071 Unit: PAG1

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16 December 2008 Mr David Frost, Mr Andrew Cave and Mr Michael Izza

Mr Frost: The question was broadly about the Mr Cave: Our early indications are that it costs our measures in the PBR. I think there were a number of members on average £2,500 to implement because good measures in there, including the small business they have had to change a lot of price lists. We were package which is clearly a bit hazy at the moment, let inundated with emails andphone calls from members alone whether the guarantee scheme is going to work, who said, “This is absolutely absurd. Why are they but we think that has the potential to really help doing this?” You do have to reduce it. I am here to business. I think the HMRC clearly shows an speak on behalf of members and they take these understanding of the need to work with business. I things on a case by case basis, and they do not see the think they first showed that during the floods of last benefits compared to the costs. They have endured year, and we place great store on that. A deferral of more of a cost with this measure than they will see in theincreaseofsmallfirms’rateofcorporationtaxwas benefit. Maybe in the long-term, but we are talking a good move. The negatives from our point of view about short-term issues here. Cash flow is the issue at were the proposals to introduce NIC contributions, the moment. whichisaveryretrogradestepbecauseitwillharmthe ability of firms who desire to increase employment, Q28 Mr Bailey: DiVerent companies seem to have which is exactly what we do need to do. We thought V the rate relief on empty property could have gone far, implemented it in di erent ways, some with more far further than it did. Broadly, there were some good burdens than others. measures to help small business. Mr Izza: Chairman, I accept your macro point Mr Izza: Chairman, could I just add, the temporary entirely,andIdothinkthereisvaliditytoit.Letusnot reduction in the VAT rate, while welcome, we think is lose sight again of this administrative burden and the going to have a relatively modest impact. At a macro potential for problems when people do VAT returns level I do not think a 2.5% change in purchase price, et cetera, because VAT is a very complicated tax. when there are so many other discounts going on in HMRC now need to approach all the changes that the high street, is going to modify behaviour. I think have been made with a light touch, because otherwise the burden on small and medium size businesses of that will be the next problem that occurs in this area. implementing it was not particularly well Mr Frost: Finally, one of our constituent chambers understood.IdonotknowwhetheralltheCommittee carried out a survey of its members immediately after are aware of this but HMRC issued 70 pages of the announcement and 80% of businesses that replied guidance to advise on the rate changes and how to said that the cost of implementing the changes would dealwiththem.Ifyouownasmallcompanyandthere outweigh any benefits. might be two, three, four or five of you this is a major administrative burden. I think potentially that was Q29 Roger Berry: I recognise there are costs with problematic. We very much welcome the people changing their price tariVs, but £12.5 billion in introduction of flexible payment schemes for tax by an indirecttax cut benefits consumersand businesses. HMRC; and when that was introduced in the foot Let us be quite clear about this. £12.5 billion goes into and mouth crisis that actually kept some farmers the system, it is not simply that consumers get the alive. So we should not forget that, and that could be benefit; in normal market conditions part of that very valuable. It was also announced that there was a would immediately improve the cash position of proposal to carry back loss relief for any losses businesses, wouldit not? Orwould you preferthat tax incurred in this year. Again, I think that is very tobestoppednowandforthe£12.5billiontobetaken welcome but there are some details of that scheme back? Would that be good for small business—to that we would still like to see; and we would like to see reverse the policy? that as widely available as it could possibly be. One Mr Izza: I entirely accept the point you are making. thing that we have been lobbying on for well over a At a macro level it has an impact. If you were to try year now is the income shifting rules, which aVects and segment where that has an impact on the many, many small and medium-sized businesses. We were glad to see that that was deferred in the PBR as economy, it may well be that this has a well. disproportionate impact in favour of large Mr Bailey: There does seem to me to be a certain enterprises rather than medium and small; because contradiction in approach here. I certainly could see, large enterprises have the resource to change prices with an individual purchasing decision where you and dealwith it quickly. Ifyou are in asmall company havediscountedgoods,2.5%isneitherherenorthere. with two or three people it is a major task. However, in macroeconomic terms it does release Roger Berry: I accept that. £12.5 billion of purchasing power. It does not just Mr Hoyle: I think we are in great danger of losing relate to one purchase; it relates to a huge range of sight. Everybody accepts that £12.5 billion being put purchases that people make every day. My instinct into the economy is so important. It is the quickest would saythat would makea diVerence, althoughit is way to get money into the market and moving probably too early to say. What is your assessment around, there is no quicker way. If you changed the so far? tax codes it would take so much longer, and the fact is Chairman: We are actually looking at the impact on that would be a burden on business as well. Whatever liquidity of small and medium size businesses. you do is still a burden on business, so let us face up to that fact as well. The other thing to remember is that Q27MrBailey:Actuallywearetalkingaboutthepre- it does make a diVerence, whether somebody is Budget Report and its impact on small businesses. I buying a CD and it knocks 20p oV, I agree with you, it would like to have some assessment. Have you got does not make that much; but, on the one hand, you any early indications? are saying, “There are already discounts taking place Processed: 19-03-2009 18:38:37 Page Layout: COENEW [E] PPSysB Job: 419071 Unit: PAG1

Ev 8 Business and Enterprise Committee: Evidence

16 December 2008 Mr David Frost, Mr Andrew Cave and Mr Michael Izza on the high street” so therefore people are already need all the help they can get to achieve that growth altering the price of goods to begin with, but this is an we all want to see—be it in two years’ time or extra 2.5% that is not being given by the company but whenever. Are you fearful of that at this stage, or are is being given by the Government. I think we have to you just focussing on the short-term cash flow remember that. On the one hand, they are already problems? discounted; this is a further discount that can help. Mr Cave: I will be perfectly honest with you, we are Let us look at it the other way. Mr Cave, you focussing on the short-term at the moment because represent small businesses: builders—builders who that is what we have got to solve. There is built into are building extensions to houses—three-man bands this concern for the future. I come here because we really do benefit if they can knock 12.5% oV a £75,000 were asked to give evidence, and I can only give house extension, so it really does make a diVerence. evidence on what our members are feeling now. The Let us get away from the CD mentality and chocolate problem with that VAT change is that it is a cost at a bars—small businesses can benefit that way. Also, time when markets are contracting. Therefore it is what we need to stimulate is the other part of impossible and too early to measure the possible businesses, and that is the car market. If you take benefits of that; but, I agree with you, there is a cost V V 2.5% o a car it really does make a di erence. What associatedfurtherdownthelineandthatissomething we haveto dois be carefulwe donot justcondemn but to be worried about. we actually see the benefits as well. The fact is that we have £12.5 billion immediately into the market that does help everybody. Q32 Miss Kirkbride: It is interesting to see, Chairman: We are not the Treasury Committee and Chairman, how the Government party squawked we are not looking at the macro impacts of £12.5 whenyouhadthetemerity tosuggestthatthiswasnot billion. We are looking at the impact on the small and a wholly good idea. If you had £12.5 billion to spend medium-sized businesses, so I want to focus any what would have liked to have spent it on, or would questions that are asked very much on that. you have liked to have seen it saved? Mr Hoyle: Finally, the £12.5 billion that is into the Mr Frost: There is a wider issue here. I think if there is market helps small businesses because that is money going to be a substantial increase in public that was not there previously. expenditure then it is absolutely vital that that money gets through to stimulate business. Therefore, we see Q30 Mr Clapham: I want a word on the RDAs, programmes of road building, we see programmes of because the RDAs have had an input into the PBR house building, we see programmes of school andarealsomakinga£110millionpackageavailable. building and hospital building that are really going to How important do you see the RDAs in actually boost the construction centre—that is one sector of facilitating a revival of the SMEs? the economy that is being hit very hard indeed. Our Mr Cave: Potentially very important. We were very concernisthatwewillseeanincreaseinthenumberof encouraged by One NorthEast and the measures they public sector employees at the expense of capital brought forward before the PRB, and they have also expenditure. steppedup totheplate andsaidthat theywillgo tothe Chairman: I observe a lot of small businesses saying European Investment Bank and buy money theyaregettingasubstantialreductioninordersfrom themselves. That is something that is practised in the pubic sector at present, particularly from local mainland Europe and we, as the FSB, have been authorities. encouraging RDAs around the country to do that here. We would like to see that happen more. We do have some serious question marks over the actual Q33 Mr Bailey: Coming back to the question I was delivery of it though; because the RDA network going to ask 15 minutes ago and to a certain extent diVers around the country—some are exceptionally Andrew anticipated that: how far do you think the good and quick oV the mark, as I have just views of SMEs were taken into consideration in the mentioned, and others less so. This is an opportunity measures in the pre-Budget Report? actuallyforthemalltoraisetheirgame,andwewould Mr Cave: I think to a large extent they were taken into like to see that. We want to see their delivery account. One thing that we have welcomed and we mechanisms and their contact with small businesses have been pleasantly surprised about is the improving. willingness of Government and the opposition Mr Frost: Can I turn that on its head. I think the partiesandgovernmentministriestoactuallylistento response to this is that for the first time the RDAs and the concerns of small businesses and what is the whole business support structure has got the happening on the ground; and we have been opportunity to prove itself. If it cannot show added inundated with requests for information and data on value over the next two years then essentially why do that. That was fed into the PBR and as a they exist? consequences that is why we welcome a lot of the measures that have been adopted. The other thing I Q31 Mr Binley: It is interesting to see supporters of would say—and this relates back to a conversation the Government party telling you what you have to Mr Hoyle and I had last time we were here relating to believe. Quite frankly, I thought that was quite procurement and the Glover Review—we very much interesting! The VAT fitting has a cost to it, and the welcome a lot of what is in that Glover Review. It is cost to it comes just as we are emerging out of measures like that—linking what David has just been recession and just at a time when SMEs are going to saying about infrastructure spending—which make Processed: 19-03-2009 18:38:37 Page Layout: COENEW [O] PPSysB Job: 419071 Unit: PAG1

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16 December 2008 Mr David Frost, Mr Andrew Cave and Mr Michael Izza it possible to connect infrastructure spending and the Mr Cave: In theory it should make a big diVerence. money there with the small business community, so There is a lot of money there that can be channelled that we can benefit from procurement contracts. primarily through the banks. Whilst we of the FSB Mr Frost: I have been highly encouraged by the have explored other ways of accessing that money, dialogue that has taken place between the it should primarily come through banks; that is the Government and ourselves on behalf of businesses; a fastest route. We are concerned that the behavioural real feeling that the Government does want to listen inconsistencies that I keep referring back to, which to what the issues are aVecting business and how they are so important at the moment, are having an can find solutions; whether that be a small business, a impact here as well. I was talking to a member finance forum which I think is in its early stages yesterday who had been to his bank and sought clearly seeking to look at the data it should be funding, particularly looking EIB funding which his monitoring about bringing the banks and business bank deals in and he was told, “Actually, we together;and Ithinkit iseven thingslikethe launchof couldn’t oVer it at a rate that would be any diVerent the Better PaymentPractice code last week.I do sense from a standard loan you’d get from your existing a desire to get through and get the understanding of bank”. There is something not quite right there, business. because the whole point of EIB money is that it Mr Izza: Chairman, I would agree. I think there is a should be oVered at preferential rates. There are much better dialogue going on with business today problems in the system. We want to see EIB money than there certainly was 12 months ago. flowing as far as possible. We are encouraged that banks and more banks are looking to sign up to it Q34 Mr Bailey: Could I just refocus slightly. The but they need to explain how it works to their own V measure available, the £1 billion for export credit, in members of sta for it to actually get to our theory at least that, combined with the depreciation members. of the pound, you would expect to help a lot of Mr Izza: Chairman, if I could just add, speed is of businesses that are export-focussed. Is it too early to the essence here because at the moment there are V assess any positive benefits that have come from that? only three banks in the UK that o er EIB funding. How do you feel about it—either working or going Although there are many more interested they need V to work? to act quickly because they have to train their sta Mr Frost: In essence it is a good move; I think it is too and become familiar with the scheme. If that takes early yet to monitor its eVectiveness. What is six months then they will have lost the moment. absolutely clear is that this credit crunch, credit crisis, is not purely a UK issue. I have been speaking to Chairman: To be fair, the Department have told us many businesses who have products and goods they in their written evidence that they are looking for want to sell abroad and, in essence, the customers clarification on some aspects of the way this would want to buy but there is no money there. By feeding work. There is a board meeting of the EIB today to money through ECGD and keeping that up should provide some clarification on the use of the monies help but we will monitor it in 2009. and how they can be deployed. Mr Cave: I would agree. Mr Izza: That is export credit guarantee. There is a Q37 Mr Bailey: Would it be a fair summary of your major problem in the UK with credit cover. comments to say that the Government needs to talk Chairman: We will do that in a moment. That is our to the banks to ensure that they are stepping up to last serious of questions on credit insurance. the plate on this? The money is there, they need to have the schemes for training and the facilities, and Q35 Mr Hoyle: I am pleased that Mr Cave has to understand it themselves for it to benefit. touched on procurement, one of the big issues where Mr Cave: From what I see and hear, it has been laid IthinkGovernmentcanmakearealdiVerencehaving out. The banks have shown that they want to take that money for small, medium and large businesses. part in this; it is additional money to the system. I Does he share my concern that we have local think the point has been made, and we just need to authorities up and down this country that sat on huge get that out into the market ASAP. balances, which is one thing, as we found out with all Chairman: I think we will hear what the banks say the money that was invested in Iceland and elsewhere about the way the EIB money works. It is not as that could be spent on schemes; but, more straightforward as we may assume, but we will find importantly, they actually sat on 106 monies which out in our next evidence session. We will turn to does not belong to them but was given by developers credit insurance. that is meant to be for social housing, community centres and recreation grounds. Could that make a Q38 Roger Berry: There are countless reports of the V di erence? Does he not agree with me that local companies finding it increasingly diYcult to get their authorities have got their part to play as well? insurance. How serious is the problem? Mr Cave: Yes. Mr Izza: I think this is a serious problem and it is growing in severity. We understand that credit Q36 Mr Bailey: Again, thishas been touched on—the insurance is being withdrawn for whole sectors of European Investment Fund. One of the panel the market. Insurers are deciding that a sector is one mentioned RDAs and in eVect trying to access it. for which they no longer wish to carry the risk, and What diVerencesdo youthink itis goingto make,and that is very problematic because it is being done with what steps are being taken to utilise it? very little notice. For a medium-sized business which Processed: 19-03-2009 18:38:37 Page Layout: COENEW [E] PPSysB Job: 419071 Unit: PAG1

Ev 10 Business and Enterprise Committee: Evidence

16 December 2008 Mr David Frost, Mr Andrew Cave and Mr Michael Izza is suddenly faced with the prospect of always having Mr Izza: I would be more inclined to look to the had this cover and it now being withdrawn, it market for solutions but if the market cannot find completely changes the relationship then that you solutions, well, perhaps it is a legitimate thing for the have with your customers, so it is a serious issue. If Government to look at in these diYcult times. you are looking for solutions, perhaps the solution is Roger Berry: That seems a wonderful summary of that the insurer should be guaranteeing to keep them where we are at the moment. The market has failed in place for six months, because businesses just us in many areas quite significantly and we are left to cannot respond to things being withdrawn at 24- pick up the pieces. hours’ notice. Mr Binley: Except many might say regulation has failed, quite frankly. Q39 Roger Berry: So you would make it a legal requirement that insurance companies would, Q44 Chairman: We have run to the end of the against their wishes, be required to maintain questions we wanted to ask you and we have a little insurance cover for six months. bit of time in hand. Is there anything you feel that Mr Izza: Whether it is a legal requirement or you have not said at suYcient length or anything whether it is part of a code of conduct I do not really that you would like to qualify or add to the care, but getting the cover to the businesses that need discussion? it I think is the important thing. Mr Cave: There is one thing I would like to emphasise. We find ourselves in exceptional Q40 Roger Berry: Is there anything else government circumstances. We need quick actions to get cash can do, apart from trying to encourage that and flow moving and to get access to finance moving. facilitate that, to address this credit insurance The Government has responded to this. The £1 problem? billion found that was in the PBR is a brilliant step Mr Cave: I do not think I have anything to add in the right direction, but it needs to be available beyond what has been said on that. soon—not at the end of January, as we he have Mr Frost: No. heard, it needs to be sooner. I would say, in response to what was said earlier, let us put party politics to one side and accept the fact that the principles Q41 Chairman: I would like to get from you a sense around that £1 billion fund are good, but it is not of the urgency you attach to this issue. We are having enough, so let us broaden it out, and let us make sure a very quiet and gentle discussion, but I met a that we help as many businesses, viable businesses, manufacturer in my constituency on Thursday of as possible. Anything we can do to put pressure on last week who faces desperate diYculties because of the Government to press for that would be this issue—a perfectly viable business. The credit wonderful. insurers have decided that that type of structure of company they just will not insure any more, for no good reason, and it could be the end of the business. Q45 Roger Berry: I entirely agree with all of that. I just want to get a sense of the urgency attached to From your point of view, what is the obstacle to this issue. accessing this £1 billion a little more quickly? I am Mr Frost: I think the point is, Chairman, that it is an staggered at what seems to be the snail’s pace of a lot issue but it is only one part of the jigsaw, one part of of this, given the nature of the problem. From your the issues facing that business. As I said earlier, there point of view, though, why January? Why have are diYculties clearly with the relationships with the things not happened already? banks for many of these businesses—diVerent on the Mr Cave: It has been a real education in how slowly credit insurance. Of course they are then being government ministries and party organisations roll squeezed by both customers and suppliers and the compared to businesses on the frontline. With the cash is just draining out of the business. It is an greatest will in the world—and certainly the oYcials important aspect. As I say, we at the moment are we have spoken to about this do want to get it surveying exactly what is happening. moving quickly—there is the Christmas period, et cetera, et cetera, and it all adds to the delay. There is not as much realisation in Westminster about how it Q42 Chairman: For each business its own particular V is impacting in real time with our members on the challenge will be di erent. This particular business ground. In comparison, things move in slow motion. has a strong cash flow, it has no other problems. Its Mr Frost: The point I would like to make, only problem is the loss of credit insurance. How Chairman, is that if we had been sitting here 12 widespread is that problem? months ago it would have been a very diVerent Mr Frost: I cannot give you a response on the actual economic environment and discussion that we scale but it is a significant issue. would have been having. I do not think you can discuss the relationship between banks and business Q43 Roger Berry: Should the Government step in without overlaying it with what is happening in not and provide this facility? No doubt for a premium. only the UK economy but the global economy fund Mr Frost: My understanding is the Government is as well. There is a marked downturn. I do not want examining this. If it is of a growing scale and to appear an apologist for the banks, but certainly magnitude then I think the Government will have a lending decisions are going to be looked at in a very role. 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16 December 2008 Mr David Frost, Mr Andrew Cave and Mr Michael Izza ago. If we are to get through all of this, it is of British business, and, as David said earlier on, absolutely crucial that we maintain the good quality British business is not a basket case across the board. businesses, the businesses that have a good track There are some businesses that will do very well in record and that have potential, and then not let go. the forthcoming year and it will be those who are the If that does not happen, then I just cannot see us engines of growth for the future. getting out of this very fast. Mr Hoyle: Would it be fair to say—and you have Mr Izza: Wherever you sit in UK plc today, whether summed up quite well—that it is good that the it is at the large end or the micro end, the key issue Government has taken action. There may be more is one of confidence. The solution is not in the hands that needs to be done but it is a lot better than of any one particular group—I mean, the doing nothing. Government, the banks, the insurers. Everybody has Chairman: That is a rather partisan observation a role to play in bringing this back. But one group from Mr Hoyle. No one is suggesting doing nothing. which I think does have an important role is the We are all discussing what is the right thing to do. On media. The media can often talk down the prospects that note, I conclude the session.

Witnesses: Mr Steve Cooper, Managing Director, Local Business, Barclays Bank, Mr John Maltby, Managing Director, Commercial Banking, Lloyds TSB, Ms Lynne Peacock, Chief Executive OYcer, Clydesdale Bank, and Mr Peter Ibbetson, Chairman, RBS Small Businesses, Royal Bank of Scotland, gave evidence.

Q46 Chairman: Lady, gentlemen, welcome to this tough out there—in terms of lending to small evidence session on finance for small- and medium- businesses or lending to the market in general, I sized businesses. We are having a very sombre think there is a little misunderstanding in general as session this morning, which I think it is appropriate to what some of the challenges are. Yes, banks are in the circumstances, but we are looking forward to being asked and have agreed to increase their capital what you have to say. Could I begin by asking you ratios quite significantly, and are doing that, and at to introduce yourselves so that we all know who the same time trying to lend more money to the you are. overall market to provide needs there. I think in the Mr Cooper: Steve Cooper. I am the Managing mortgage market there are some issues around Director for Local Business in Barclays. supply. There were 300 providers of mortgages 18 Mr Maltby: I am John Maltby, Managing Director months ago and now there are less than one dozen. of Commercial Banking at Lloyds TSB. In the SME market, my view is that at the smaller Ms Peacock: I am Lynne Peacock. I am Chief end there is not a supply issue around access to Executive, Clydesdale Bank, which also finance. For larger businesses, and I am talking incorporates Yorkshire Bank. typically of business that have a staV of 250 people Mr Ibbetson: I am Peter Ibbetson. I am Chairman of or more, there is an issue. On that basis, certainly Small Businesses for Royal Bank and Nat West. from Barclays’ point of view, I have no issues around capital constraints in terms of lending to smaller Q47 Chairman: I should say two things from the firms. To the larger SMEs, I think there is in the Chair. First of all, the fact that you four are here market a degree of capital issues. Half of the credit does not mean that there is particular significance in to the larger SMEs has historically been provided by that. We would like to have had all the banks foreign banks, equity markets, hedge funds, et represented but we could not do that, and so we have cetera. They are not there any more. One of the chosen a representative group. No blame or shame previous panel members referred to £200 billion or credit attaches to being here; it is just a selected worth of loans or debts to larger companies which is group. I should also declare the fact that I have just due for repayment in the next 12 months. Not only completed an Industry and Parliament Trust with is that due for refinancing but, equally, for people the Royal Bank of Scotland. That is not a financial who are looking to get access to that money, those declaration but it does mean that I know the bank participants are no longer there. There are those rather better than I do the other three. Perhaps I challenges facing the overall sector. could begin by asking each of you one question. You Mr Maltby: At Lloyds TSB we do not have a are under attack quite often for not lending enough constraint on our lending to small and medium sums of money to small businesses. We have heard a businesses; indeed, we have grown our lending this very measured, I think, description of the situation year some 18% to that sector. We do see the points from representatives of those small businesses in our that you make, that there are increased capital last session. What are the constraints you are under requirements. Those come from Basle and they also when deciding how much you can lend? I am come from the recapitalisation. That has not thinking of things like capital requirements, Basle, aVected our ability to lend to this sector. Probably preference shares. What are the issues that constrain the biggest thing that aVects how much our lending your lending ability? will grow will be the quality of opportunities that are Mr Cooper: First of all, in the knowledge that we are put in front of us. In a recessionary environment, not in a very diYcult trading environment—we speak to all businesses are in the same viable position that thousands of small businesses every day and it is very they might have been in in more benign Processed: 19-03-2009 18:38:37 Page Layout: COENEW [E] PPSysB Job: 419071 Unit: PAG1

Ev 12 Business and Enterprise Committee: Evidence

16 December 2008 Mr Steve Cooper, Mr John Maltby, Ms Lynne Peacock and Mr Peter Ibbetson environment, so we see that as more of a constraint Chairman: I am in danger of treading on Brian in terms of the credit quality rather than the Binley’s territory a bit too much, so I think I will availability of capital in this sector. hand over to him. Ms Peacock: Chairman, without repeating the points, Clydesdale and Yorkshire only lend in the Q49 Mr Binley: We have already said and the SME sector. We are a much smaller bank, this is the Chairman has heavily intimated that the banks need only sector within business in which we operate. In to raise extra capital and are facing a riskier our financial year ended 30 September, our lending economic background. There is no doubt about in the business area increased by about 20%, so we that. How do you balance the need to maintain are not seeing a reduction. However, I think there lending to support the economy? How do you are some factors since then that are maybe causing balance that? What would you want the this perception. First, the market has become very Government to do to help you do that more Y di cult. We are still approving nine out of 10 credit eVectively? applications, but the number, particularly in the Ms Peacock: From our perspective, we are property sector rather than in the SME sector per se, constantly trying to balance the needs of our small has declined. I do think we have seen some reduction business customers, our personal borrowers, and of in demand—not as much as within the mortgage course our savers. We have, for example, 10 times market, but certainly, in our experience, some of the the number of savings accounts than we do smaller banks, the foreign banks that were around, borrowers. It is a constant balance. We have tried to are not around, so maybe that is what is causing grow our lending prudently. We have had to raise some of the feedback that the Committee is extra capital. We have done that from within our receiving. group, but within the diYculties of the market it is Mr Ibbetson: The question of capital was raised in something that we believe we can balance. As far as the last session as well. There is a balance. We do the initiatives are concerned, I think they are all have to balance the allocation of capital and where helpful. My personal view is that there is not one we apply that capital. I agree with Steve: we do not single initiative that is suddenly going to transform have a constraint at the SME level. The pressure, if the situation. There are a number of things that are we see pressure, would be much higher up the tree all helping. I think one of the things that would help than at the SME level. I do not believe there is a is that we cease to receive more bad news from constraint per se from the banks. I do agree with the around the globe and we see a gradual return of other comments: we have seen exits from market, so confidence. the Icelandic banks are no longer there, and there is Mr Maltby: We do welcome the initiatives that have quite a gap that they have left. There are issues on been brought to bear, we do welcome the attention asset financing: the residual values of assets have that has been brought to bear onto this sector. It is declined, so there are constraints there. I think the an important sector for us as an organisation and only real constraint we see is in businesses coming clearly for our customers. I think that there are a through the door of the quality that we would like. couple of areas where we would like to see further We have not in any way changed our principles in work and further initiative. One is in the area of lending: our bar is exactly where it has been, but prompt payments, and I think that is something that virtually every SME by definition at the moment is was touched on in the previous session. We do think that that is an issue that is increasing the challenges facing diYculties and the quality of the client coming on working capital of small businesses. The second through the door is declining. is about confidence—again, something that I know was touched on in the previous session. There are good businesses out there that are doing well, there Q48 Chairman: I want to understand what I have are good businesses that are having a challenge and been told, before I hand over to Brian Binley. You are having a tough time, and I think it is important are saying that there are some very real constraints that all parts of the market—the banks, accountants on the ability of banks to lend coming from Basle, regulators, other parts of government, and the increased capital requirements, 12% insurance rates development agencies—work together to support on preference shares, requirements to rebuild capital that. I have seen encouraging signs over the past few in addition to Basle as a result of the way that weeks. That is something that would underpin capitalisation has been conducted, but those confidence and I think that is going to be very constraints are not going to impact on SME lending helpful. because . . . ? Why? Mr Cooper: They are very good points. There is Mr Ibbetson: The portfolio we have as a bank, another area where I would like to see some more lending to all kinds of sectors at all kinds of levels, is work done. Some businesses are really struggling, very, very big. The SME sector is a portion of that and it may or may not be due to lack of cash. Quite but it is not an enormous portion of that, to the often it is due to their business model not working in extent that we can continue supporting that sector. today’s environment. A typical example I would give As a commercial perspective, as a bank, it is an is of a restaurant that is empty. Whether you double important sector for us. There are 4.7 million or triple or quadruple the funds that restaurant has, businesses across the country and we have about 1.2 that on its own is not necessarily going to make more million of those. It is an important sector for us people eat in that restaurant. I think businesses need which we can continue to support. help to understand what they need to do to make Processed: 19-03-2009 18:38:37 Page Layout: COENEW [O] PPSysB Job: 419071 Unit: PAG1

Business and Enterprise Committee: Evidence Ev 13

16 December 2008 Mr Steve Cooper, Mr John Maltby, Ms Lynne Peacock and Mr Peter Ibbetson their restaurant more attractive to the consumer on applications that we are getting are much lower than the high street, whether that be reviewing why they we have seen in volume before, so we are about 15% are going to the restaurant next door or what the down on applications year-on-year, but we are customers want. I think that is a combination of help about 40% down in volume year-on-year, so even from banks, advisers, accountants, and I think both those coming to us for support are asking of less. public and private sector have a role to play in that Ms Peacock: We are seeing a diVerence between the in terms of helping the business community to think property sector, where I think things are incredibly that way and to take on board the advice and the subdued, and general trading businesses. We are support they need to do that. Finance is one element seeing a diVerence as well between our existing of that, but it is not the only element. customer activity and new applications. New credit Mr Ibbetson: There are two main things I would applications are probably down by about one-third, mention here. One is liquidity and the other is whereas we have not seen much of a change in investment. We are not seeing an awful lot of activity amongst our existing customers—who we investment, by a long straw, at the moment. We keep very closely to. would like to see that. Q53 Mr Binley: You are telling us that small Q50 Mr Binley: Does that mean more businesses are not coming to you for help and in fact encouragement for savers? Is that what you are that has dropped down rather than increased. Is that saying? what you are telling me? Mr Ibbetson: No, I am talking about investment in Mr Maltby: Maybe I could make a distinction. I the refrigeration units which will grow the business think there is a distinction between businesses and those sorts of things. That is very, very quiet at coming for help in terms of new investment—and the moment. Liquidity is the key issue. Today SMEs that was a point Peter had made earlier—and those wake up in the morning and worry about their organisations that need support in terms of working liquidity far more than they worry about their capital, for all the reasons we have talked about, investment. Immediately we need to focus on the including extended payment— liquidity side. I think as banks we are doing that, we understand that. We are working closely with the Q54 Mr Binley: A one-oV cash-flow hit and that sort businesses doing that. I think government of problem. understands that as well. The Small Firm Finance Mr Maltby: Yes. We have seen that increase. In fact scheme that was introduced will help, but, as John our overdraft volumes have increased 10% this year. has said, it is wider than that; it is trying to get the We have also increased overdraft limits for existing debtors to pay on time and it is all of those issues. It customers. We are seeing a shift in the requirements is addressing that liquidity piece that is the for small businesses away from investment, important thing. One other comment I would make particularly in sectors like property, through to is that only one in three SMEs do borrow. The other working capital, which is what we believe we would two-thirds do not have bank lending, they run in expect in a recession. credit most of the time, and a big need that they have at the moment is the advice. Many have not been Q55 Mr Binley: That is where the diVerence comes through a recessionary time before. We should not between loan and using their bank account ignore those businesses and we do need to provide overdraft facilities. advice to those as well. Mr Maltby: It is. One of the other major shifts and one of the measures that we use is the utilisation of Q51 Mr Binley: Absolutely. I would like to move on their overdraft. A small business may have a £10,000 to ask my second question, and you will have heard overdraft but how much of that is drawn down? We me asking a similar question earlier on. The banks have seen that that has increased. The overdraft say that lending has not decreased, yet the utilisation in our business has increased from some Government and business organisations say that 55% to now nearly 60% over the period, but that still access to credit has got harder. From your means that on average our customers have 40% of perspective, what is happening here? their overdraft that they have not yet drawn down, Mr Ibbetson: Year on year we are lending more to and one of the things that we have committed to in the SME market, so lending has not decreased and our recent charter was not to remove those facilities. it has increased. Q56 Mr Binley: Thank you. Do you have anything Q52 Mr Binley: Are you talking there up to, let us to add? say, a period three months ago and not taking into Mr Cooper: I think a couple of measures may help. account the last three months, which have been With 20% market share, we are seeing, through bank pretty hectic? Or are you saying up to this present accounts, businesses paying in about 6% less year- time? on-year, so that is a good barometer that businesses Mr Ibbetson: Up to this present time, year on year, are generating about 6% less cash than a year ago. our lending has grown. It is fair to say it is slow but To put it into context, that is the biggest contraction it has grown year on year. We are seeing the other we have seen in about 20 years, so it is pretty tough. providers exiting the market, so I think it is right to That means that the number of businesses—and we say that access to finance, access to support has are still seeing plenty of businesses looking to declined One of the big frustrations we have is the expand and grow—is down year-on-year in terms of Processed: 19-03-2009 18:38:37 Page Layout: COENEW [E] PPSysB Job: 419071 Unit: PAG1

Ev 14 Business and Enterprise Committee: Evidence

16 December 2008 Mr Steve Cooper, Mr John Maltby, Ms Lynne Peacock and Mr Peter Ibbetson that type of investment. People are holding back. I 15% of our customers the risk profile has spoke to a manufacturing company in the North deteriorated and for some of those customers there yesterday. They are expanding and they want to buy has been an increase in the interest rate. Equally, their factory but they have decided to wait a year to another 15% have seen a reduction. The vast see what happens to the price. It may go down. They majority have seen no change at all in terms of bank are seeing what happens in the future with interest spread or bank margin, and they have received the rates. They may go down. They are looking at full benefit from the base rate reductions. The vast opportunity in terms of exchange rates and what majority of small businesses are seeing real may happen there in terms of their exporting reductions in interest rates. capability. A number of people are just being cautious in terms of what may happen going Q60 Mr Weir: Surely, what you are saying is the risk forward. We are seeing a little bit of new investment has increased. Surely, in a recession, for the vast slowdown—it is still happening, just not as much as majority of small businesses the risk will have previously—and there is some stress around the increased, therefore the vast majority coming for working capital requirements, where businesses are new loans will find that they are having to pay more collecting cash less quickly and so do need finance to get these loans. Is that not the truth of the matter? for that. The businesses that are more marginal in Mr Cooper: For a small number of businesses the terms of their viability are now being stretched, and risk is increasing. For the vast majority it is not, or they are the ones which are struggling in terms of not changing materially to reflect in a change in the their access to finance to tide them over. In reality, interest rates on whatever their borrowing is. I go what they need to consider is: “Is my business model back to the stats we are seeing: the vast majority of correct for today’s environment.” our customers are seeing a real reduction in their interest rates. Q57 Mr Weir: You mention that businesses are not coming to the same extent for investment, but we get Q61 Mr Hoyle: What Mr Cooper says is interesting. complaints from small businesses that when they do If I have got it right, the majority of your customers go to the bank the cost of getting credit or loan have benefited from not only the cut in base rate but finance is increasing. I have had businesses coming what they are paying over and above base. to me saying that, whilst it is not increasing, they are Mr Cooper: The margin they are paying over and not getting the benefit of falling interest rates. When above base is broadly unchanged over the past 12 the Bank of England has dropped the interest rate, months. all that has happened is that the commercial banks have put up their cut, if you like, so the overall Q62 Mr Hoyle: So they have not gained anything? interest rate is exactly the same when they come for Mr Cooper: They have gained in— a new loan. (a) can you comment on that and (b) if that is the case what is the point in the Bank of Q63 Mr Hoyle: I know base rate but it is what you England slashing interest rates if the benefit is not are charging above base rate. getting through to business? Mr Cooper: It is broadly unchanged. For some Mr Cooper: First of all—and I think it is fairly customers it has gone up marginally; for some similar with other banks—80% of our business customers it has gone down marginally—depending customers are borrowing linked to base rate and on their risk profile. The vast majority have seen no they get the full change in base rate passed on material change in the margin they are paying immediately. That is contractual in our over— arrangements with them, so, whether it is up or down, they get the immediate benefit of a base rate Q64 Mr Hoyle: So it is business as usual, with no change immediately. For the 20% of customers who benefit. do not get that, they have chosen themselves to have Mr Cooper: The benefit is coming from overall rates a fixed rate, and they have chosen that to give them in the market. They are receiving benefit from falling certainty of finance costs. base rates.

Q58 Mr Weir: I had a constituent who had base plus Q65 Mr Hoyle: You are saying that some have had 2.5%. They went for a new loan when the base had above base rate increased, but those that have seen fallen by 1.5%, but, instead of getting base plus 2.5%, that increase are those you see where they are most they were quoted base plus 4%; that is, a 7% interest at risk. rate was exactly the same. Mr Cooper: Yes, but that is a very small number. Mr Cooper: Yes. Q66 Mr Hoyle: Presumably they need the most help. Q59 Mr Weir: The eVect, when they applied for a What we are saying is that those who need the most new loan for new investment in equipment, was that help get the least help, but get the extra charges. Is they were getting no benefit from the drop in interest that right? rates. How is that fair? Mr Cooper: No, I do not accept that. What they Mr Cooper: It is good banking practice, good are doing— regulatory practice to price for risk: the higher the risk, the lower the rate; the lower the risk, the lower Q67 Mr Hoyle: I did not think you would accept it, the rate. We have seen in Barclays that for about but . . . . Processed: 19-03-2009 18:38:37 Page Layout: COENEW [O] PPSysB Job: 419071 Unit: PAG1

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16 December 2008 Mr Steve Cooper, Mr John Maltby, Ms Lynne Peacock and Mr Peter Ibbetson

Mr Cooper: Risk has to be priced appropriately. Our was a very small number, eVectively, which had their shareholders would be concerned if we did not do rates of interest increased or not reduced in line with that, as clearly would our savers be concerned as the reduction in bank basic rate. Given the current well. We are trying to make sure that we pass a rate climate, the impression that I am getting is that there to any customer, in their agreement, which is both are far more companies at risk—and certainly I am appropriate for the risk and they are able to aVord— getting reports from manufacturers that there are. Is your decision related to the change in the macro Q68 Mr Hoyle: In their agreement? But we all know economic climate, or the specific business models they have no choice: it is take it or leave it, because that you have had to live with for this particular nobody else is going to take them on. In fairness, it company throughout your business relationship is like playing Russian roulette with a bullet in every with them? chamber, is it not? Mr Cooper: I think that is a good question. First of Mr Cooper: There is choice. It is a competitive all, I want to stress that any change in base rate does market. get passed on to the borrower. In the cost—

Q69 Mr Hoyle: The other big concern we hear Q75 Mr Bailey: It would be compensated for by an about—and I have to say we hear a lot about tit but increase in the surcharge, if you like. never get a lot of proof—is that if overdraft facilities Mr Cooper: In part, for some, yes. get too high you try to capitalise that. I do not know whether that is the case. I would like you to comment Q76 Mr Hoyle: So it is a myth. on that. The other is that you try to force people into Mr Cooper: How risk is priced is based on, one, the factoring, which is a very expensive way for doing industry that business is in—so there is a macro business. Is that the case? element on that. The other element is: What is the Mr Maltby: First, I think that we do not force business model on that particular business? As customers into factoring. For some customers it can someone on the earlier panel said, within any be a preferable source of finance because, as a industry—and we have no blanket policies in place facility, it grows with the size of their business. for any sector—there are good businesses and there Indeed, the cost of factoring today is not a huge are bad businesses. The primary weighting on this is V amount di erent from the cost of overdraft for many that where there is a bad business model we work as customers. In terms of the facility itself, certainly hard as we can with that business, so that they are from Lloyds TSB, as I mentioned earlier, our encouraged to adapt their business model. In some overdrafts have grown by 10% year-on-year—and it cases, a loan may be more appropriate. If a business is, Chairman, up until the end of October this year, has been trading with losses and is sitting on an so we have seen those increases. I mentioned earlier overdraft facility which is now really solid, actually that we have not seen any reduction—in fact we have there is financial benefit to that business in seen an increase—in interest in having overdrafts transferring it to a loan: (a) it is cheaper and (b) that and our ability to be able to service them. loss gets repaid over time. Mr Bailey: I have a follow-up question and there are Q70 Mr Hoyle: Do the banks benefit from people two angles to this, particularly relevant to the factoring? Is it good business or bad business for current climate. First of all, on the basis of your you? experience, is the Government action to stimulate Mr Maltby: It is a diVerent line of business. It does consumer spending (the so-called fiscal stimulus) open up an opportunity potentially— helping to improve, if you like, the viability of those businesses? Second, where there is still risk and a Q71 Mr Hoyle: It is good or bad profit? danger of businesses going under, how do you think Mr Maltby: It is broadly the same profit as an government can engage in reducing that risk in order overdraft loan. It does mean that sometimes when to prevent businesses from going under? somebody uses factoring it can increase the amount Chairman: That ties in with some of the questions of working capital that we can provide because that other colleagues want to ask later on. Can we see if factoring is secured on the debtor book whereas those questions are addressed by colleagues and most overdrafts are unsecured. come back if they have not been answer satisfactorily? Q72 Mr Hoyle: Only for a period, and then you take it oV and you take it oV the next set of invoices. Q77 Mr Bailey: At least the second question is Mr Maltby: EVectively, it is a revolving facility that perhaps not so wide. is secured on the debtor book which moves and Mr Cooper: I think the Finance Forum is a good evolves as debtors— initiative. We welcome the debate we have had there. The Small Business Support Fund is a good Q73 Mr Hoyle: It is only as good as the factoring initiative. We have worked hard with government, people behind it who are willing to chase the debt. as have colleagues here, to help shape that and it is Mr Maltby: Indeed. Indeed. very nearly ready to go. Plus the European Investment Bank, we have had talks about that. So Q74 Mr Bailey: I would like to tease out this issue I think there are some good things happening. about risk and loan rates. I suppose this is Mr Bailey: Okay. I am going to come on to those specifically directed at Mr Cooper. You said that it later. Processed: 19-03-2009 18:38:37 Page Layout: COENEW [E] PPSysB Job: 419071 Unit: PAG1

Ev 16 Business and Enterprise Committee: Evidence

16 December 2008 Mr Steve Cooper, Mr John Maltby, Ms Lynne Peacock and Mr Peter Ibbetson

Q78 Chairman: Could I just say that I am finding Businesses are getting the vast majority of the base this all rather surreal. We do have a whole string rate reductions passed down to them. I hear the of anecdotes about problems that companies are anecdotes. The issues that we face, I think, are the experiencing. The Institute of Chartered ones in those grey areas. We have not changed the Accountants gave us a detailed list of anecdotes— basis on which we look at credit. Our bar has I know they are anecdotes—about problems all stayed the same; the businesses’ bars have reduced. from the West Midlands. Three of us are from the It is not in our interest as banks not to support West Midlands and they are from the West businesses. If there is one thing I would like to see Midlands examples. A solicitors’ practice found a in two years’ time, it would be still to have all the leading high street bank withdrawing its overdraft businesses we have still operating very successfully. and oVering no further advances. A manufacturing We are there absolutely to support them. but we company which employs 110 people has been asked have to be honest and we have to address the risks by a leading bank to pay oV its £75,000 overdraft properly. I suspect that many of the anecdotes that and it will close as a result. This is an extraordinary you see relate to those businesses where they do not one: a leading bank wants to renegotiate an existing like the honest responses that we are trying to give. loan to a charity with a very strong asset base from base plus 1.5% to LIBOR plus 3.5%, and charge Q79 Chairman: Can we see some statistics to back four times more on arrangement fee. For a up the claims you have made? You have made some company supplying homeware, the bank reduced very specific numerical claims there, Mr Ibbetson. the overdraft by one-third and refused to reassign That would be helpful. We will explore afterwards a personal guarantee on the departure from the how we could take that forward. board of the guarantor. As a direct result, the Mr Ibbetson: Yes. Information provided in company called in receivers. These are the confidence. anecdotes that are coming up from the real world, and yet you are telling us statistically it is all Q80 Mr Weir: Could you give us some indication splendid. I really would like to see more sight of of the percentage that have suVered an increase in those statistics and how many companies are the rate above base as a result of this? I would be having falling interest rates and loans, how many very interested in that. There is certainly are having increased interest rates, how many are information coming back from the small businesses having increased negotiation fees at the small and in my constituency, many of whom will not allow medium-sized level. There is a disconnect here us to name them publicly for fear of what the banks between the anecdotes we are getting from the real might do, so we are in a vicious circle here, that world and what you are telling us. I find this really they are suVering higher increases above base from diYcult to understand. the banks when they go back for further finance. Mr Ibbetson: I hear the same anecdotes. I spend These are not businesses, as far as I can see, in the quite a bit of time going round and speaking to struggling category. I am very interested and I businesses. I have a fair degree of experience in would like to see some figures on this. business—I have recently been invited back into Mr Ibbetson: We are required as part of the banking having spent five years at the coal face as Government support to track the figures. We a director of businesses—so I understand the issues provide those things to the Bank of England, so that are being addressed there. I categorise into certainly they are tracked. I would like to make one three the situations we are seeing a lot of the time. other point: the vast, vast majority of our SMEs There are some very good businesses which are not are base-rate linked, our funding is LIBOR based, suVering, which are not having any problems, and and there is a mismatch between base rate and we are addressing those very easily as business as LIBOR of about 130 bases points at the moment. usual. They are not a problem. There are some at We have committed that we will not pass that the other end of the scale where there clearly are funding cost on to the SMEs. We take that problems, and those businesses, even in a very good ourselves, which ensures that the SMEs do get the economic cycle, would not survive, and that is part full base rate reductions. of the business. There is a whole raft of businesses in the middle. Those in the middle are the ones that Q81 Mr Clapham: I think you were in the previous are having problems with their debtors, are having session and you would have heard that question cash flow problems, have not been here before, do about the banks failing to understand SMEs. Given lack the expertise, and these are the ones it is the situation, and in this particular crisis we see that diYcult to work with a lot of the time. I hear the perhaps the freedom of the business development anecdotes on pricing. We have heard the point chap who is down at the coal face is somewhat about base rate. Every time base rate goes down, of restricted, is it that which is causing the the 1.1 million SMEs that we have below £1 million misunderstanding? turnover, virtually every one will see that base rate Ms Peacock: We are in a slightly diVerent position reduction straight away. The pushback that says, because we are a relatively small bank, Clydesdale “Yes, but you have only just compensated it by and Yorkshire, rather than a very large bank. We increasing the margins,” is not the case. We do operate a local model. 90% of our credit decisions price for rise. As a relative: against the reduction are made by people in our business centres rather that we have seen in base rate, the risk that we have than anywhere at head oYce and that has not seen in margin has been a small percentage of that. changed through the last six to nine months as Processed: 19-03-2009 18:38:37 Page Layout: COENEW [O] PPSysB Job: 419071 Unit: PAG1

Business and Enterprise Committee: Evidence Ev 17

16 December 2008 Mr Steve Cooper, Mr John Maltby, Ms Lynne Peacock and Mr Peter Ibbetson conditions have deteriorated, so there is certainly useful. Perhaps I might give you an example. If you no pressure, if you like, from upon high, from were an accountancy practice, for example, there where we sit, to influence those local decisions. The would be a good relationship on the ground with other point I would make—and it maybe comes the relationship manager who will see that business back to a point around supporting businesses and for what is happening on the ground, but that working closely with them—is that one of the relationship manager may have little idea as to things we track very closely is the number of what accountancy practices across the country are businesses that are, if you like, talking with our experiencing and, therefore, that is why we have people in a bit more of an intensive care mode, that combination of approach. We have also found where that business might be entering diYculties. that quite useful with the customer. With an Currently, and the number has not changed—I accountancy practice, for example, in general terms cannot say that it will not change going forward— accountants may be collecting their debtors in, say, with about 75% of businesses that are, if you like, every 30 days. Our customer on the ground may be with our intensive care team, we manage to work on 50 days, in which case we are able to say to the with them to restore them back to health. That may customer, “Look, your peer group is collecting change going forward. It has not changed thus far, their cash quicker than you are. You might want and it has not changed for us over the last few to take some action to address that.” We have years. found that very powerful. Mr Maltby: We have a similar model to Mr Ibbetson: Over my time in SME banking, I have Clydesdale. 90% of our decisions are done locally seen both models of lending directly at the frontline in the same business environment as our customers sit, and we have a very experienced relationship and more centralised lending. I have to say that I management force of 1,400 people around the UK. honestly do not think it matters. The analogy I On average, they have 21 years’ experience with the always draw is that when an SME flicks the switch bank, and their average age is 42. These are people they want the light to go on. They are not too who have spent their career working with small worried about what the wiring is behind, as long businesses in their local communities. I do think as the light goes on properly. The important thing that we as an organisation do spend our time is that we take the localness, we take the understanding small businesses and want to understanding of credit, we do all the right things, provide the support to them. and then get the right answers. An advantage of Mr Cooper: We have similar demographics and so having the centralised credit function is forth. One of the things we also do is that when we consistency. I think at the moment that is very recruit new relationship managers we get customers important—it gives expertise and I think that is involved in the recruitment process: “Would you be very important—but we must not lose sight of the happy to work with this person?” As part of localness and we work really hard on that. A induction and ongoing training, our relationship challenge we have at the moment is making sure managers spend at least one day a year with a that we have our most experienced relationship business customer. I have an example of someone managers sitting alongside those SMEs that are who was in a sandwich shop yesterday. He was in finding life most challenging. there buttering bread at 5.00 am and then cleaning all the equipment afterwards, ordering stock, paying the banking and so forth. We try to get as Q83 Mr Clapham: If the challenge then is to make much experience in there as possible, but we also the localness much more pertinent, how do we go randomly sample 2,000 or 3,000 customers a about doing that? month: “Tell us about your relationship manager.” Mr Ibbetson: I think we do it quite well. We have We take that feedback and we apply it. If someone 4,000 frontline relationship managers out there needs training because they are not doing a good with the businesses. They liaise very tightly with job, we learn from that. Our people are paid partly their credit colleagues. I think we do it quite well. based on what their customers tell us about them. I have to say, speaking to the SMEs that I have been speaking to, I very, very rarely get a complaint Q82 Mr Clapham: Obviously something has to say that because the decisions are made centrally happened. There has been a change in the way in it is the wrong decision. The clever thing is flicking which you balance risk. How has that come about? the switch and making the light come on. That is When I look, for example, at how Barclays work, what we have to focus on. DiVerent models have you work with the expert at the centre, who then diVerent dynamics, but it is addressing the SME has a relationship with the business relations and delivering to them what they want which is the manager on the ground, and between them they important perspective. make the decision. Is it such because you have to be more cautious that the decision is more with the central expert than it is with the guy who is working Q84 Chairman: Mr Cooper, just remind me, is your with his businesses and knows about businesses? Is bank the one that wrote around to all its customers that the reason for the change? rather crudely telling them about the new terms and Mr Cooper: I would say it is not. We use a conditions? Did you, rather uniquely, not take the combination of top down from the centre and tailored approach that other banks took? Am I bottom up from the ground and we find that very right in saying that? Processed: 19-03-2009 18:38:37 Page Layout: COENEW [E] PPSysB Job: 419071 Unit: PAG1

Ev 18 Business and Enterprise Committee: Evidence

16 December 2008 Mr Steve Cooper, Mr John Maltby, Ms Lynne Peacock and Mr Peter Ibbetson

Mr Cooper: That has been misrepresented. We did policy, which is why we have not had to change those not write to all our customers: we wrote to a small lending policies and we can support our customers in number changing their overdraft rates. Some went the good times and the bad times. up, some went down. Q94 Chairman: You are saying you did not make Q85 Mr Hoyle: How many is a small number. mistakes in the SME sector, you made them Mr Cooper: 15% went up, 15% also went down. elsewhere. Mr Maltby: I am saying that as an organisation Q86 Mr Hoyle: I am not being funny, but how many Lloyds TSB was a more prudent lender across its customers is 15%? group, and particularly the bit that I represent in Mr Cooper: It is round about 80,000 customers. A terms of the SME sector. We have a book that has a small number. relatively low impairment level.

Q87 Mr Hoyle: So it is 160,000 that you have sent letters to. Q95 Chairman: I must ask your three colleagues Mr Cooper: Correct. Individual letters, most of whether they were imprudent lenders or not in turn. which were followed up by a phone conversation, so Do you think you were an imprudent lender in the it was not a standard circular—though it may have past in the SME sector? been presented as such. Mr Cooper: I would not say necessarily imprudent in terms of the SME sector. I think the industry as a whole has lessons to learn from being, I guess, to a Q88 Chairman: Even so, it is quite a deterioration in degree, too liberal around providing access to the nature of the relationship that you would expect finance. And Barclays has had a part to play in that. between a big bank and its customers to have. You Equally I think so has the consumer had a part to did not cover yourself in glory with that episode. play in that as well. I think it is important that Mr Cooper: We spoke to most of the customers we everyone learns lessons from this and that there is no could on a face-by-face basis. Most of our customers knee-jerk reaction from one extreme to another but have actually responded fairly positively to that. finely balanced through that. Clearly those who received a reduction in rates were more positive than those others. Ms Peacock: Chairman, I would not say that Clydesdale or Yorkshire have been an imprudent lender either in the business or personal sector. We Q89 Mr Hoyle: You keep telling us this: some go up, did not get involved in some of the activities on the some go down. Did the majority go up or did the fringe of the market and, as a result, whilst we have majority go down? not been immune from the wider factors in the Mr Cooper: The majority were unchanged. economy and in the global markets, we have been trading through this as a bank relatively well. It Q90 Mr Hoyle: I will try again. Did the majority go really is not in our interest to lend a penny to up or did the majority go down? Forget the anybody who we do not believe can pay us back. unchanged because that is meaningless. What about That is a philosophy we have had through this. did the majority go up or did the majority go down? Where we have been accused, we have been accused I suspect the majority went up. of turning down opportunities rather than taking Mr Cooper: That is not correct. The majority— them on board. Mr Ibbetson: It is an interesting question. I am Q91 Mr Hoyle: More people benefited. reflecting on it. I do not think we have been Mr Cooper: Correct. imprudent in any way. Within the Nat West brand and the Royal Bank brand we have led the market Q92 Mr Hoyle: Than went up? for about 20 or 30 years and we have been hugely Mr Cooper: Correct. supportive of this sector. I was just reflecting back Mr Hoyle: That is fine. to: Was it diVerent last time when we were in a recession and heading for the recession as against V Q93 Chairman: We are giving you a very easy time, this time? It is di erent this time. I do not think we I am very conscious of that. You may not feel like it, could be accused of being imprudent, but it is V but it feels like it from this side of the table. The di erent this time. There are a lot of other factors trouble is, one of the reasons we are in this mess— there this time. It is far more global this time. We one of them, it is not the only reason—is that the have issues like energy prices that have been hugely banks made so many mis-judgments in the past. volatile and far, far more important this time. How can we trust you to get the right answers now? Things are diVerent this time. I think we need to do You are saying you are doing all the right things this time as we did last time, which is to support the now, but the history of the last few years is that you businesses and understand the businesses and stay did not cover yourselves in glory really, did you? close to them. The important thing to recognise is Mr Maltby: One of the things that Lloyds TSB that it is not in our interests as banks to see SMEs particularly was criticised for in the most benign fail. We want to be there, as we get through this times was being prudent on its lending policy. We recession, supporting those same businesses, and believed that we had a through-the-cycle lending that is good commercial business for us. Processed: 19-03-2009 18:38:37 Page Layout: COENEW [O] PPSysB Job: 419071 Unit: PAG1

Business and Enterprise Committee: Evidence Ev 19

16 December 2008 Mr Steve Cooper, Mr John Maltby, Ms Lynne Peacock and Mr Peter Ibbetson

Q96 Chairman: I have one last question on this and charge of, the small businesses, are now suVering to that leads me nicely to it. Do you make money on some extent because of the irresponsibility of those your SME books? Do you make money out of this? at the top in your banks, I think is probably a fairer It sounds to me like a loss-leader exercise for you judgment to take. Listening to you, I am with the now from what you are telling us. Chairman in that the anecdotal experience we have Mr Ibbetson: With great caution because I had a both in my own postbag and in stuV we have had to similar debate with the Competition Commission the Committee does not entirely fit with the picture when they were reviewing the profitability of the that you have told us of today, so we are all SME sector, so I address it with great caution. Over struggling to work out what the diVerence is. Is the the cycle of course, this is business that we want to diVerence the fact that you are now claiming that, do, but it is a cycle and there are downs and there are “Well, the world has changed because of what has ups. Over the cycle, it is good business, it is happened and we now have to price the risk, and important business for us, it is important for our that really what we see in our anecdotes is the price portfolio and, if it were not, it would not be a sector of risk and not the fact that we have changed our that we would continue supporting. overall lending policies, but we are just applying our Ms Peacock: Chairman, as a bank, we made about previous policies, but with more risk attached”. Is £250 million post-tax profit in the last financial year. that what it is? We only made that from two sources. We made that Mr Ibbetson: Frankly, I would agree with that, yes, profit from individuals and we made it from the I would agree with that. SME sector, so clearly in the cycle both sectors are Ms Peacock: Well, I am here representing our bank profitable for banks and I think that is actually a and I think that a number of things are happening. healthy position to be in. It is in no one’s interests for The conditions are getting tougher and we have banks to be unprofitable. always priced the risk and we continue to price the Mr Maltby: We have had relationships with our risk. We are always trying to balance the needs of all small and medium businesses for some time and we of our customers and we fix risk being on the do make a profit, as an organisation, over that receiving end of additional cost-funding. Last year, period. we absorbed quite a bit of that and one has to hope, going forward, that the relationship between base Q97 Chairman: There is nothing wrong with making and LIBOR, like one of the other banks here has said a profit. It is all wonderful, what you are doing, this morning, one has to hope that that relationship lending at base when the LIBOR is higher than base, gets back more to normal, whatever “normal” is, but I am just trying to establish whether you want to situations. be philanthropes at present or actually still running businesses. Q99 Miss Kirkbride: Just before you carry on, risk is Mr Maltby: No, it is something that we feel very likely to get worse, is it not, given what the strongly, that this is a sector that is important to us, predictions are for the economy, so is our as an organisation, and we recognise it through our predicament going to get worse for financing small cycle as, we believe, the gap between base and businesses? LIBOR is not going to remain at the level that it is Mr Maltby: One of the things which, I think, has always going forward, and we believe that, as we become hopefully clear to the Committee is that, as have relationships with our customers for a period of banks, we are dependent upon the ongoing success time, actually we will make a good and strong profit of our small business customers. It is an important over that period. market for us all and it is something that we take a Mr Cooper: I think a similar story. I guess the one lot of time over. One of the things that we are doing thing I would add is that it is a competitive market to address the expectations that the economy is and increasingly so. Two years ago, only one in 20 going to be challenging next year is that we are small business multi-sourced financial needs and rolling out a series of 120 seminars, local seminars, today it is one in five, so small businesses are getting so that each of our customers and prospective very adept at actually looking around for their best customers can come and meet with local experts, our needs and services at a very competitive price. own teams, to talk about how they can help themselves and how we can help them to prosper Q98 Miss Kirkbride: Just on that, I think, in a way, during these more challenging times, so I do not the panel that we have here today are representative think it is just about the finance, but it is the point of the small business sector in their banks, possibly Steve made earlier, it is about what businesses can do with the exception of Clydesdale and Royal, who themselves and how we can, along with other perhaps have wider responsibilities and perhaps advisers, help them in identifying how they can have been more responsible in the past. If we had change their business model and improve their your chief executives here, then we could actually lay prospects. claim to the responsibility perhaps. NatWest/RBS’s aggressive takeover policy has not helped its balance Q100 Mike Weir: In their evidence to us, the sheet at the moment with the tax-frame narrowing to Clydesdale says, “We empower our managers to 58%, so clearly across your banks as a whole, make local decisions enabling our managers to react including Barclays who, after all, have been bailed to local conditions and individual business out by the Middle East, you have been irresponsible, circumstances”, and Lloyds TSB made a similar but your sector, the bit that you are actually in comment, and you have both talked about the local Processed: 19-03-2009 18:38:37 Page Layout: COENEW [E] PPSysB Job: 419071 Unit: PAG1

Ev 20 Business and Enterprise Committee: Evidence

16 December 2008 Mr Steve Cooper, Mr John Maltby, Ms Lynne Peacock and Mr Peter Ibbetson approach here today. Can you tell me to what level Q105 Mike Weir: But again how do you define a a local manager, say, in my town of Breakon can “local” business centre? I represent Angus, a largely make a decision and how do you define “local” rural area with small towns, and I doubt whether because, in my experience, the local business there is a local business centre in Angus. There may manager might be based in, say, Aberdeen or be in Dundee or there may be in Aberdeen. How Edinburgh which have a very diVerent economy many do you have in Scotland and what sort of area from the local economy in Breakon, so, how much do they cover? can they do and how do you define “local”? Ms Peacock: We have 77 business centres across Mr Maltby: Our local management teams can have England, Wales and Scotland and we have about 34 the discretion for up to £500,000 lending which in Scotland, and, for example, we would have a actually covers 90% of the lend we do to small and centre in Dundee, we would have a centre in medium businesses. That local management team Aberdeen. would be comprised of some relationship managers, and I mentioned earlier that they have an average of 20 years’ experience. Depending upon their Q106 Mr Hoyle: Just on that exact point about experience, they would have the discretion for business centres, what you have said, if I take it right, between £100,000 and £250,000 and their manager, is that you have 72, is it? the senior manager who is also local, would be up to Ms Peacock: No, 77. £500,000 and, on average, there would be something around seven to 10 managers per senior manager. As Q107 Mr Hoyle: And 30-something in Scotland with to your second point about how local, we do have a small population. local facilities and it is true that Lloyds TSB today Ms Peacock: Yes. does not have a significant presence in the Scottish market, something around about 5%, but in terms of the major towns where we are able to provide that Q108 Mr Hoyle: If we take the north-west region support, we want to provide it locally. which is bigger than Scotland and bigger than Wales, with a population of around seven million, how many business centres have you got in the Q101 Mike Weir: But, if you are talking about seven north-west region? to 10 managers, they are not going to be in towns, Ms Peacock: Chairman, I would have to come back smallish towns or even largish towns, but you are with the exact number, but we have approximately talking about probably the four cities. Is that not the about 30 in Yorkshire Bank territory which would situation? cover the North East and the North West. Mr Maltby: Those seven to 10 managers are not all Remember, we are a small bank, we have about 2% grouped together. The reason why there are seven to of the UK market and in the last four years we have 10 per senior manager is that they are able to support actually doubled the number of centres and we have the local communities in each area. We have the actually doubled the size of our small business benefit of having the largest branch network in the centres. UK and most of our managers are located in our Mr Hoyle: The point I am trying to make is that a branches. local business centre sounds good, but the reality is that, with a seven million population, I do not think Q102 Mike Weir: So, to get this clear then, the you have very many business centres and, compared manager in the branch would have the discretion for to the population of Scotland, we have got a much up to, you said, £100,000? better footprint, and that is all I would say. Your Mr Maltby: For £100,000 to £250,000, depending argument would be, “Well, we have more customers upon experience. there in the North West”, but I will leave it at that, Chairman. Q103 Mike Weir: And then it would be kicked upstairs to the next— Q109 Roger Berry: There are a number of problems Mr Maltby: But that upstairs would still be a local that SMEs could be, and are, facing. One is access to senior manager. In some parts of the country, that is finance on acceptable terms and the other is further away, but our time to give a decision is the obviously the need for business support and so on, same in Scotland as it would be in London. but to what extent do you think the problem facing the SME sector is the problem facing much of the economy, which is a lack of demand for what they Q104 Mike Weir: I would be interested to know how produce or, alternatively, the expectation or the you define “local” in Scottish terms, however. uncertainty about the future and that that is the Perhaps you could write to us on that. basic problem they face, which means it is not your Mr Maltby: I can write to you on that. fault at all? Sorry, forget the last comment! Ms Peacock: Our average loan to an SME customer Mr Ibbetson: I was about to agree with the last point! is about £170,000. Those decisions would be made in our local business centres and 90% of our credit decisions are made locally. Where they are not made Q110 Roger Berry: But you get my point, that the locally, they are not made at head oYce, but they are small businesses that I know are not complaining to still made within the region in the vast majority of me, I have to say, about their financial cases. arrangements. They complain to me because there is Processed: 19-03-2009 18:38:37 Page Layout: COENEW [O] PPSysB Job: 419071 Unit: PAG1

Business and Enterprise Committee: Evidence Ev 21

16 December 2008 Mr Steve Cooper, Mr John Maltby, Ms Lynne Peacock and Mr Peter Ibbetson not enough footfall at the moment and, if it is would you go along with that? Is that something you holding up at the moment, their expectation, having would be prepared to do to ensure that this did not read the newspapers, is that in the near future it is happen by looking at the draft accounts and making going to get worse and that is their problem, but you sure there was not a qualification due to the bank’s are the experts on SMEs, so is that your perception lending practices? as well? Mr Ibbetson: I think that is quite a fair way of Mr Ibbetson: I think one of the most important looking at it, to be honest, and I do not think it is an things, when I am trying to put myself in the shoes issue for the banks. In the way we assess the of an SME, is actually they do not think about their applications, it is not an issue for us, but I do think banking first thing in the morning. The first thing in that there is something that needs to be looked at to the morning that they think about is are they making the extent that it will not impact adversely on trade a sale and are they going to get the money in from credit, and that may be by the banks working with that sale, so a pitfall which it is easy to drop into is the accountants. As a bank, we have come out and thinking, as a banker, that the SME is behavioural, said, “Once you have your overdraft, you have it for but that is not the case absolutely and they think 12 months”. We have made that commitment about running their business. All the ones I am ourselves and that should help the situation. In speaking to at the moment are saying, “Yes, sales are many ways, it is no diVerent than it has been in the down”, and, if you look at the latest Federation past. survey, they have said that something like 60% of their members said that sales were down, so they are the big issues that they are facing, that the sales are Q113 Mike Weir: I accept that, but we were told that down, the debtors are not paying as promptly as the banks use a sort of score card system to assess they paid before, so they are the issues. It would be risk. You have all told us that the reason that interest glib of me to say that no, this is not the banks’ fault. rates are going up above base is because of their We are part of the solution, but it is the economy assessment of risk. Surely, any bank looking at a set that is driving the problems that they are facing. of accounts with a qualification will say, “Well, there’s a risk involved here. Is that going to aVect it?” Q111 Mike Weir: We heard in the last session about You may know your customer, but what if your the concerns raised by the Institute of Chartered customer decides to switch banks, for example? Accountants of England and Wales regarding Surely, there is a problem there. You seem to get into Y qualifications on accounts as a result of the banks a circle of di culty with what should be a relatively refusing to guarantee credit lines into the future and simple solution. the concerns of getting into a vicious circle where Mr Ibbetson: I do not accept that. I do not think that businesses will begin to fail because they are is right because I think, even if customers are eVectively getting qualified accounts. Do you have switching banks, if there is a qualification on the any comments to make on that? Do you think it is a accounts, we will have a conversation with the real problem? customer. We have face-to-face relationships and we Ms Peacock: If I may, it is not a problem that we can iron out those queries. I think it becomes an have faced. However, should we face that problem, issue where there is a relationship which is not face- then a way of solving that problem is for us to agree to-face and a dialogue cannot be had, and I do not the facilities based on draft accounts. That enables think that is within the banking sector, I think it is the accounts to be signed oV and then, once the the trade credit sector where the issue is. accounts are signed oV, you can confirm the facilities Mr Cooper: The financial accounts are just one based on the full set of accounts, so, if we know that element of how we assess risk. Actually, for the vast these things are issues, then, provided the business is majority of smaller businesses, the financial a good business and is solvent, there are ways to accounts are somewhat historic and we are more solve that particular problem, and I really do interested in actually the trading performance of the believe that. business going forward, so, as to Peter’s point, it is Mr Ibbetson: I think it is becoming a bit of a actually very much about understanding the nature problem, yes, and it is something we need to watch. of the business and that is the beauty of having I do not think it is a problem for the banks per se locally based relationships. I think the other point in because I think we know our customers well enough terms of the information bit to which you refer, that, if they are getting a comment on accounts, we actually that is far more based towards the can understand that, so it is not an issue for the behaviour of the bank account which is far more banks, as such. I think progressively it will become realistic in terms of actually understanding the an issue for credit reference agencies whose way of actual nature and position that business is in, so it is looking at the credit standing is more predictive than a combination of those things and I would stress and through a manual assessment. urge no knee-jerk reactions by anybody to a qualification on a set of financial statements, Q112 Mike Weir: Mr Izza made a very good point including the accountancy practice, because I do not that, even in the banking sector, suppliers may look think within Barclays, and I am not seeing it at it, and he quoted the example of Rumours(?) elsewhere in the market, that anyone, any bank has which has eVectively gone under because they could changed their stance towards guaranteeing or not not get stock anymore. Ms Peacock and others gave guaranteeing facilities for the next six, 12 or 18 an example of how it could perhaps be tackled and months, whatever the period of time is. Processed: 19-03-2009 18:38:37 Page Layout: COENEW [E] PPSysB Job: 419071 Unit: PAG1

Ev 22 Business and Enterprise Committee: Evidence

16 December 2008 Mr Steve Cooper, Mr John Maltby, Ms Lynne Peacock and Mr Peter Ibbetson

Q114 Mike Weir: Given that, if a customer came to bank to have a modified account because you will you and said, “Look, because of this, I’m having talk to the accountants and say, “No, it’s not a diYculty with a supplier”, is there anything the bank problem”. Basically, what you have all said today, can do, for example, contact that supplier and say, all four of your, about your policies towards the “Look, their credit line is okay here”, or anything SME sector is that you are very anxious to keep lines like that? Is there action the bank can take to deal of credit going, so surely a proper dialogue between with this problem which clearly seems to be relationship managers probably and the accountant exercising the accounting profession? I get the firm in question could avoid modification at all. Is impression from you all that you think this is rather that right? a storm in a teacup as far as the accountants are Mr Cooper: Yes. concerned and it has been blown a bit out of Ms Peacock: Yes. proportion, but is there anything you can do to Chairman: Well, that is very helpful and thank you. avoid it becoming a problem? I am encouraged that you will take that back and Mr Cooper: I am not dismissing it, let us be clear on work on that because I do think it is an important that. I think there are measures that can be done so issue. that, if any of our customers ask us for a reference for a supplier of theirs in terms of whether they are good for money or not, we would be prepared to give Q118 Mr Bailey: Just to pick up a point I was that based on the actual nature of their position. I exploring earlier with Mr Cooper, although this is would encourage all businesses to help their credit really relevant to all members here, in terms of status by actually paying their people and their dealing with “high-risk” customers, I think it was suppliers on time, and we encourage it with all our Mr Cooper who mentioned the Small Business suppliers to make sure that they pay their suppliers Scheme and we heard earlier from the business on time, so I think there are a number of measures representatives that it was great, they wanted it, but that can be made, but it is really about it was not moving fast enough to actually address the understanding the nature of the business and a urgent problems that businesses were facing, so blanket qualification should not be necessary in very basically how are you co-operating with it? many cases. Mr Cooper: We have had several meetings with the Government and HMT on this and I have been encouraged by how open they have been to ideas and Q115 Mike Weir: But you must accept that in a suggestions, but there really was not anything other recession where, with all the best will in the world, than simply a very high-level ideal framework businesses do fail, then for anybody looking at it, announced with the PBR around this, so that has they are going to be assessing the risk in the same been largely sort of understood now in terms of what way as banks, any supplier is going to be looking at the business needs actually are. Clearly, people like that and considering that to be a greater risk to their the Federation of Small Businesses fed input into own business. that as well. The legal arrangements are now being Mr Cooper: Sure, everyone is slightly more cautious drawn up and we expect to be able to use this, and in an economic downturn, as they should be, so I quite aggressively using this, from very early in think it is a combination of, again as I said earlier, January, probably the second week, but it is days accountant, bank and customer talking together. away now. Mr Maltby: We are in a very similar position and I Q116 Mike Weir: But do you accept that the think that I would echo the experience we had earlier accountants say that there is danger that companies this year where the Small Firms Loan Guarantee may be undermined by this? Scheme was simplified. There had been some Mr Cooper: I accept there is a danger, but I also feedback problems from businesses and banks that accept there is an opportunity and a responsibility to this was a complex facility to administer and it was work around that as much as we possibly can. simplified, and our lending on that scheme has increased by some 40% since that was done, so we Q117 Chairman: The reason this is so urgent in my are having the same conversations or having similar mind is that we are coming up to the year end. There conversations with Steve and the rest of the banks is the calendar year end coming up and then the and we want to use, and draw on, these facilities, financial year end next year and, if a significant including the EIB Scheme on which we are in active number of businesses are undermined by this for the dialogue and we want to be in a position to draw on reason, I think, that the accountants gave, that that early in the new year as well to increase our suppliers, for example, are no longer prepared to ability to support this important sector to us. supply to them, which would be devastating, there Ms Peacock: We are in a very slightly diVerent could be a very urgent and rapid eVect. Also, I am position because, being relatively small, for reasons concerned that I have seen in the financial sector a that one can quite understand, we are not always at lot of tendency for people to follow new and these discussions. Where we are at these discussions, arbitrary rules and whole categories of lending, we welcome it. We welcome the initiatives that come whole financial structures, are something ruled out, out and actually look to take part in them. so I can just see suppliers and so on, saying, “Hey, we Commenting on one particular initiative, for won’t deal with anyone with a modified account”, so example, if you look at the Debt Guarantee Scheme, I am rather encouraged by what Lynne Peacock was we were the first bank outside of the large eight telling us, that there is no need for any client of your banks to raise guaranteed funds under that Processed: 19-03-2009 18:38:37 Page Layout: COENEW [O] PPSysB Job: 419071 Unit: PAG1

Business and Enterprise Committee: Evidence Ev 23

16 December 2008 Mr Steve Cooper, Mr John Maltby, Ms Lynne Peacock and Mr Peter Ibbetson particular scheme and we did that actually in the last Q121 Mr Bailey: Rather than take a whole lot of the couple of working weeks, so we are not always there, Committee’s time, is there anything that any of the but we understand why we are not there and I do not other representatives would add to that? No, good. think we believe that we are being deliberately Can I just go on to the European Investment Fund. excluded, but some of these things are being done If you were in earlier, you would have heard the very quickly and it is not always possible to have business representatives point out that there were every single bank around the table. some examples where the banks did not seem to Mr Ibbetson: I have to say, I think the Small understand it and indeed were not actually passing Business Finance Scheme is a classic example where, it on. Now, I think this is really only relevant to working together, we can get a solution. I have no Barclays at this moment, but, first of all, what are reason to assume the other banks did not have you doing to help customers access these funds and, bilaterals, but, from my own perspective, for about secondly, moving on to the others, is there any six weeks prior to the PBR, I had bilateral meetings chance of other banks participating in this scheme? with HMT and with DBERR, setting out what I Mr Cooper: I am very clear what the European believed the scheme should be, what I believed the Investment Bank facilities relate to. I think there is issues would be and why we needed a resolution to a misunderstanding around that in the marketplace. the liquidity problems that were coming up. HMT We have been working with the European and DBERR listened. I had similar conversations Investment Bank for about 14 years and we have had with the Federation and the Federation were putting a good, long relationship with them and I think we in a number of £1 billion, which they thought was the have lent something like £3 billion through them number, and, if I am honest, I thought it was £2 over that period. First of all, we do not need billion, but I think £1 billion is a good starting point, European Investment Bank money for liquidity or so here was a case where we did collectively try and identify what the problem would be and come up capital. What the European Investment Bank is, with a solution for it, so it was announced at the because it is owned by European governments, is a PBR and we are now working, I think, fairly quickly triple A-rated bank and, therefore, it has one of best- to get it launched. I would agree with everybody rated agencies around and, therefore, is able to raise around the table, that the sooner we have this funds at a slightly beneficial cost to traditional scheme up and running, the better, and I think the banks, and actually the European Investment Bank beginning of January is when it will lend, but we are dictates what they lend that money at to Barclays working very closely with the oYcials now to get it and other banks. We then work out the benefit of out on the table and operational. that cost versus our average source of funding, and we agree—

Q119 Mr Bailey: Again, there does seem to me to be a danger in it, that actually it misses the target, ie, it Q122 Mr Bailey: I am sorry, I may have becomes a source of finance for businesses that misrepresented it, but we are talking about the maybe are not in the high-risk category. European Investment Fund which has been Mr Ibbetson: I do not agree with that at all. The negotiated. whole structure of this facility is to address Mr Cooper: By the European Investment Bank, yes, situations where SMEs have cashflow challenges. I am referring to that, so that benefit in cost or the These are classically cases where debtors are not price of that we pass on entirely to the customer. paying on time and the security now is not enough Now, what we have been working hard with the to justify continued lending, so it justifies an Government and with the European Investment intervention from government in exactly those cases, Bank on is to relax its qualifying criteria which were so I passionately believe that that scheme will pretty tough and they are now much more relaxed, provide an awful lot of resolution to some of the dramatically more relaxed, I would say, and we are cashflow problems SMEs will have. passing all our customers who request to borrow Mr Bailey: That is very reassuring. money from us to see that they actually pass the qualifying criteria. If the qualifying criteria are met, Q120 Chairman: I was not clear about the £1 billion we pass all our borrowing requests through the EIB, and £2 billion. Were you saying you thought it was so we are very pleased to announce that our first one going to be £2 billion or you wished it was £2 billion? was drawn this week for a family manufacturing Mr Ibbetson: This question came up before, is £1 business in Doncaster borrowing £200,000 to billion the right number, and I think Mr Hoyle expand and they have received the entire benefit of recognised and challenged this to say, “Well, if £1 the European Investment Bank funding by way of a billion gets used, then there’s an opportunity to cash-back upfront premium, which was a couple of refresh and have another billion”. What the right thousand pounds, and they have used that to fund number is, I do not think anybody knows, but it is the valuation of their factory, so it is a nice story and very reassuring that there is £1 billion on the table as we expect to turn that into hundreds of requests over a first step and I think, if it all gets used, in many the next few weeks. ways that would be good because that is helping SMEs and, if it all gets used, in a way that is bad because that is a demonstration of how diYcult the Q123 Mr Bailey: So that fund is already being used environment is, but we want to see it used. eVectively? Processed: 19-03-2009 18:38:37 Page Layout: COENEW [E] PPSysB Job: 419071 Unit: PAG1

Ev 24 Business and Enterprise Committee: Evidence

16 December 2008 Mr Steve Cooper, Mr John Maltby, Ms Lynne Peacock and Mr Peter Ibbetson

Mr Cooper: Correct. Q128 Roger Berry: Finally, credit insurance and the squeeze on credit insurance, do you think this is as Q124 Mr Bailey: How well do you think businesses serious a problem as some are saying and, if so, how are aware of its potential? should it be addressed? Mr Cooper: I think it is growing, so have done a lot Mr Cooper: From my point of view, is it serious? I of work to make sure all our 2,000 relationship think it could become serious. I do not see it being managers understand it. As I say, even without the serious at the moment. To put it into context, we customers requesting it, every borrowing request we have only had two examples where we have had to get we are putting through that facility, if it qualifies, review with the customer the impact on their regardless of whether the customers actually request facilities as a result of that, so that is two out of close it to be looked at from the EIB perspective. We are to a million customers which is a very small number also working with the EIB to get the qualifying at this moment in time. I do think that, if an insurer criteria relaxed even further and they are not the withdraws, you need to think, both as a bank and as quickest in the world, but we hope to make good a business customer, about why that insurance is progress there. being withdrawn. Is it right, therefore, that the business takes on the additional risk of the supply in Q125 Mr Bailey: Would any of the other fulfilling their obligations? I think that is a very representatives like to comment on whether there is serious thing to be looked at. I think the other thing any chance of their participating? too to help counteract that is that, if suppliers and Mr Maltby: Yes, I can comment. Our expectation is businesses pay their businesses, customers and that we will be drawing on these facilities early in the suppliers on time, the need for credit insurance is new year, hopefully as early as January. I think that actually reduced somewhat, so at this moment in the work that has been done to simplify the process time I am not seeing it as a serious issue, but it is very and relax the criteria has been extremely helpful. much on the radar though. What I would say, and it goes back, I think, to your Mr Ibbetson: It is being talked about a lot now and original question, is that one of the important parts I think it is becoming an issue. I think I agree, in a of any of these schemes is that not only customers way, with Steve, that, if you had this dialogue three understand what the opportunities are, but also our months ago, it would not have been an issue and relationship management teams. I mentioned earlier now it does seem to be getting a little bit of that our small firms’ loan guarantee lending had momentum. It is going to have businesses looking increased by 40% and one of the reasons for that is much more carefully at whom they are dealing with, that we have actually gone on a very intensive and that might have an impact on volumes of training programme for our relationship managers, business, so I think it is becoming an issue. I have to so we would intend to do the similar process when we are able to draw on the EIB scheme. say, I am not sure what the answer is to resolve it and Ms Peacock: We would draw on all schemes that we it may be that another government intervention in are able to draw on; it is as simple as that. due course is worthwhile. Mr Ibbetson: Yes, we support the scheme. As, I think, the Chairman mentioned, there is a meeting today and we would hope for positive news out of Q129 Chairman: Well, what are the looming that meeting today. problems which we worry about? What is the next problem facing the sector of banking for small and Q126 Chairman: This is about risk-sharing, is it not? medium-sized businesses in general that we should That is the issue on the table? be worrying about, as a committee? Mr Ibbetson: I think it is the whole arrangement, Mr Maltby: I think there is no one single issue. I whether it is risk-sharing or whatever it is. It is the think the issue of falling sales, the issue of cashflow whole arrangement about what the scheme will be, from large companies that are maybe not paying and we would hope to be part of that and, as Lloyds, smaller companies on time, these are real issues join in the new year. today and they are likely to continue and, if anything, likely to increase, so I think that the Q127 Mr Bailey: What changes have the banks attention that has been brought through this made as a result of participation in the Small Committee and, I think, through other initiatives Business Finance Forum? across the political divide is important and it is Mr Ibbetson: As a measure of my age, I guess, I was important to actually focus on these issues now. around the same table the last time it happened! It is very diVerent this time. The co-operation between the Government, the banks and the representative Q130 Mr Hoyle: Mr Ibbetson, you touched on it, the bodies is much more co-ordinated this time, and I problem of the energy companies and how that has think that point was made in the last meeting. I have been damaging businesses. I do not know if the to say, I think it is a good networking meeting with banks have any experience of that because I know of positive actions coming out of it. It is an open a company where their energy bills have gone up meeting, it is a good dialogue, it is receiving input 200% and I do not know whether that has been from the representative bodies, with solutions from reflected. Also, is there some good news going to the banks and co-operation from the Government, come from the banks next year, and do you want to and I do think it is working. share it with us now, or is there going to be bad news? Processed: 19-03-2009 18:38:37 Page Layout: COENEW [O] PPSysB Job: 419071 Unit: PAG1

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16 December 2008 Mr Steve Cooper, Mr John Maltby, Ms Lynne Peacock and Mr Peter Ibbetson

Mr Maltby: If I can answer the first question on Q131 Mr Hoyle: Do you think the actors in the cartel energy costs, we recently did a survey of businesses are too powerful? to find out what their issues were and, for Lloyds Mr Maltby: That is not something that I— TSB customers, access to credit was sixth behind Chairman: Sadly, the Government has squeezed my cashflow, falling income or falling sales, energy debate, this Committee’s debate, this afternoon on costs, fuel costs and there was one other, so I think the floor of the House on precisely this subject with it is a real issue and it is something where, for a small three statements, but we will be debating these issues business, when you see falling sales, one of the things later this afternoon and I look forward to your you want to do is actually manage your costs. contribution then. Gentlemen, is there anything you Unfortunately, if one of your costs is energy, which want to add by way of conclusion or shall we draw in many cases it is, then actually they are not seeing matters to an end there? You are happy. Well, thank those falls, they have not seen the benefits of the falls you all. We will keep a watchful eye on you all, and in some of the commodity prices, and that is actually not just you four, but the rest of your colleagues as causing real strain. well, I can assure you. Thank you very much indeed. Processed: 19-03-2009 18:48:02 Page Layout: COENEW [SE] PPSysB Job: 417244 Unit: PAG1

Ev 26 Business and Enterprise Committee: Evidence Written evidence

Memorandum submitted by the Department for Business, Enterprise and Regulatory Reform

Introduction 1. Small and medium sized businesses (SMEs) are the lifeblood of our economy and their performance will be crucial both to maintaining employment and activity through the current global economic downturn and to providing growth as we look towards recovery. Government provides a wide range of support to SMEs from the £190 million per annum spent by RDAs on Business Link to the support provided through R&D tax credits, worth an estimated £600 million a year1 to small businesses. This memo focuses on the impact the financial crisis and the credit crunch, which has resulted in near complete collapse of wholesale lending markets, has had on the ability of SMEs to access to credit. 2. There is emerging evidence that SME borrowing for some parts of the market is being impacted in varying degrees with respect to terms and access through a combination of capital constraints on lenders and risk-aversion by lenders. This may prevent potentially viable businesses from accessing the finance they need. It is Government’s priority to prevent viable businesses from failing as a result of this. If fundamentally viable businesses fail because of temporary short-term funding gaps, there will be substantial losses to the economy in terms of lost employment and output, as well as disruption to markets and supply chains. 3. The Bank of England and the banks themselves have reported an overall fall in demand by small business for credit and banking services, partly reflecting a curbing of growth plans and planned capital expenditure in response to the deteriorating economic conditions. Anecdotally, we also know that many SMEs are experiencing cash flow diYculties and facing a general tightening of credit conditions, with the cost of finance also increasing. Credit availability has begun to decline, with the latest Bank of England Credit Conditions Survey (Q3 2008) showing a general tightening of credit over the last three months compared to the previous three months.

Small Business Finance Package 4. The Government has therefore taken decisive and extraordinary action and will continue to act to support the banking system during this period of exceptional financial turbulence, and to strengthen the system for the future as markets stabilise. Alongside the recapitalisation package, Government has, over the last six months introduced a series of measures to help SMEs access the finance they need as well as taking steps to ensure that Government understands in a timely manner the changes in lending patterns to SMEs. 5. The pre-Budget report recognised the challenges that SMEs face in the current environment and that Government needed to take decisive action to ensure that viable SMEs struggling with short term working capital, trade and investment finance problems were supported. The package announced at pre-Budget report, worth £2 billion, will be developed for launch early in the New Year with a single high profile portal which will direct SMEs to the appropriate support made up of: — Small Business Finance Scheme enabling up to £1 billion of bank lending, for working capital guaranteed by the Government to allow small businesses to borrow sums of between £1,000 to £1 million at more flexible terms; — a separate £1 billion guarantee facility run by the Export Credit Guarantee Department to support bank lending to small exporters needing short-term trade finance to take advantage of strong overseas markets and competitive sterling; —a£50 million fund to convert businesses’ debt into equity, targeted at economically viable SMEs who are currently overleveraged; and —a£25 million regional loan transition fund to help businesses over the next six months administered by RDAs. 6. The two guarantee schemes will be provided via the banks on a risk share basis giving them the confidence to lend. The scheme will be temporary and run for 12–14 months. The overall scheme will be developed in consultation with small businesses and banks for launch in the New Year. 7. Advantage West Midlands have already launched a transition loan fund for viable companies facing finance diYculties. The scheme is being rolled-out across the network of Regional Development Agencies, with £25 million available to businesses over the next six months. 8. UK small businesses will be able to benefit from around £4 billion lending from the European Investment Bank (EIB) between 2008 and 2011. The UK banks have now negotiated credit lines of more than £1 billion from the European Investment Bank (EIB) to become available for SME lending before the end of 2008. The EIB supports SME investment mainly through credit lines made available to national and regional intermediaries which then onward lend the finance as loans to SMEs that meet EIB criteria.

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9. By encouraging UK take up of these funds, HMG also welcomes EIB proposals on a new risk sharing facility as part of the core SME loan fund. This oVers to share part of the risk that banks and Government take on in commercial lending to businesses and where it is judged to represent a higher risk. The UK is also urging the EIB to provide detailed guidance on how this will work, as well as formal clarification on the use of SME loans funds, in particular the propensity for banks’ use to service loans for working capital. EIB has agreed to provide clarification on both of these issues following its next Board meeting on 16 December 2008.

Monitoring Lending to SMEs 10. In addition to this package of financial support to small businesses, Lord Mandelson, Secretary of State Business, Enterprise and Regulatory Reform on 27 October 2008, announced the establishment of a new Small Business Finance Forum (written statement attached at Annex A (not printed here)), bringing together all banks, small business representative organisations and small businesses themselves to have an informed dialogue to discuss and resolve their concerns on business lending. This group, chaired by Lord Mandelson has already achieved several key outputs including: — The establishment of a new monitoring panel on business lending (written ministerial statement of 11 November attached at Annex B (not printed here)). This panel, made up of senior Government oYcials from HM Treasury and the Department for Business and representatives of the Bank of England will monitor and enter into a constructive dialogue with individual lenders2 on the availability, risk and overall cost of lending to small and medium sized businesses from the five major banks. — These banks have agreed to provide, in strictest confidence, data on the availability, risk and overall cost of lending to the monitoring panel. 11. A revised Statement of Principles (part of the Banking Code), alongside the 2008 PBR announcement that the Banking Code will now be placed on a statutory footing, will define how small businesses and banks should work together as an eVective relationship.

Action on Prompt Payment 12. In addition, Government has provided further help to help small businesses manage their cashflow by introducing a 10 day target for Government payments, which has also been widely supported across the wider public sector. Alongside this, Government is introducing a range of measures to ensure that central Government payment processes are consistent, transparent and speedy, including: — standard guidance across Government to suppliers on how to submit their invoice (including who to contact in case of delay or problems and who to contact to raise a complaint); — ready access to this guidance within the suppliers terms and conditions and all public facing websites; — a common standard for establishing when an invoice is received; and — a common standard for counting elapsed days.

Pre-Budget Report Measures 13. This year’s Pre Budget Report provided a further package of targeted, temporary measures which will help small businesses struggling with short term working capital and cashflow. They include: — New HMRC Business Payment Support Service to enable businesses in temporary financial diYculty to pay their tax and NI bills on a timetable they can aVord, with no penalties or surcharges on agreed deferred tax payments. Interest will be charged at non punitive rates. — Overcoming barriers to public sector contracts—a new web portal for public sector opportunities over £20,000, a better deal for small business contractors and simpler systems, as recommended by the Glover Report. — More generous carry back tax relief for trading losses for businesses now making losses. Up to £50,000 of losses can be carried back for up to three years from the current one year. — Deferring the increase in the small companies’ rate of corporation tax (currently 21 per cent) to April 2010. — Deferring planned changes to income shifting (where income can be shifted to another person, usually a spouse, which is then taxed at a lower rate) and keeping this issue under review. — Exemption of foreign dividends for medium and large businesses. — Reinstating empty property relief for one year from April 2009 for properties with a rateable value of £15,000 or less.

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14. Business Link, the Government’s business advice and support service, is now oVering free personalised, confidential, business “Health checks” on how to maximise cash flow, as well as improving marketing and business planning. To date, Business Link has undertaken 8,900 health checks across England. This is in addition to its full range of services—which last year helped around 856,000 customers.

SME Finance Gap 15. The UK’s finance market has been ranked second best in the world for supporting business financing needs by the Milken Institute Capital Access Index 2006, just behind Hong Kong and Singapore, and ahead of all other OECD countries. However, the performance of the UK’s finance markets and measures currently in place to improve access to finance SMEs’ demand for and access to external finance in more stable economic conditions needs to be viewed alongside the impact of the global credit crunch and economic downturn on the supply of finance and the demand for new finance from SMEs. 16. In more stable economic conditions finance markets provide the majority of businesses with the finance they require. Evidence suggests that only around one in eight businesses needing new finance fail to obtain any finance. However, surveys also show that many businesses who initially fail to obtain finance from one source go on to obtain it from another.3 But whilst the general financing situation for existing business might be good in stable economic conditions, the evidence suggests that diYculties remain for a minority of viable businesses. Research evidence shows that start-ups and young businesses continue to be more likely to experience diYculties accessing finance compared to more established businesses. Those businesses aspiring to grow are more likely to seek finance and to have experienced diYculties in obtaining it. 17. It has long been recognised that market failures exist both in the debt and equity finance markets. Within debt finance markets diYculties are frequently related to a lack of available collateral against which to secure finance, or to an insuYcient financial track record.4 For businesses with very high growth potential, access to modest amounts of equity finance can be problematic.5 The balance of evidence indicates that those seeking between £250,000 and £2 million have particular problems accessing equity finance.6 High transaction costs associated with investing small amounts of capital and the economies of scale achieved from a smaller number of larger investments have resulted in a shift in equity investments towards larger and more established businesses.7 Business angel investments are an extremely important source of equity finance for new and nascent businesses. In comparison to venture capital funds business angels typically make relatively modest individual investments. 18. The supply of finance is an important element of improving access to finance, but it is also important to address weakness on the demand side. If businesses are to be able to take full advantage of the range of finance available it is important that they are finance and investment ready. Research has shown that SMEs that would otherwise benefit from external finance or investment miss out because they do not know how to make their business proposals into attractive investment opportunities and are often unable to present a convincing business case to investors. In addition, many smaller businesses do not have their finances managed by a qualified individual; and confidence in dealing with finance is not high compared to other aspects of running a business.8 Some entrepreneurs can therefore lack the skills and confidence to access external finance. Small businesses in the UK also appear to be less aware of the possibilities of diVerent forms of risk finance than their US counterparts.9

Accessing Debt Finance 19. Around one in five businesses use debt finance to start up their businesses, making bank loans the main source of external finance for start up businesses.

Small Firms Loan Guarantee 20. The Small Firms Loan Guarantee (SFLG) is currently the Government’s principal debt finance instrument. It is an established mechanism through which the Government provides participating lenders with an alternative form of security, underwriting 75% of the loan, to small businesses with viable business plans who meet the bank’s normal lending criteria but do not have the collateral or track record against which to secure that lending. The SFLG is available to a wide range of businesses through high street lenders. The Government’s Enterprise Strategy, published with the Budget in March 2008, announced a number of

3 Financing UK Small and Medium Enterprises: The 2007 Survey, Cosh, A, Hughes, A, Bullock, A and Milner, I, Centre for Business Research, University of Cambridge, 2005; Annual Small Business Survey, 2006. 4 Finance for Small and Medium-Sized Enterprises: A Report on the 2004 UK Survey of SME Finances, Fraser, S, University of Warwick, 2005. 5 Bridging the Finance Gap: next steps in improving access to growth capital for small businesses, HMT/SBS, 2003. 6 Bridging the Finance Gap: next steps in improving access to growth capital for small businesses, HMT/SBS, 2003. 7 A mapping study of venture capital provision to SMEs in England, Almeida Capital, 2005; Bridging the Finance Gap: next steps in improving access to growth capital for small businesses, HMT/SBS, 2003; Factors Determining the Performance of Early Stage High Technology Venture Capital Funds, Stockholm School of Economics, 2005. 8 Fraser, S (2005), Finance for Small and Medium-Sized Enterprises: A Report on the 2004 UK Survey of SME Finances. Warwick, University of Warwick. BERR (2008). 9 Enterprise Britain: a modern approach to meeting the enterprise challenge, SBS/ HMT 2002. Processed: 19-03-2009 18:48:02 Page Layout: COENEW [O] PPSysB Job: 417244 Unit: PAG1

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measures to further broaden and strengthen the scheme. The Government announced that the banks SFLG lending allocations would be increased by 20% for one year, increasing the amount of lending available by £60 million to a total of £360 million, providing greater SFLG capacity at a critical time for SMEs. The Government also extended the eligibility of SFLG to businesses with growth ambitions who are more than five years old, including, but not limited to, those that have changed ownership. Since 1981, around 100,000 loans valued at £5 billion have been guaranteed through the SFLG. Government provides a report to Parliament on the performance of SLFG on an annual basis. 21. The Government also directs targeted debt finance support to people and businesses from disadvantaged communities through the Community Development Finance Institutions.

Community Development Finance 22. Community Development Finance Institutions (CDFIs) are independent financial institutions, normally serving a specific disadvantaged geographic area or disadvantaged group (eg charities, non-profit distributing social enterprises or organisations supporting specific groups such as ethnic minorities). They lend to start-up companies, individuals and established enterprises from within that area or community who are unable to access finance from mainstream banks. Enterprises supported by CDFIs are nevertheless viable and benefit the community in which they operate, for example, in terms of jobs and services provided. 23. The Government’s Enterprise Strategy (published March 2008) included a commitment that more businesses and individuals in deprived areas who are unable to access finance from commercial banks will be supported by CDFIs. The Government continues to support CDFIs through the Regional Development Agencies (RDAs) and the Community Development Finance Association, the trade association for CDFIs.

Equity Support 24. On the supply of equity, since 2000 the Government has supported programmes to address an equity gap which showed that SMEs seeking relatively small amounts of finance (between £250,000 and £2million) were disadvantaged by the lack of private sector venture capital funds operating at that size. 25. Government equity funds have been established under a variety of programme to: — encourage risk funding for start-ups through Regional Venture Capital Funds and Early Growth Funds; — encourage investment in the most deprived wards through the Bridges Community Development funds; and — encourage specialist investment through the UK High Technology Fund. 26. Enterprise Capital Funds (ECFs) are the most recent to be launched, in 2006. ECFs operate on a commercial basis, mixing private and public money in small high growth businesses that are seeking up to £2 million of risk capital. The Government provides up to two thirds of the capital in each Fund and takes only a limited share of profits in order to encourage private investors to participate where they would not otherwise. The Government has now committed over £141 million to ECF funding with a further £150 million earmarked for future funds over the next three years. 27. All of the above programme use standard capital market disciplines and the skills and experience of professionals in the private sector to meet both their and public goals via hybrid fund structures. Since 1997 these programmes have provided over £247 million funding, leveraging another £400 million of private funding. 28. Capital for Enterprise Ltd, a wholly-owned BERR NDPB, was established from 1st April 2008 to take responsibility for managing the Government’s venture capital and loan activity. The third round of ECF investment is currently underway, with Capital for Enterprise aiming to commit around £50 million of Government capital per year in the next two years. 29. The Enterprise Strategy, published in March 2008 alongside the Budget, set out a longer term vision for ensuring that SMEs can access the finance they need. It built on the steps Government had already taken to ensure that finance would be available to SMEs through a period of financial market disruption. The Enterprise Strategy announced: — a 20% increase in lending allocations under the Small Firms Loan Guarantee to a total of £360 million for this financial year and eligibility extended to businesses with growth ambitions over fivee years old, from 1 April 2008; — an additional £30 million through Enterprise Capital Funds with the aim of stimulating Mezzanine Finance; — launch of the third round of Enterprise Capital Funds (Enterprise Capital Funds) to help high growth businesses seeking risk capital launched 1 April 2008 as part of £150 million earmarked for future rounds of ECFs; Processed: 19-03-2009 18:48:02 Page Layout: COENEW [E] PPSysB Job: 417244 Unit: PAG1

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— lifting of restrictions on the assignment of debt in Government contracts, which hitherto had restricted SMEs’ ability to use factoring (which can be an important source of finance for many businesses) have been removed; — launched the Aspire Fund—a £25 million investment fund for women led businesses on 19 November 2008. The Aspire Investment Fund is the first of its kind and will receive over £12.5 million in funding from the Department for Business to be matched by a further £12.5 million from private sector investment; and — a doubling of funding (by Government and Banks) for the Money Advice Trust’s Business Debtline service by 2010–11. The service provides free confidential independent advice to small businesses with cash flow or debt problems. 9 December 2008

Memorandum submitted by ACCA

Summary — The deepening financial crisis and poor economic outlook have lowered expectations of SME creditworthiness and made lenders more risk-averse. — Though lending is still increasing overall, the supply of working capital through overdraft facilities is decreasing in real terms. With lenders losing credibility, an advice gap has emerged just when SMEs need advice the most. — The SME sector is more financially robust than it was during the last recession, and appears to be more creditworthy than big business. — The Government’s response should acknowledge the systemic nature of supply chain risk and work through the existing credit supply chain, oVering guarantees for default and credit risk to reduce risk-aversion. — Assistance to the SMEs will be funded by debt; Government must not lose sight of its cost or it will jeopardise the sector’s recovery.

Introduction

1.1 ACCA is the global body for professional accountants. We aim to oVer business-relevant, first-choice qualifications to people around the world who seek a rewarding career in accountancy, finance and management. 1.2 ACCA has its headquarters in London and 53,000 of our members are based in the UK. Globally, we support our 122,000 members and 325,000 students throughout their careers, providing services through a network of 80 oYces and centres around the world. 56% of our members in the UK work in or for a small and mediums-sized enterprise (SME) and we have over 100 years’ experience in understanding and supporting small firms. Independent research shows consistently that accountants are the first choice advisors of small businesses. 1.3 Given that our members advise their small business clients on a daily basis on tax matters, we are well placed to comment on issues aVecting SMEs. ACCA is a formal member of the Small Business Advisory Group and a key member of a range of Inland Revenue groups which consider tax matters and how they impact on small firms. 1.4 ACCA organises leading SME events across the Globe working with key local stakeholders, other international bodies and national Governments. 1.5 ACCA also acts as secretariat to the All Party Parliamentary Small Business Group, chaired by Andy Love MP, which exists to further the aims of small businesses and to provide feedback on small business issues to Parliament. Founded in 1997, the APPSBG has grown in prominence and is now believed to be one of the largest all-party parliamentary group in the UK with around 400 members from the House of Commons and House of Lords.

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2.0 Working capital at risk as lending slows 2.1 Information emerging concerning trends in SME lending can appear contradictory. Banks claim to have increased lending to small businesses by nearly 10% in the past year,10 while small business organisations oVer a numerous examples of credit becoming tighter and more expensive.11 2.2 Closer inspection (see Table 1) reveals that both sides are right to some extent. The latest BBA data reveal that, for the average small business, term lending has increased by more than 4% in real terms, but overdrafts have fallen by at least 3% in the past year. Deposits also fell in real terms. 2.3 Additionally, data on lending during the latest quarter (Q3 2008) reflect a deepening financial crisis. Growth in term lending per SME slowed substantially and deposits fell sharply. In fact, if increases in business costs are taken into account (rather than consumer inflation), both the average overdraft and overall lending to the average SME fell in real terms. The fact that overdraft lending tightened at a slower rate in Q3 is only mildly encouraging. 2.4 The data suggest that restoring the availability of working capital, rather than credit in general, is now the priority. Even when security is oVered, overdrafts suVer from not being tied to a specific programme of use whose returns lenders can forecast with some confidence. The latter point is reinforced by anecdotal evidence of lenders asking for frequent and detailed cash flow statements, thus attempting to introduce more transparency into overdrafts. 2.5 Despite these worrying developments, small business credit needs to be put into context of overall business lending. Credit is tightening much faster for larger firms than for small businesses, reflecting the healthier finances of the latter. Total lending to non-financial firms of all sizes grew only by 6.5% year-on- year and deposits actually fell by 5.2%.12 2.6 Finally, the SME sector is in much better financial shape currently than it was during the last recession. Even in hard-hit sectors such as manufacturing and construction, small businesses are still net lenders to financial institutions,13 while in 1991 they were weighed down by £21.1 billion of net debt. Overdrafts, the most problematic area of the SME finance supply chain, now account for only about 17% of all lending to SMEs, down from 58% at the end of 1991.14

3.0 Justified pessimism, irrational fear lie behind tightening credit 3.1 According to the BoE, the stark economic outlook is the main reason for tightening credit.15 Banks naturally need to anticipate that there will be fewer creditworthy businesses in a recession than during times of rapid growth. 3.2 But the BoE also notes that lenders have become more risk-averse.16 In practice this means that creditworthy SMEs cannot access finance because banks cannot be sure how much risk they are undertaking or what levels of lending they will be able to sustain should the financial crisis deteriorate further.17 3.3 Finally, while secured lending is aVected to a lesser extent, using security has itself become more diYcult due to falling property and asset prices. 3.4 It is important to remember that some of the increase in risk aversion is fully justified. The government must only seek to discourage risk aversion that is irrational and driven by fear.

4.0 Pockets of poor practice are fuelling an advice gap 4.1 While tightening credit does not constitute poor commercial practice in principle, it can translate as such, especially in the absence of competition.18 Complaints from small businesses tend to concern new charges, higher interest rates, reduced overdraft facilities or withdrawal of previously agreed loans. 4.2 Though the Banking Code commits its signatories to 30 days’ notice of such changes,19 this will not be suYcient in all cases. The withdrawal of overdraft facilities, for instance, may require a small business to seek alternative sources of finance or reconsider the scale of their operations—both lengthy processes. 4.3 Some SME organisations have also drawn attention to the quality of advice provided by lenders, citing a lack of experienced personnel authorised to provide personalised service.20 There is even anecdotal evidence of lenders encouraging late payment as a form of free credit.

10 BBA, “Support for small business—3rd quarter of 2008” November 2008. 11 Smith, L and Keter, V (eds) “Small Business, Insolvency and Redundancy” Commons Library, November 2008. 12 Bank of England, “Sectoral breakdown of aggregate M4 and M4 lending”. October 2008. 13 BBA, “Support for small business—2nd quarter of 2008” September 2008. No sector data exist for Q3. 14 BBA, “Support for small business—3rd quarter of 2008” November 2008. 15 Bank of England, Credit Conditions Survey Q3 2008. 16 Ibid. and Bank of England Inflation Report Q3 2008. 17 One banking expert has suggested that banks’ default risk models are only applicable to about 10% of the stock of businesses. 18 The BERR 2007 UK Survey of SME Finances found that three quarters of all SMEs bank with one of the big four high street banks. Only 12% of SMEs engaged with any lender apart from their main bank in the year to Autumn 2007. Of the rest, 81% didn’t even consider doing so. 19 BBA, “The Business Banking Code”, March 2008. 20 FPB and Graydon UK, “Financial advice and smaller businesses” November 2008. Processed: 19-03-2009 18:48:02 Page Layout: COENEW [E] PPSysB Job: 417244 Unit: PAG1

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4.4 Apart from its adverse eVect on SMEs’ cash flow, it appears that poor practice has compromised the relationship between lenders and SMEs and the credibility of the former as a source of advice. This threatens to create a substantial advice gap that the sector cannot aVord given the current economic outlook.

Table 1

SMALL BUSINESS LENDING TRENDS, YEAR-ON-YEAR AND QUARTERLY

Last year Nominal Growth Real Growth (Q3 2007—Q3 2008) Total Per customer Total Per customer Term Lending 11.3% 7.4% 7.9% 4.1% Overdrafts 3.7% 0.1% 0.5% "3.0% Total Lending 9.9% 6.1% 6.5% 2.8% Deposits 4.9% 1.3% 1.7% "1.8%

Last quarter Nominal Growth Real Growth (Q2 2008—Q3 2008) Total Per customer Total Per customer Term Lending 1.9% 1.5% 0.7% 0.3% Overdrafts 1.4% 1.1% 0.3% "0.1% Total Lending 1.8% 1.4% 0.6% 0.2% Deposits 0.6% 0.2% "0.6% "1.0%

Last quarter (annualised) Nominal Growth Real Growth (Q2 2008—Q3 2008) Total Per customer Total Per customer Term Lending 7.6% 6.0% 2.7% 1.2% Overdrafts 5.9% 4.3% 1.1% "0.5% Total Lending 7.3% 5.7% 2.5% 0.9% Deposits 2.4% 0.8% "2.3% "3.8%

Customer, lending and deposit totals taken from BBA, “Support for Small Business Q3 2008”. The BBA defines any business with less than £1 million of turnover as a small business. Assuming all turnover passes through an SME’s main bank account, this encompasses about 92% of all SMEs. (Cosh et al).

Real growth rates computed using CPI data from BoE Inflation Report, Q3 2008. Note that the CPI does not measure changes in small business input prices. BoE estimates of private sector cost inflation are not available past Q2 2008. However, if the rate of private sector cost growth in Q2 2008 is assumed to have persisted in Q3, then both term lending and overdrafts per SME have fallen in real terms. This is not unlikely as consumer inflation was higher than Q2 2008 levels throughout Q3 2008.

5.0 Financing SMEs in the recession: Key principles

5.1 Professional advice has never been more valuable. To prepare for an even sharper downturn in 2009, more SMEs will need independent advice to help them manage their resources, navigate the range of finance products, build relationships with lenders and, if necessary, compare and switch between banks. As the latter lose credibility,21 accountants need to fulfil their role as intermediaries between SMEs and lenders.22 5.2 Supply chain risk is systemic. Healthy SMEs can still fail if they cannot rely on their customers for payment and their suppliers for delivery. Supply chains conduct risk both upstream and downstream, and the more lean and eYcient they are, the more dangerous they become in a recession.23 The Government must look at translating policies aimed at containing systemic risk from the financial sector to non- financial firms. 5.3 Risk must be shared, not borne by the government. SMEs facing a market failure are those that would be oVered credit if lenders were fully rational. To ensure that public funds are not misused, private parties should be willing to share a substantial amount of risk before the government can oVer assistance.

21 FPB and Graydon UK, “Financial advice and smaller businesses” November 2008. 22 See for instance UEAPME (European Association of Craft, Small and Medium-sized Enterprises) Newsflash 36/2008. 23 Deloitte, “Supply chain’s last straw: A vicious cycle of risk”. June 2007. Processed: 19-03-2009 18:48:02 Page Layout: COENEW [O] PPSysB Job: 417244 Unit: PAG1

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5.4 The finance supply chain is not broken. Lenders are still better positioned to assess the creditworthiness of SMEs than the government. All government support to SMEs needs to be channelled through the existing credit supply chain. The government does not need to micro-manage lending to SMEs, but rather underwrite pooled risks, letting the private sector identify, assess and manage the risks in question.

5.5 Cost-eVective delivery is crucial. As support to SMEs will be financed by government debt,24 it needs to be as cost-eVective as possible so that the recovery of the sector is not jeopardised by high taxes in the future.25 Additionally, action addressing the supply of credit require wide take-up in order to have any eVect. Given the poor penetration rates of government support,26 distribution will fail unless it utilises existing networks of lenders, intermediaries, business organisations and supply chains.

5.6 The demand for financial skills must be met. Businesses with better financial skills are able to access more, and more diverse, funding. Yet one a quarter of all owner-managers are aware of programmes to help them develop their understanding of finance.27 Though demand for most types of skills has fallen, this is an area where it is strong—and unmet.

6.0 Financing SMEs in the recession: Proposals

6.1 Small Firms Loan Guarantee (SFLG). The Government needs to decisively review the size and scope of the SFLG while the UK is in recession. The Scheme should be actively marketed and widened to include smaller, shorter-term debts in order to guarantee access to working capital for firms of all ages. Government should waive its 2% premium, as well as security requirements for partnerships and sole traders. Finally, lenders should be allowed discretion on the level of guarantee extended to individual loans, subject to an overall level of 75% across their portfolio.

6.2 Risk reinsurance guarantees. A tightening supply of credit insurance can interfere with the factoring of commercial debt and the supply of credit from suppliers to customers. Though limited competition among credit insurers may contribute to the problem, a lack of reinsurance for credit risk lies at its heart. By oVering reinsurers a partial guarantee for losses, government could significantly improve conditions in this market.

6.3 Supply chain recapitalisation and supplier bail-outs. Subject to agreement on a sector basis, the government can encourage creditworthy large firms to recapitalise their supply chains, obtaining stakes in small suppliers and other partners in return for injections of working capital. Government support could range from loan guarantees to matched equity investment or incentives through lower rates of capital gains tax.

6.4 Business banking code of conduct. It is clear that the current code of conduct for business banking has failed to inspire SMEs’ confidence in the UK banking sector. A new code of conduct for small business banking, with statutory standing, should commit signatories to giving adequate notice of changes to their terms of service, discouraging late payment and providing better access to independent financial advice.

6.5 Investing in recession-proofing skills. Demand for labour and, indeed, skills will inevitably fall during a recession. The UK’s sizeable skills budget should now be redirected towards those areas where demand is still strong. Recent initiatives to free up funding for higher-level and modular training for smaller businesses should be extended to financial literacy and credit management training, and address the smallest and most vulnerable enterprises.

6.6 Supporting local enterprise networks. To engage small business owners within their peer groups, support and mentoring networks embedded in the local enterprise community must be recruited to the cause of improving access to credit. Entrepreneurs themselves can act as trusted, unbiased mentors to SME owner- managers and Regional development agencies (RDAs) can show strategic leadership by supporting more high quality, sustainable local mentoring services. 19 December 2008

24 HM Treasury, Pre-Budget Report November 2008. 25 The start-up cycle should begin to recover in 2011. ACCA, “Financing SMEs in the recession” November 2008. 26 IFF Research, “The Annual Survey of Small Businesses” Opinions 2006–07” BERR, February 2008/ 27 Cosh A, Hughes A, Bullock A and Milner I, “Financing UK small and medium-sized enterprises—The 2007 Survey” University of Cambridge Centre for Business Research, August 2008. Processed: 19-03-2009 18:48:02 Page Layout: COENEW [E] PPSysB Job: 417244 Unit: PAG1

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Memorandum submitted by Barclays Plc

1. Introduction to Barclays Business Banking Operations Barclays welcomes the opportunity to participate in the BERR Select Committee’s hearing into financial support for Small and Medium Sized Enterprises USMEs). Banking support in these sectors is a central part of Barclays banking operations, reflecting Barclays origins in the 1670s as a source of entrepreneurial finance. The BERR Select Committee hearing represents another important opportunity to focus on the needs of SMEs in the current economic downturn, in addition to the recently established BERR Small Business Finance Forum, of which we are a member. In the UK, Barclays broadly categorises its SME customers as follows: — SMEs with a turnover up to £1 million are typically within the Local Business banking division of Barclays; and — larger SMEs with a turnover over £1 million and up to approximately £20 million are typically within the Medium Business and Agriculture unit (MB&A) of Barclays Commercial Banking division. For the purposes of this submission, references to SMEs means customers of Local Business and of MB&A, whilst references to “small businesses” and “larger SMEs” are references to Local Business and MB&A customers respectively. As the majority (approximately 85%) of SME customers are in Barclays Local Business division the Managing Director of Local Business (Steve Cooper) is the most appropriate representative to assist the Committee by giving oral evidence on financial support for SMEs. Although this response focuses mainly on businesses within our Local Business division, Mr Cooper is able to respond to any question on the overall SME market and Barclays positioning within it.

2. Market Overview for Small and Medium Sized Enterprises—Barclays Observations

2.1 Trends and data Many small businesses in particular are experiencing significant trading diYculties in the economic downturn and testing market conditions. Around one fifth of small businesses borrow at any one time and they may currently be experiencing diYculty in gaining access to finance, partly due to increased risk—and for larger SMEs, a shortage of supply.

2.2 Focus on Small and Medium Sized Enterprises (SMEs) Barclays provides business banking services to nearly one-in-four SMEs in England & Wales, as well as an increasing involvement in Scotland and Northern Ireland. Barclays SME customer base totals around 700,000 firms and covers all areas of economic activity. Current characteristics of the SME market include: — The value of sales receipts credited to Barclays SME current account base has fallen steadily during the course of 2008. The figures for November 2008 were circa 6% lower than in the same period in 2007, the sharpest decline for over a decade. — For much of the period 2005 to early 2007, the profitability of the SME sector was buoyant. However over the last 12–18 months, many customers have seen cash flow reduced with spending often running ahead of sales receipts leading to a cut in cash reserves (and as a consequence reducing the ability to meet repayments of new and existing debt). — Even so, most SMEs are still in a strong net liquid position, and some by a significant margin. In the case of Barclays, only about one-in-six of our small business customers have either a loan or overdraft and the number of firms in credit outnumbers those borrowing by a ratio of 3 to 1. — At the time of the last major recession (early 1990s) SME borrowing from the banking sector exceeded deposits by a significant margin (£20 billion) whereas today, savings and borrowing across the SME market are broadly aligned. — Another impact of recent economic conditions has been a reduction in the number of business start- ups and an increase in business closures. In the SME sector, business closures now exceed start- ups, leading to a fall in business stock of about 30,000 during 2008, a drop of approximately 1%. However this should be set against the experience of a substantial net increase in the stock over the last 10 years (about 18% from 1997 to 2008). Processed: 19-03-2009 18:48:02 Page Layout: COENEW [O] PPSysB Job: 417244 Unit: PAG1

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3. Industry Response to Current Market Conditions — As evidenced by data published by the British Bankers’ Association,28 the main high street banks have continued to increase the level of support to the small business sector during 2008. At the end of the quarter to 30 September 2008, total borrowing by the small business sector was £54.2 billion, some 10% higher than a year before; an increase was reported in both loan and overdraft availability. — Loan balances for small firms have continued to increase, particularly for short maturity loans (under three years) and loans for over 10 years. This indicates a continuing willingness of the main banks to commit both flexible short term funding and long term development capital to the small firms sector. Medium term loan balances have also increased.

4. Barclays Response to Current Market Conditions

4.1 Barclays commitment to the UK SME sector — Barclays is very much committed to SME business—in the year to September 2008, more SME customers switched their relationship to Barclays than left us, leading to a growth in our SME customer base despite a general contraction in the marketplace. We are also seen as one of the top banks for start-ups. — In line with this account growth we have seen increases in our share of engagement with small business customers. Our SME customer stock has increased by over 10,000 during the last year. Our lending origination to small business customers has increased by more than 20% year to date (end October 2008) and even after refinancing/repayments made, our stock of SME loans was still 8% higher than a year before. — Indeed, Barclays has written more new loans to small businesses in the first 10 months of 2008 than we did in the whole of 2007. In addition, through a range of market leading, managed rate products we have also attracted substantial new credit balances to Barclays in the last year. Consequently, deposit funds under our stewardship at the end of October were 10% higher than a year earlier. — Through its relationship teams, Barclays is committed to taking fast and decisive action to help SMEs through the current economic downturn. — Our relationship managers are in constant discussion with customers as to the best way we can help their businesses. For example, on average every working day in September 2008 our staV had nearly 1,800 face to face meetings with customers. Also, we sanctioned a new small business loan every 70 seconds.

4.2 We oVer high quality products and advice Barclays overall approach to SMEs is to provide a blend of financial products and invaluable business advice to construct solutions that meet the needs of customers: —Achoice of small business accounts that they can tailor to their needs and the provision of up to two years free banking to start-ups, subject to remaining in credit. — Day to day small business banking support through an award winning team of Business Managers who are available over the telephone for everyday and urgent banking needs during the daytime, evenings and weekends. — Free consultation for small businesses with a local accountant, marketing expert and solicitor to advise on topics such as the best legal status, how to advertise or draft supply contracts. — Barclays oVers a free nationwide small business seminar and workshop programme. This is designed to help small business owners network and gain practical help on relevant challenges such as marketing, trading online or how to generate more business profits. — Business management software has also been developed to help small business customers complete their account work quickly and eYciently; support their hiring eVorts; help back up their business data securely; and avoid late payment and bad debts. — Creditfocus is an innovative web based service provided to small business customers to help them reduce the risk of late payments and bad debt, with elements of the service provided to customers for free. Businesses regularly fail due to late payment of invoices and bad debt, and this is a tangible example of how Barclays is reflecting a strong understanding of its customers needs in our product development. Creditfocus won the Institute of Financial Services (IFS) Award for Innovation Excellence.

28 BBA press release Support for Small Firms, 21 November 2008. Processed: 19-03-2009 18:48:02 Page Layout: COENEW [E] PPSysB Job: 417244 Unit: PAG1

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— Barclays customer satisfaction levels for relationship managers remain high; in Q3 2008, over two thirds of customers were either very or extremely satisfied with the service they received from their manager. — For our larger SMEs we provide a more sophisticated oVering in terms of product set and services. For example, our teams are increasingly industry focussed, with staV undergoing training to become specialists on a particular sector. This enables relationship managers to be customers’ trusted business partners, helping them identify opportunities and manage risks more eVectively. Furthermore, this year we have launched the Barclays Latitude business club which oVers products and advice to support business development and growth, domestically and internationally.

4.3 Key features of Barclays lending strategy to SMEs There has been considerable focus in press commentary about lending to small businesses in particular. Over a typical business lifespan, about 60% of small businesses will need to borrow money for one reason or another (even though only a minority are borrowing at any one point in time). In some industry sectors, access to working capital is an almost perpetual requirement. In other sectors, debt finance is more associated with business development opportunities. It is important that we clarify our lending strategy: — As outlined above, in spite of diYcult market conditions Barclays has already lent more money to SMEs this year than last and new lending to small businesses is up by more than 20% year-on-year. — Across our SME customer base as a whole, Barclays lending increased by 8% in the year to September 2008. — Barclays has a continued appetite to provide finance to SMEs at our current levels as a minimum (these levels already being higher than in 2007). — Barclays charges for debt on a risk adjusted basis: higher rates for higher risk customers, lower rates for lower risk customers. This year we increased rates for a small number of businesses and reduced rates for a similar number whilst the vast majority remained unchanged. As a result of our policy, customers representing lower/improved risk do not subsidise others. — Base rate movements are passed on in full to all base rate linked borrowing customers (approximately 80%). — Barclays ensures that up front lending fees are communicated clearly and in advance. Any other fees are clearly articulated in our tariV charges and we actively explain to our customers how to save money. — Barclays maintains a consistent approach to risk—lending responsibly. Risk decisions are made jointly by centrally based credit experts and locally based relationship teams, with local knowledge. — We treat each business on an individual basis with no “blanket” policies for industry sectors. — We are leading users of European Investment Bank (EIB) funding passing the full benefit on to SMEs. — We are fully involved with BERR in shaping the new Small Firms Loan Fund and will actively market this in January 2009.

4.4 Focus on our decision making process and the role of branch-based relationship managers Barclays has a network of almost 2,000 locally based relationship managers who work with our business customers on a day to day basis. These trained staV operate in the local community, either in a branch or a specialised corporate banking centre: — Each local team works with a regional business support structure and has access to a national network of product specialists. — There is face to face access to a trained relationship manager. This is an important customer need and is central to our oVering. For larger SMEs our staV are trained as industry specialists to oVer an enhanced level of support and advice. — Credit risk decisions for borrowing up to £25,000 are largely automated through sophisticated bank account behavioural models, with some discretion of the local relationship manager. — Credit risk decisions over £25,000 are supplemented with much more personalised assessment and discretion. This process involves a centrally based credit risk expert (who views industry data across the UK) and a locally based relationship manager who assesses how the individual business is performing locally. — Credit risk decisions are always based on the ability to repay and not just the level of security. Decisions are communicated locally. Our current credit sanction rate is in the region of 80%. Processed: 19-03-2009 18:48:02 Page Layout: COENEW [O] PPSysB Job: 417244 Unit: PAG1

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— Before a lending request is declined it goes through two separate appeal processes where the local relationship manager can provide additional information. — We provide a range of services and support structures for SMEs experiencing financial diYculty. For larger SMEs, this includes our Business Support Team. 80% of SMEs which use Business Support, trade out of diYculty and this team has just won the award for Private SME Company Turnaround by the IFT (Institute for Turnaround).

5. Conclusion Barclays SME customers are suVering the sharpest contraction in business conditions for a generation— and many business owners have never experienced such diYcult circumstances before. Barclays is working hard to support as many of these customers as possible through diYcult times including, where appropriate, providing additional loan and overdraft finance. We have already increased lending above our 2007 levels (despite a reduction in the number of customers seeking finance). Barclays has a continued appetite to provide finance to SMEs at our current levels in 2009 (and 2010), subject to demand and credit quality. This is already significantly above 2007 levels. Our branch based network relationship staV are working very hard on a day-to-day basis to help customers, treating every customer as an individual and always doing as much as we can to deliver a finance solution for them that is both responsible and in line with our credit policy. Where customers cannot meet our credit risk requirements, we will actively market the new Small Business Loan Fund on terms agreed with the Government as soon as the details are settled. As economic activity improves in 2009–10, our commitment to the sector will also be a key component to support business growth and expansion over the medium term. 8 December 2008

Memorandum submitted by the British Bankers Association This submission outlines the UK banking industry’s support for SMEs during the current economic crisis. BBA defines an SME as a business with an annual turnover of under £1 million.

Background 1. There are nine major UK high street banks that provide lending facilities to SMEs: — Lloyds TSB; — HBOS; — Royal Bank of Scotland; — HSBC; — Barclays; — Alliance and Leicester; — National Australia Bank Group (Yorkshire Bank and Clydesdale Bank); — Abbey; and — Co-operative Bank. 2. There are approximately 4.7 million SMEs in the UK employing a total of 13.5 million people and generating more than 50% of UK turnover.29

Regulation of SME Banking 3. Banks’ dealings with small business customers are regulated via the BBA/APACS Business Banking Code. The Code is independently monitored by the Banking Code Standards Board (BCSB) and includes commitments to treat customers fairly and deal sympathetically and positively with cases of financial diYculty. 4. The Business Banking Code30 also contains requirements about bank practices involving current accounts; deposit accounts; loans and overdrafts; charges and interest rates; and how banks will assist small businesses in financial diYculty.

29 Figures provided by the Federation of Small businesses http://www.fsb.org.uk/default.aspx?id%64&loc%policy 30 Copies of the Business Banking Code are available free in all bank branches and at http://www.bba.org.uk/bba/jsp/polopoly.jsp?d%1538&a%14707 Processed: 19-03-2009 18:48:02 Page Layout: COENEW [E] PPSysB Job: 417244 Unit: PAG1

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5. The Code is independently reviewed every three years and all key stakeholders, including government and SME representative groups are invited to suggest additions and amendments. 6. Subscribers to the Code also follow the BBA Statement of Principles which sets out how banks and SMEs should work together from the outset of their relationship through the life of the small business, including if the business should find itself in financial diYculty. A copy of the Statement is given to all new small business customers and available free at any time on request. 7. The Statement is currently being revised in light of the current economic circumstances and BBA is working with BERR to consider input from members of the Small Business Finance Forum. (Further information follows in the Current Initiatives section below).

BBA Small Business Statistics 8. BBA has collected data since the early 1990’s on bank support for small businesses (defined as those— some 3.7 million—other than charities, clubs or societies, with total payments from their bank accounts of less than £1 million annually). Around one-third of small businesses are borrowing either through loans or overdrafts and, although changes in organisational structures within individual banks and minor coverage changes have caused some breaks in series, general trends in lending can be seen below:

£ billion 60 Bank lending to small businesses - source BBA

50

40

30 Overdrafts 20 Loans 10

0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

9. The graph illustrates the long term structural change from overdrafts to loans as the main means of debt support for small businesses. As overdrafts are really only suitable for short term working capital needs, this change in structure provides a more sound footing than was existent in the recession of the early 1990’s. 10. At the end of the third quarter, total lending to small businesses was growing at an annual rate of 10%. The net increase in lending of nearly £1 billion in the quarter was only marginally lower than in the previous quarter and the same quarter of 2007:

2007 Q1 2007 Q2 2007 Q3 2007 Q4 2008 Q1 2008 Q2 2008 Q3 £ mn 0.830 0.608 1.086 0.615 1.754 1.051 0.950

11. Whilst lending to small businesses totals some £54 billion (average loan is around £80,000, average overdraft is around £12,000), deposits from small businesses stand at £55 billion. Annual growth in deposits has slowed to only 3% from 18% at the beginning of 2007, as small businesses increasingly fund their activities out of cashflow, rather than increasing their borrowings in the face of diYcult trading conditions and the economic downturn. 12. Banks continue to support small businesses (perhaps by oVering cash management facilities and payment services, rather than finance) and more than 0.5 million new small business relationships were established with banks over the last year.

Current Outlook 13. As responsible lenders, banks must ensure that applications for lending are subject to appropriate risk and credit assessment techniques. Banks will want to see that SMEs ensure their business plans, cashflow forecasts etc are reviewed and still realistic in light of the current economic uncertainty. 14. Government believes that the banking industry should make more credit available to SMEs and this places pressure on banks to relax their approach to responsible lending. To do so would be harmful in the long term as businesses that are not viable become overextended, with knock-on eVects on businesses that trade with them. Processed: 19-03-2009 18:48:02 Page Layout: COENEW [O] PPSysB Job: 417244 Unit: PAG1

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15. There is a perception that reductions in base rate should make lending to SMEs cheaper. This is not the case as the short-term LIBOR rate remains significantly higher than base and longer maturing funding is higher still. 16. An additional pressure is the government’s increased requirement in the amount of capital that banks are required to hold against their lending. This capital is expensive and as the economy deteriorates more capital is required to oVset the higher risk of the lending. 17. A major impact on SME cashflows is the increasing extension of debtor days among traders ie the gap between receiving and paying an invoice. Late payment is common and becoming more acute in current conditions. The average period is now over 60 days (twice the period allowed for under UK legislation). 18. Contrary to the evidence provided by the BBA’s statistics, many commentators are claiming that banks will not lend to small businesses. These claims are undermining small business confidence and discourage customers from approaching their banks to ask for help at an early stage.

Financial Reporting Cycle 19. BBA has been in discussions with the Financial Reporting Council; Audit Practices Board; Institute of Chartered Accountants for England and Wales; and the CBI to discuss concerns that companies may find it diYcult to get confirmation of the availability of future finance, for inclusion in end of year accounts ie classification of the business as a going concern. 20. Members confirmed that they are seldom approached by small businesses seeking confirmation of facilities during the annual reporting cycle. Banks do not anticipate an increase in such approaches during the 2008 cycle. 21. Our members do not believe that a form of words or “negative assurance” on the continuing availability of finance is appropriate. Primarily, such an initiative could have the unintended consequence of banks’ determining that facilities are to be reviewed on a more frequent basis to ensure that a statement of “negative assurance” is still valid. This would incur costs for the small business and the use of time and resources to provide more frequent information. Additionally, our members do not believe that such assurances could be given without risking that a bank becomes legally liable for any change in circumstances over the period. 22. Members believe that the 1994 guidance developed by the APB is still fit for purpose. It provides useful information on how directors should consider their status as a “going concern” and members have agreed to contact the APB if they consider that there is scope for additional clarity in the document.

Current Initiatives 23. As outlined above, BBA’s members are continuing to make finance available to SME’s at the same level as 2007, as per their commitment to the government. 24. Through participation in BERR’s Small Business Finance Forum, BBA and its members have also acted to: (i) provide a single dedicated central phone number at each bank for SMEs to contact if they are not happy with their branch’s actions; (ii) collect the BBA’s SME lending statistics on a monthly basis, rather than just quarterly; (iii) work with key stakeholders to revise the BBA Statement of Principles to be monitorable by the BCSB and to more clearly outline banks’ responsibilities during times of financial diYculty; and (iv) work with the Bank of England to collect fortnightly SME lending data. 25. The BBA has also created a dedicated page on its website to house information and advice for small businesses.31 This includes: (i) the BBA/Moneyfacts Business Account Finder, which helps SMEs to compare and select from over 50 types of business current account (this had 3,661 visits in November 2008); (ii) links to BERR’s guidance to SMEs on managing cashflows; (iii) top tips to SMEs on how to improve the viability of their business; (iv) copies of all the BBA’s free SME leaflets; and (v) copies of the Business Banking Code and Guidance. December 2008

31 The Small Business page of the BBA website can be found at http://www.bba.org.uk/bba/jsp/polopoly.jsp?d%1538 Processed: 19-03-2009 18:48:02 Page Layout: COENEW [E] PPSysB Job: 417244 Unit: PAG1

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Memorandum submitted by the British Chambers of Commerce

Summary

1.1 The British Chambers of Commerce (BCC) welcomes the chance to respond to the Business and Enterprise Committee’s request for evidence on financial support to SMEs. The BCC is the national voice of local business; a national network of quality-accredited Chambers of Commerce, uniquely positioned at the heart of every business community in the UK. The BCC represents over 100,000 businesses of all sizes across all sectors of the economy that together employ over 5 million people. 1.2 The current economic climate is causing great diYculties for small and medium sized businesses in particular. DiYculty in accessing credit lines provided by banks is by far the largest problem and is manifesting itself in several diVerent ways. The removal and tightening of credit conditions appears to be both indiscriminate and arbitrary. This problem needs to be addressed to get the wheels of the economy turning again.

British Chambers of Commerce Response

2.1 Over the last two months, the BCC has been gathering evidence from the Chamber network on the experience of their members with regard to access to credit. The following have been reported across the length and breadth of the country: — Banks refusing credit lines to businesses that they have had a relationship with for decades. — Increases of interest rates on overdraft facilities. — Terms of credit facilities being altered mid-term. — The charging of interest on the full amount of an overdraft facility, irrespective of the actual amount being used in the overdraft. — The indiscriminate removal of credit lines. 2.2 A specific example that neatly sums up the problems was submitted to the BCC by a business who is a customer with a major high street bank. They stated that they had had no previous problems with access to credit or the repayment of it. Further to this, their custom had been highly sought after by other banks. The following is a comparison of credit facility renewal at their bank:

This years renewal Previous years renewal Fee requested £25,000 £0 Term 6 months 12 months Rate 3% over base 1.5% overbase LTV 72% up to 76% Overdraft 0 £100,000

2.3 Further evidence from the Chamber network comes from the London Chamber’s October business leaders survey, they found the following results: — One-third (35%) of businesses said that they had experienced increased conditions and/or charges to their credit streams. — Just under a quarter of businesses surveyed said that they were finding it diYcult to access credit. 2.4 Furthermore, the decision making process for granting access to finance has been taking longer. Several businesses have stated that decisions made on lending prior to the financial crisis were made over a relatively short time span. Now, however, the decision making process is taking far longer, largely because lending decisions are being referred to those at a higher level within the lending institution. 2.5 The sum of these problems is contributing to a severe loss of confidence in the banking system within the business community. One particularly worrying example given to the BCC by the Chamber network was that firms from their local retail sector will be withholding cash from their bank accounts over the Christmas period in the fear that banks will use it as an excuse to reduce overdraft limits. 2.6 It is important that the credit problem is viewed in the context of what it means for payment down the supply chain. Further evidence given to the BCC has been that payment times have been extended, with instances of large firms demanding discounts from previous invoices for continued future custom. Processed: 19-03-2009 18:48:02 Page Layout: COENEW [O] PPSysB Job: 417244 Unit: PAG1

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2.7 Following events within the global financial system and previous loose lending practices, it is inevitable that the cost of credit will be more than 12-18 months ago. However, it is important that an arbitrary approach by banks to improve their balance sheets is avoided. The creation of the Small Business Finance Forum is a step towards improving the situation, but it remains to be seen how eVective this dialogue between banks and businesses is. 2.8 To a lesser extent, there have also been examples of issues surrounding credit insurance. One business oVered a detailed, typical example where they have experienced a number of limit withdrawals as insurers have reviewed their exposure to geographic markets/industry sectors/individual buyers. The main areas they found aVected were Ireland and the Baltic States, with a smaller incidence in other parts of Europe. 2.9 The recent Pre-Budget Report contained several measures that the BCC is supportive of and which have tried to address the problems surrounding credit. The Small Business Finance Scheme is a welcome move, and the BCC had suggested a similar policy proposal, but more flexible so as to be applicable to all forms of small firms finance. December 2008

Memorandum submitted by the British Marine Federation

1. Introduction 1.1 The British Marine Federation is the trade association for the leisure boating industry representing around 1,500 member companies. Our members provide the boats, equipment, facilities and services that enable nearly 4 million people to enjoy their recreation afloat on the coast and inland waterways of our country. The BMF also operates the London and Southampton International Boat Shows via its subsidiary National Boat Shows. 1.2 Our industry is wholly comprised of small and medium-sized enterprises with over 95% of companies within our membership employing less than 50 people (based on BMF membership statistics). In total the UK leisure marine sector directly employs over 35,000 people and generates annual revenues of nearly £3 billion, of which 35.1% represents export sales. Over recent years the leisure marine sector has been recognised by Government as a manufacturing success story and a growing and valuable contributor to the UK economy. 1.3 The BMF welcomes the opportunity to submit evidence to the select committee hearing at a time when many member companies are facing financial diYculties, including access to credit from lenders and other financial institutions. 1.4 A significant number of firms in the leisure marine industry have entered administration in the last six months and hundreds of highly skilled workers have lost their jobs, often in areas of the country with few other employment options.

2. The Current Economic Situation 2.1 The current economic situation is having a profoundly negative eVect on the leisure marine industry in the UK, and has resulted in companies taking hard commercial decisions in order to survive. We have seen a dramatic increase in companies entering administration and a severe downturn in sales. 2.2 The BMF has seen the resignation of 151 member companies since July of this year and we have recently had to terminate the membership of 46 companies for non-payment of subscriptions. 2.3 50 BMF members have ceased trading this year. Of these, 17 firms have gone into liquidation, with a total value of £34 million turnover. 2.4 Larger firms have also suVered from the downturn. Two major boat builders located in the East of England and Midlands regions have recently made almost 400 redundancies and closed two of their four factories. Other manufacturers have gone to short time working. 2.5 Over the past eight years the revenue generated by the UK leisure marine industry has consistently grown over recent years by 7%–8% per annum. The current economic downturn is the first time in many years that the leisure marine industry has faced a comparable decline in sales and consumer confidence and such a decline in employment numbers.

3. Access to Credit 3.1 The current economic downturn has been compounded by the problems facing member companies in accessing credit streams. Processed: 19-03-2009 18:48:02 Page Layout: COENEW [E] PPSysB Job: 417244 Unit: PAG1

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3.2 Experience from member companies suggests that: — Business relationship managers from banks are under increasing pressure to maximise profitability and are being overruled by senior management where previously they would use discretion to authorise credit. — Interest rates for business overdrafts are being increased by as much as three and a half times their current rate. — Banks are heavily punishing the breaching of loan covenants where previously they would have sought compromise to ensure the debtor remained solvent for the life of the loan. — New loans being oVered to small businesses are being oVered at interest rates of up to 20%, increased from an average of 9%–11% earlier in 2008. Such lending rates have made credit totally unaVordable.

4. Measures Which could Help 4.1 The leisure marine sector is feeling the impact of the financial crisis as business demand is falling sharply. The change of interest rates down to 2% will help our exporters but as it is a global crisis and many of countries that our sector exports to are in similar diYculties there is a real need to stimulate business in UK as well. Furthermore many of our companies are small to medium businesses and they need to secure access to aVordable credit in order to honour current commitments and embark on new projects. 4.2 The BMF welcomes the Government’s commitments in the Pre-Budget Report to temporarily reduce the rate of corporation tax, but believes this should be made permanent, welcomes the commitment to help exporters and welcomes moves to increase the availability of loans from Regional Development Agencies (RDAs). 4.3 The BMF calls on Regional Development Agencies to develop specific plans to reach out to and help leisure marine businesses, especially in areas of the country such as the South East, where the sector is a major local employer for coastal towns and cities. 4.4 The BMF particularly welcomes the establishment of the Small Business Finance Scheme which could enable many member companies to access aVordable credit. However, the BMF believes that greater clarity is needed on aspects such as the lending criteria that will be used under the scheme. The benefit of the scheme for SMEs in the UK remains unknown; such is the sheer number of businesses in the sector and the problems aVecting all industries in accessing aVordable finance. 4.5 In its policy making the Government needs to make a distinction between small sized businesses and medium sized businesses. There is a vast diVerence in the credit needs and financial challenges facing a specialist firm of three individuals when compared with a medium sized manufacturer employing two hundred people. 4.6 Banks must be discouraged from prohibitively increasing interest rates on existing overdrafts and new loans for small and medium sized businesses or there will be an increase in insolvencies and redundancies in the leisure marine sector. The Government must use its new influence over the financial sector to restrict such practices. 4.7 The BMF would welcome the opportunity to enter a dialogue with the Government to establish how it could further assist the leisure marine sector in accessing aVordable credit and in how it can ensure banks continue to assist industry in its recovery from the current economic situation.

5. Next Steps 5.1 The BMF would be happy to provide further evidence to the committee, or indeed take part in an oral evidence session should the committee wish. We look forward to further involvement as your scrutiny continues. December 2008

Memorandum submitted by the CBI

Introduction 1. The Confederation of British Industry (CBI) is the national body representing the UK business community. It is an independent, non-party political organisation funded entirely by its members in industry and commerce and speaks for some 240,000 businesses that together employ around a third of the UK private sector workforce. The CBI’s membership includes 80 of the FTSE 100, some 200,000 small and medium-sized enterprises (SMEs), more than 20,000 manufacturers and over 150 sectoral associations. Processed: 19-03-2009 18:48:02 Page Layout: COENEW [O] PPSysB Job: 417244 Unit: PAG1

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2. The CBI welcomes the opportunity to respond to the House of Commons Business and Enterprise Select Committee inquiry into financial support for SMEs. 3. Since the turmoil in the financial markets began in September, the CBI has received numerous examples from its SME members of how the credit crunch is aVecting their business, in particular their access to finance. These case studies are supported by our survey data which shows that a substantial proportion of SMEs have experienced deterioration in the availability of capital since the onset of the credit crunch. This has manifested itself in two ways; an increase in the cost of finance and more stringent conditions imposed by the lender. It is less common, but still prevalent, for a business to have new credit refused or existing credit lines reduced or withdrawn. 4. For the most part these credit constraints are a rational response by the banks to their own circumstances. The banks own cost of borrowing has increased while their supply of money has fallen. In addition the recession has increased the risk of default by SMEs and falling asset prices have reduced available collateral. The banks are also under pressure to respond to the conflicting priorities of government; to increase lending to SMEs and households while simultaneously increasing their capital ratios. But SME members have also reported an increase in arrangement fees and deterioration of their banking relationships, neither of which can be fully explained by the changes to the banks operating circumstances. 5. The potential of last month’s pre-budget report announcements to resolve SMEs’ credit constraints will be dependent on the scope and speed of implementation. Further investigation is needed in order to pinpoint the precise problems that are causing these credit constraints and, if required, further solutions should be developed.

The Effect of the Credit Crunch on SMEs

Cost of finance 6. In October the CBI surveyed 204 senior executives from a range of sectors, of which 116 were SMEs.32 The results show that the credit crunch is having a substantial impact on the SME sector. Nearly half of the SMEs surveyed by the CBI have experienced some deterioration in the availability of capital for their business since the onset of the credit crunch. The eVect of the credit crunch has been more pronounced for those businesses with less than 20 employees; two fifths described the deterioration as significant compared to a fifth of SMEs overall. More than 60% of SMEs expect to see the situation worsen over the next 12 months. 7. The CBI’s survey also asked how capital availability has deteriorated. Seven out of 10 SME respondents cited the increased cost of finance and more stringent conditions imposed by lenders. Where the cost of borrowing had increased for existing lines of credit, it was most commonly by less than 50 basis points. The cost of existing credit lines rarely increased by more than 100 basis points, except in the case of the very smallest businesses, one in 10 of which had experienced such an increase. 8. The cost of new and renewed credit lines has increased more substantially. One in five SMEs reported increases of more than 100 basis points. Similar proportions also experienced increases of between 0 and 50 basis points and 51 to 100 basis points. 9. The deterioration in credit conditions has been felt most acutely in relation to fund raising for working capital and capital investment; over half of SMEs experiencing credit constraints say it has occurred in these areas. 10. The CBI’s survey results are supported by case studies we have received from members. SME members have reported that over the past year, as the economic situation has deteriorated, there has been a tightening of credit from banks and a decrease in the willingness to lend. Overall these case studies show there have been notable restrictions in credit access but finance is still available for those willing to pay a premium and more eVort is needed to secure it. 11. Many members have reported significant increases in the interest rate on their credit. In some cases, debt has been made more expensive when a bank has switched from using the base rate to LIBOR to calculate repayments. It has been reported that it is not just the credit rates that have increased but also that the arrangement costs are substantially greater than last year. One medium-sized company in the construction sector has had its fees increase tenfold. 12. Some firms have had to switch banks to get the best credit oVer. For example one medium-sized manufacturer used hire purchase services from its bank which had cost 0.6% above the base rate. When the member sought to renew this service, the price had increased to 6% above the base rate. The member was quoted 0.8% above the base rate by another bank, which they accepted.

32 An SME is defined here as businesses with less than 500 employees. Note that the banks do not use employee numbers to define the size of their business customers. Processed: 19-03-2009 18:48:02 Page Layout: COENEW [E] PPSysB Job: 417244 Unit: PAG1

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Availability 13. More worryingly, the CBI’s survey shows two fifths have had an application for new credit refused and three out ten had had existing lines of credit reduced or withdrawn. 14. CBI members report that even when a credit oVer is made, it is sometimes too expensive to accept. For example, a small business in the technology sector took its business plan to its bank’s credit committee but the arrangement fees quoted were prohibitively expensive and the bank asked that these were paid up front, irrespective of whether a credit oVer would eventually be made. The business decided it could not pursue credit with this bank.

Relationships 15. Some members also reported deterioration in their long-term banking relationships. One small company has been with its existing bank for 15 years yet it has experienced what it feels is a significant lack of service in the past 12 months. Other members have reported that at very short notice interest rates have been increased and credit facilities reduced.

Trade credit insurance 16. Additionally, in the past four weeks, the CBI has received an increasing number of reports that accessing trade credit insurance has become more diYcult. There are two ways in which SMEs who are unable to insure their debtors are aVected. Firstly, they may be refused credit from their banks, which sometimes require SMEs to have trade credit insurance when the business is dependent on one customer. Secondly, as they are unable to insure their biggest customers, they have to ask for payment up front. This increases the working capital requirements of these customers, who may be unable to increase their own credit lines in response. If they are unable to pay for goods and services in advance, then the SME will lose their custom, on which they depend.

SME Lending Conditions 17. In light of the evidence that SMEs are credit constrained there is a need to assess the extent to which this is a result of the conditions under which banks are operating. On the whole, most of these credit constraints can be explained as a rational response to these operating conditions. But while these can explain the increase in price and the more stringent lending conditions, they do not fully explain the substantial increases in arrangement fees and the deterioration in customer-bank relationships. 18. On the demand side, the economic recession has increased the risk of businesses defaulting. Therefore, even if banks are sustaining their appetite for risk and their credit policies remain the same, more businesses will find it diYcult to achieve the minimum criteria and satisfy credit committees. Additionally, house and commercial property prices have fallen since the start of the year, meaning that less credit will be available for those seeking to secure it against property.33 Banks are also experiencing adverse selection. SMEs not dependent on credit have reduced their demand while those that do, and are therefore more risky, have increased theirs. This results in more credit applications becoming subject to greater and longer scrutiny. 19. On the supply side, banks have experienced reduced ability to raise funds with which to lend to customers and the price of funds which have been raised has increased. 20. In the past decade banks have made a significant shift from depositor funding to wholesale funding. The customer funding gap34 has increased from zero in 2001 to over £700 billion in 2008. The cost of funds in these markets has been historically very low, lowering the overall average cost of funds to the bank and allowing cheaper financing to be passed on to customers. Since mid-2007, the concerns over US sub-prime mortgages and the structured credit products that were based on these mortgages, have led to the eVective closure of the securitisation (and other wholesale) markets with the eVect that there is a greater reliance on retail deposits, which are a generally more expensive source of funds. 21. A major part of banks funding, and therefore a driver of the ability for them to lend more, is inter-bank lending, which has become more expensive. Historically, LIBOR rates have been very close the Bank of England rate, as the risk premia associated with the counterparty default was considered very low. In recent months the risk of counterparty default has increased significantly and so LIBOR spreads over the Bank of England rate have increased.

33 In October both Nationwide and Halifax reported a year-on-year fall in house prices of over 14%. IPD have reported falls in commercial property prices every month since the beginning of 2008. 34 Defined by the Bank Of England in its Financial Stability Report as customer lending less customer funding, where customer refers to all non-bank borrowers and depositors. Processed: 19-03-2009 18:48:03 Page Layout: COENEW [O] PPSysB Job: 417244 Unit: PAG1

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22. Bank lending is also constrained by the conflicting priorities of regulators and the government. Regulators and the government are anxious for the banks to re-build capital strength in order to ensure the stability of the banking system. To increase capital ratios, banks must bolster capital levels and reduce capital requirements. Therefore there is an incentive to reduce the amount of new and existing lending. 23. This objective is to some extent at odds with the simultaneous desire from government for banks to continue to support lending to SMEs. The government needs to ensure that it is clear as to how it prioritises these objectives to satisfy the need for a stable and robust banking system together with limited long term damage to the overall UK and global economy.

Pre-budget Report Announcements 24. The CBI welcomed the access to finance measures announced by the Chancellor as part of the pre-budget report in November. 25. It is diYcult to predict the impact of the new schemes without details of how they will work. However, the proposal for the temporary Small Business Finance Scheme should ease some of the credit constraints on SMEs given that the government intends to take a greater proportion of the lending risk and increase the loan amount on oVer, compared to the Small Firms Loan Guarantee. If the scheme is to have the greatest impact possible, it must be created quickly and delivered in an eVective and non- bureaucratic way. 26. The high demand for RDAs transition loan funds demonstrates that government backed finance is needed by many SMEs. For example, in the North East, 50% of the loan fund was applied for within 24 hours of its launch.

Potential for Action in 2009

Action by banks 27. There are already a number of voluntary initiatives underway to resolve the credit issues faced by SMEs, many of which the CBI is involved in and support. 28. The CBI is keen to facilitate a constructive discussion between SMEs and the banks and therefore we welcomed the government’s creation of the Small Business Finance Forum. At the first meeting the banks committed to fundamentally revising the British Bankers Association’s Statement of Principles, which sets out how banks and businesses work together. The CBI has contributed to the revision of the Principles, which could be a useful tool for providing certainty to SMEs, particularly of their customer service expectations. The CBI believes that the Principles should be a proper partnership agreement between banks and their SME customers. They currently detail what a bank can expect of its SME customer but say very little about what SMEs can expect of their banking provider. In our comments to the BBA on the Principles we called for more consultation with SMEs about their expectation of banks and for the Principles to be much more accessible, to both SMEs and local business bank managers. 29. The banks have also committed to providing more data to the government on the availability, risk and overall cost of lending to SMEs. The only publicly available statistics on small business lending comes from the BBA.35 These statistics show that lending to small businesses continues to grow year on year. Indeed, LloydsTSB have reported that their lending to SMEs has grown by 18% over the past year. This is clearly at odds with the experiences reported by SMEs and our survey data. While helpful, case studies and survey data cannot demonstrate how credit constraints diVer from sector to sector and with diVerent types of credit. The forthcoming data from the banks will play a vital part in assessing credit constraints and developing the appropriate solutions. 30. The CBI also welcomes the recent announcement of RBS, LloydsTSB, and HSBC in relation to their small business lending. These announcements will provide much needed certainty to their small business customers about their banking relationships going forward. 31. The CBI is also taking a lead role in bringing together banks and SMEs. Later in December we will host, jointly with the BBA, a roundtable to discuss current lending conditions.

Action by the government 32. At this stage the CBI would not recommend any regulatory action against the banks, with respect to their small business customers. It is yet to be seen how the voluntary actions taken by the banks and the implementation of the finance announcements made in the pre-budget report will aVect SME lending and banking relationships. 33. In addition, the forthcoming granular data from the individual banks will allow us to pinpoint the precise problems which are causing credit constraints and therefore create a solution to these problems. Any further action taken by the government needs to be based on this evidence.

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34. The government should urgently assess the trade credit insurance market and, in consultation with businesses, take appropriate action. In addition the government should consider further measures to boost the supply of equity finance for SMEs, where this type of finance would be appropriate. December 2008

Memorandum submitted by the Civil Engineering Contractors Association

Executive Summary An October survey of small and medium sized members of CECA found that 46% had seen the cost of their banking arrangements rise as a result of the current economic downturn. 28% of firms had found it more diYcult to secure new bank funding since the start of the economic crisis according to the same survey. According to recent anecdotal reports, firms have not seen any worsening of the situation since the survey, however concerns still remain about treatment of some firms by their banks. Availability of Small Business Finance Scheme should be accelerated, and Business Payment Support Service should be made available to firms who were overdue on payments to HMRC prior to the announcement of the service’s introduction. 1. I write today on behalf of the Civil Engineering Contractors Association (CECA) in order to provide evidence to the Business and Enterprise Committee on financial support for small and medium-sized businesses. 2. The Civil Engineering Contractors Association has for some time been aware that the problems experienced by the UK banking sector were having an impact upon its members. 3. Initially this impact was limited to a decline in workloads associated with sectors closely linked to the availability of finance such as house building and commercial property. Workloads in these areas have collapsed since Q2 2008, putting many small and medium sized businesses under pressure to find new sources of work. 4. However in September 2008 CECA started to receive reports from members that the banking crisis was starting to have more direct impact upon their businesses, with claims that banks were raising costs of banking facilities, or withdrawing them altogether. 5. In order to build up a clear picture of the impact of the downturn upon these SME firms, in late October CECA carried out a survey of its small and medium sized members, asking for details of their experiences on a range of issues including the cost of banking, as well as broader issues such as workloads, payment terms, employment and inflation. 6. The results of this survey showed that 46% of firms surveyed had seen an increase in the costs of their existing banking arrangements since the start of the economic downturn. 7. In the same survey 28% of firms had found it more diYcult to secure new funding from banks since the start of the downturn. 8. The results of the survey were published on 21 November 2008. Since then CECA has maintained contact with a number of its small and medium sized members, contacting a number of them following the announcement of the Business and Enterprise hearing to find out their latest experiences. 9. The general picture among those firms spoken to was that they had not seen a worsening picture in terms of their relationships with their banks, although concerns were raised about what would happen when firms came to renew existing facilities. 10. In a small number of cases where facilities had come up for renewal, firms reported increased fees from banks. In one case a member reported a near trebling in the cost to renew his overdraft facility, with the introduction of a charge for the facility even if it remained unused. 11. CECA welcomes Government proposals to support small and medium sized enterprises through the current diYcult economic conditions, including the introduction of the Small Business Finance Scheme. But with firms that would be likely to benefit from such a scheme often already under pressure, CECA would press for the scheme to be made available as soon as is possible. 12. Finally CECA also welcomes the proposed Business Payment Support Service provided by HM Revenue & Customs for firms worried about being able to meet tax, National Insurance, VAT or other payments. The potential to spread payments over longer periods will provide vital respite to many firms. However we are concerned that the support is only available to firms that became unable to meet payments to HMRC following the announcement of the service. Firms that were already overdue on payment appear not to be eligible, leaving these companies open to strict enforcement action that may put otherwise healthy firms out of business. Processed: 19-03-2009 18:48:03 Page Layout: COENEW [O] PPSysB Job: 417244 Unit: PAG1

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The Civil Engineering Contractors Association represents in excess of 350 UK civil engineering contracting companies. Between them these member companies are estimated to be responsible for between 75 and 805 of all civil engineering workload carried out in Great Britain, constructing and maintaining the country’s vital transport and utilities networks. The civil engineering sector employs more than 110,000 people with an annual output of around £12 billion. December 2008

Memorandum submitted by the Cleaning and Support Services Association The Cleaning and Support Services Association (CSSA) is the UK trade association for the contract cleaning sector. CSSA members account for some 70% of the turnover in that sector and employ around 250,000. In preparation for this submission the CSSA has recently undertaken a survey of its membership. The sample group surveyed for this report consisted of companies ranging in turnover from £100,000 to one of over £100 million, with the large majority consisting of SMEs.

Background The focus of the select committee call for evidence is the financial support needed for SMEs in the current economic crisis. When CSSA members were surveyed about current policy issues, financing costs, while important, were not a key priority. This is because some 80% of the costs of a cleaning contract are variable labour costs and these are therefore covered by payments from clients. However, a number of issues did emerge where Government policy is putting extra burdens on business, right at a time when these burdens are most counterproductive. The CSSA would encourage the Committee to focus on these burdens at the same time as financial issues so as to ensure that the Government does not give with one hand and take away with the other. This issues raised by CSSA members are late and disputed payments, TUPE, National Minimum Wage and Sickness Benefits.

Late and Disputed Payments CSSA members are reporting an increase in late and disputed payments from clients. It seems that increasingly, clients are either unilaterally pushing out payment terms or creating disputes about the quality of service in order to hold back on payments. This created a significant cash flow problem for smaller businesses and pushes then into the hands of their bankers for extensions to working capital, which are becoming prohibitively expensive. The CSSA calls on the Committee to press for a speeding up of payments from all Government and private clients to service companies, to prevent them from needing to access further finance. The CSSA welcomes Lord Mandelson’s commitment to swift payment by central Government, and hopes that this will be extended to local Government and the NHS also.

TUPE CSSA members have also raised the issue of TUPE compliance as a significant extra cost imposed by Government. TUPE is of great importance to cleaning businesses due to the large number of contracts that are transferred every year. TUPE legislation has proved troublesome to CSSA members due to the complexity of laws surrounding it. Members questioned have stated that inconsistencies in legislation have proved problematic to them, and this is something the Government should look at as a matter of urgency. In particular, the judgement in the Redcar/Middlesbrough case on equal opportunities appears to conflict with current TUPE legislation. CSSA members seeking to meet the requirements of this equal opportunities case law may well find themselves falling foul of TUPE and vice versa. The CSSA is very willing to work in conjunction with the Government so that this can be addressed. The CSSA is currently involved with BERR in setting up a working party aimed at publishing a best practice guidance document for cleaning companies on TUPE. The present thinking within the CSSA is that if agreement on guidance can be reached, the CSSA will ensure, to the best of its abilities that all CSSA members abide by it. Processed: 19-03-2009 18:48:03 Page Layout: COENEW [E] PPSysB Job: 417244 Unit: PAG1

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National Minimum Wage A number of CSSA members are concerned about the impact of recent and future rises in the National Minimum Wage. The CSSA will be making an oral submission to the Low Pay Commission on this subject. This is particularly important for those cleaning contractors that are subject to competition from the informal economy. Any commitments the Government can give on tackling illegal working would be welcome, as tackling illegal competition is preferable to worsening conditions for legal workers in response.

Sickness Pay The cleaning industry is characterised by a significant level of staV turnover, which can exceed 100% per year in some businesses. One of the eVects of such high turnover is that where employment rights begin from day one of employment, this can place a significant burden on a small firm. The CSSA has received a number of representations from members where because of long terms staV sickness and the need to recruit extra staV to cover, contracts have become unprofitable. It would be helpful for small cleaning companies if sickness benefits could be delayed until three months after employment starts. This qualifying period would assist in managing out the exploitation of sickness benefits that does occur.

Oral Evidence The CSSA would be delighted to give oral evidence to the committee should the opportunity arise. December 2008

Memorandum submitted by Clydesdale Bank I am grateful to you and your Committee for giving Clydesdale Bank the opportunity to set out our approach to supporting our business customers through the current economic challenges. As you will see from the attached submission, our business banking models diVers from other UK banks. This has enabled us to continue to support and to lend to the vast majority of our existing customers very much as we always have done, despite the many challenges facing the banking sector. As you may know, Clydesdale Bank PLC is part of National Australia Group, one of only a small number of banks worldwide that are currently “AA” rated. Whilst part of a bigger group the UK business is managed by a UK executive team led by me and we hold a single banking licence covering both our Clydesdale and Yorkshire Bank brands. We have approximately 2.6 million customers, of which approximately 200,000 are businesses. We operate 342 retail branches (predominantly in the Midlands, North of England and Scotland), along with 77 “Financial Solutions Centres”, which provide specialist support for our business customers. We provide traditional banking products and services and our approach has won significant customer approval and external recognition. In November 2006 (the last time of its publication) a survey by the Forum of Private Business named Yorkshire Bank “The Best Business Bank” in the UK, with the Clydesdale Bank placed next. In the same month, our call centre in Clydebank, Scotland, was named “Best Call Centre in the World” at the Contact Centre World Awards. Last month, “Your Mortgage” magazine named Clydesdale Bank as “Best Mortgage Lender, Scotland” and Yorkshire Bank as “Best Regional Mortgage Lender”. This recent success is the direct result of our strategy to focus our business model firmly on the needs of our customers and, in particular, to build local relationships with the small and medium-sized businesses that bank with us. Our Financial Solutions Centres are the focal point for the support that we provide to businesses. Each is led by a Managing Partner, who is a senior banker with a personal interest and involvement in supporting the local business community. Almost all credit decisions are made locally because our managers have built a deep understanding of local conditions and individual business circumstances. Similarly, deposits raised locally are reinvested locally. This local approach particularly suits the SME market that we operate in and our typical business loan size averages c £170,000. As we have developed strong and trusted relationships with our business customers, we know the issues that they are facing at the moment, and we believe that we have an obligation to work with them through the current economic challenges. Even though we have always had a disciplined and conservative approach to credit risk, we still approve nine out of 10 business credit applications. This approval rate has not changed over the last year. What has changed however is the number of applications that we receive, these have fallen by approximately a third in the last 12 months as businesses become more cautious in their borrowing. We are committed to continuing to support trading companies wherever possible, particularly SMEs, but we have scaled back lending in some sectors, most notably for property development given the almost complete absence of a market for these activities at present. Processed: 19-03-2009 18:48:03 Page Layout: COENEW [O] PPSysB Job: 417244 Unit: PAG1

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As before, the majority of our business lending continues to be priced against Base Rate, with customers benefiting from any Bank of England reductions. Any change to rates or facilities that we need to make is agreed by negotiation rather than imposition. This is despite the significant increase in the cost of funds that we have faced as a result of higher than normal LIBOR rates and specifically the major dislocation between it and the Base Rate compared to long term trends. We have only been able to do this by reducing our own margins. I hope that you will appreciate from the attached information the eVort that we have made to forge a new approach to business banking with our customers and to diVerentiate ourselves in the market place. We regard the economic challenges that banks and businesses currently face as an opportunity for us to strengthen still further the trusting relationships that we have built with our customers.

SUPPORTING INFORMATION FROM CLYDESDALE BANK PLC

General — We are a traditional bank, managed in the UK and benefit from an Australian parent, one of only 12 AA rated banks in the world. — We continue to grow our UK business in a prudent and responsible manner. — Our growth has been balanced, growing both lending and deposits. This means we have a responsibility to our savers as well as those with borrowings.

Strategy — Our focus since 2004 has been on becoming the bank of choice for SMEs. — Our business model is based on trusted, local relationships with our business customers. — We empower our managers to make local decisions enabling our managers to react to local conditions and individual business circumstances. — Our focus is on businesses with a turnover up to £30 million; reflecting this, our average business loan size is c £170,000. — The basis for our growth has been the value we can add to a business rather than simple price. — Since 2004, we have grown our business lending from £6.3 billion to £15.3 billion.

Business Lending — We continue to grow our business—in the year to September, our business lending increased by 24% while business deposits grew 19%. — This growth has slowed, principally because businesses are being more cautious in their borrowing—the number of new lending applications has fallen by over a third compared to 12 months ago. — We have a disciplined and thorough approach to credit risk. Whilst the number of applications has fallen we are still approving nine out of 10 business applications—the same as 12 months ago.

Pricing — The cost of funds has increased for all banks as the competition for deposits has increased and interbank lending has slowed. — Banks are also being asked to hold greater levels of capital than 12–18months ago which has further increased costs. — We have softened the impact on our customers—our margins have reduced compared to 12 months ago (reduction of 44 basis points). — Nearly 60% of our total business lending is priced against base rate with full base rate cuts passed to our customers, an approach we will continue. — For our small business customers, borrowing less than £250,000, 100% of our borrowing is priced against base rate.

Assisting Businesses — During the current economic climate our focus is on supporting our existing customer base whilst prudently acquiring new customers. — It is not in our interests to have any of our customers in financial distress. Processed: 19-03-2009 18:48:03 Page Layout: COENEW [E] PPSysB Job: 417244 Unit: PAG1

Ev 50 Business and Enterprise Committee: Evidence

— We are committed to supporting our business customers through these diYcult times and helping them to be successful. — Our business model is based on a close relationship between the Bank and our customers. — The Business Partner is the best person to provide early assistance to any customers experiencing diYculties. — If appropriate, they can then call on the services of a range of specialists to assist the business. — We have a strong track record in supporting our customers.

Integrated Financial Services

Clydesdale Bank has developed an integrated Financial Services (iFS) model to manage and deliver its business banking operations.

The majority of business lending is managed through the 77 Financial Solution Centres (FSCs), which are managed in eight regions. 50 are branded Clydesdale Bank (16 in Scotland, 34 in England) while 23 are branded Yorkshire Bank. An additional four are dual branded.

The iFS approach ensures that everything we do revolves around meeting the needs of our members. We oVer a total banking solutions for SME customers that is tailored to their needs and integrated within the bank. But we also oVer more than simply banking—the iFS model prioritises the additional benefit that we can create by helping to connect people and create value partnerships between our customers, partners and suppliers.

Each Financial Solution Centre is managed by a Managing Partner who is accountable for the performance of their Centre and is empowered to take decisions locally. They have all the essential resources that they need available to them, while functions (such as Human Resources) are delivered centrally.

We have placed a great deal of emphasis in creating the right culture throughout our network and believe that we have empowered a team of staV who are passionate and creative but, most of all, are committed to service and business excellence. We have done this by recruiting high performers with the expertise to build relationships and who are good communicators too.

We work to ensure that our processes are streamlined and completely customer-centric and that all of our Financial Solution Centres have a professional “look and feel” with integrated technology that speeds the decision-making process.

LOCATION OF FINANCIAL SOLUTION CENTRES

Rural Scotland Brand Used London Brand Used Ayr Clydesdale Canary Wharf Clydesdale Carlise Clydesdale Chelmsford Clydesdale Dunfermline Clydesdale Basildon Clydesdale Inverness Clydesdale Knightsbridge Clydesdale Stirling Clydesdale Paddington Clydesdale Perth Clydesdale London City Clydesdale Thainstone Clydesdale Richmond Clydesdale Montrose Clydesdale West End Clydesdale Inverurrie Clydesdale North & Central Scotland East Aberdeen Clydesdale Bury St Edmunds Clydesdale Dundee Clydesdale Cambridge Clydesdale East Kilbride Clydesdale Hertford Clydesdale Edinburgh Clydesdale High Wycombe Dual branded Glasgow Clydesdale Ipswich Clydesdale Paisley Clydesdale Milton Keynes Clydesdale Bearsden Clydesdale Norwich Clydesdale Peterborough Dual branded St Albans Clydesdale Watford Clydesdale Processed: 19-03-2009 18:48:03 Page Layout: COENEW [O] PPSysB Job: 417244 Unit: PAG1

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North East Southern Doncaster Yorkshire Basisngstoke Clydesdale Leeds Yorkshire Brighton Clydesdale Newcastle Yorkshire Crawley Clydesdale South Yorkshire Yorkshire Croydon Yorkshire Tees Valley Yorkshire Guildford Clydesdale West Yorkshire Yorkshire Maidstone Clydesdale York Yorkshire Tunbridge Wells Clydesdale East Yorkshire & Lincs Yorkshire Portsmouth Clydesdale Reading Clydesdale Southampton Clydesdale North West & Midlands South West Birmingham Yorkshire Oxford Clydesdale Bolton Yorkshire Bristol Dual branded Blackburn Yorkshire Bath Clydesdale Coventry Yorkshire Taunton Clydesdale Northampton Yorkshire Worcester Clydesdale Leicester Yorkshire Gloucester Clydesdale Liverpool Yorkshire Exeter Dual branded Chester Yorkshire Plymouth Clydesdale Manchester Yorkshire Truro Clydesdale Nottingham Yorkshire CardiV Clydesdale Derby Yorkshire Preston Yorkshire Lancaster Yorkshire StaVord Yorkshire Cheshire Yorkshire

SUMMARY OF THE IFS OPERATING MODEL

1. Value Proposition A full service, oVering a traditional relationship model with decision making close to the customer and helping businesses connect to one another.

2. Customers Targeting high-value and high-potential members from SME business segments.

3. Economics Driving favourable economics through relationship based pricing and a low cost network footprint.

4. Staff and Incentives Sharing profits through an incentive system that promotes “ownership” and aligns high-performance partners and encourages tenure.

5. Business Leadership Attracting local business leaders as Chairmen to provide mentoring and connections.

6. Network Reinforcing the powerful business network to create value for the members and is supplemented by referral partners/brokers. Processed: 19-03-2009 18:48:03 Page Layout: COENEW [E] PPSysB Job: 417244 Unit: PAG1

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Memorandum submitted by England’s Regional Development Agencies

Introduction Across England, RDAs are committed to helping small businesses survive the current economic downturn and come out even stronger. We are working collectively and with national government, business organisations and other partners to ensure a comprehensive response. At the national level, RDA Chairs are members of the Regional Economic Council, chaired by the Chancellor of the Exchequer and the Secretary of State for BERR. The Council was established to ensure that the issues and concerns of businesses in each region are heard and acted upon across Government. In the regions outside London, the RDA Chair and the Regional Minister co-chair a Regional Economic Delivery Council with representatives of businesses and organisations that support them. In London, the Mayor co-chairs the High Level London Group, a group of senior leaders from business, unions, and the public sector established by himself and the Minister for London to focus on key strategic issues aVecting London’s ability to respond eVectively to the current economic diYculties; and to identify specific action to be taken by the public sector to feed into national and regional policy making. These bodies ensure that all concerned have an up-to-date understanding of the issues impacting on businesses in each region and provide a high-level means of ensuring a comprehensive and joined-up response. RDAs provide the councils with monthly economic assessments of the economic performance of their region. In responding to the downturn, RDAs in the regions outside London are supporting national initiatives to support businesses, re-focusing existing regional initiatives and resource allocations to meet the particular needs of businesses in their regions, and where necessary, establishing additional measures to address new market failures. In London, working with partners, the Mayor is implementing an Economic Recovery Action Plan which refocuses all public sector investment towards helping businesses and includes a new LDA package of public sector support and initiatives for businesses. These interventions all fall within the emerging Business Support Simplification portfolio of products, but utilise the flexibility available to respond to particular business needs and priorities where these vary.

Pre-Budget Report The RDAs have been central to Government thinking over recent months, acting as an “ideas factory”, designing innovative suggestions for improvements in the interventions required to assist businesses. We have been creative in our responses, encouraging Government to think outside of the usual rules and regulations. A significant outcome of this enhanced role for RDAs saw, for the first time, the Pre-Budget Report (PBR) contain a specific chapter devoted to the work of the RDAs, entitled “‘Meeting the economic challenges in every region” (Her Majesty’s Treasury, November 2008). RDAs were supportive of the package of access to finance measures launched in the PBR, which included: — Small Business Finance Scheme, enabling up to £1 billion lending to be guaranteed by Government; — a separate £1 billion guarantee facility to support bank lending to small exporters; — a £50 million fund to convert businesses’ debt into equity; and — in the regions outside London, Regional Transition Loan Funds (TLFs). RDAs were involved in the development of these measures and are providing £110 million of their funding towards this package in addition to the wider range of support they are providing to businesses, of which up to £25 million is to be provided through the TLFs.

RDA Response

Enhanced Business Link RDAs are responsible for delivering the Business Link service in their regions and have refocused the Business Link oVer to provide: — Free Business Health Checks, including maximising cashflow, marketing and business planning, debt management, new market and product development; — access to finance advice, credit crunch presentations and finance clinics; — guidance and events on how to survive and thrive in diYcult times, including advice on reducing energy consumption and costs; — access to the RDA funded Resource EYciency Programme; — access to a specialist skills assessment and the Train to Gain service; and — analysis and information on new business opportunities and markets. Processed: 19-03-2009 18:48:03 Page Layout: COENEW [O] PPSysB Job: 417244 Unit: PAG1

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Where necessary, RDAs are either providing additional funding or reallocating existing resources to their Business Link service providers to enable increased access to professional advice and ensuring a comprehensive delivery of the Health Checks. RDAs are mounting a national marketing campaign, supported by tailored regional campaigns, to further promote the support available through Business Link.

Business Loan Funds

Regional Transition Loan Funds

In the regions outside London RDAs are committed to establishing Regional Transition Loan Funds to help viable businesses through short-term liquidity problems. The loans will be directed at businesses with good management and viable business plans that can demonstrate an ability to service the borrowing required or refinance it when commercial markets stabilise. The loans will help where such businesses are unable to obtain suYcient funding from conventional sources and as a result are at risk of failure to achieve growth potential, significant short term contraction or going out of business. RDAs have so far launched two Transition Loan Funds (AWM and SEEDA), worth £4 million and up to £3 million respectively, integrated with their existing financial support schemes and further Funds are in the process of being developed in other regions (eg the East of England Development Agency is launching a Fund in early Spring 2009 and emda is working with AWM to extend their fund into the East Midlands). In London, the LDA is developing an Economic Recovery Investment Fund as part of the Mayor of London’s Economic Recovery Plan which is due to be launched this month.

Increasing Investment in existing or new Funds

In addition to the Transition Loan Funds, RDAs are reviewing and in a number of cases extending existing financial support schemes, for example: — ONE (North East Regional Development Agency) is providing an additional £6.25 million into the North East Investment and Co-Investment Funds to give vital access to finance for growing firms. — Some RDAs (eg NWDA and ONE) are investigating how to secure significant funds (ie in excess of £100 million) from JEREMIE—the Joint European Resources for Micro to Medium Enterprise initiative. The potential scale of this fund will enable the RDAs to continue to deliver existing Investment Funds and also look to create new funding mechanisms that will help support businesses. — Yorkshire Forward has approved an investment of £9.7 million in an interim fund to provide support to the South Yorkshire Investment Fund and Partnership Investment Fund and also for the development of a new single regional Venture Capital and Loan Fund. The investment is expected to support 95 businesses. — SEEDA will be providing £3 million into a Commercialisation Fund to support businesses to bring new products and services to market as part of the £20 million South East Funding Escalator. — emda has provided an additional £1 million of funding for a Resource EYciency Grant Programme based on stimulating investment by business to reduce their energy, waste and water costs.

Grant for Business Investment Scheme

The Grant for Business Investment scheme help businesses expand, create new jobs and safeguard existing posts. RDAs have responded to the needs of business in the current climate by enhancing the availability of the scheme and increasing funding for the scheme.

Community Development Finance Institutions

Community Development Finance Institutions (CDFIs) are a financial tool for social, economic and physical renewal in under-invested communities. They lend and invest in deprived areas and under-served markets that cannot access mainstream finance. RDAs have increased investment in these vehicles, for example, the North West Development Agency is expanding CDFI loans and are working closely with banks on co-financed loans. emda has established a £4.5 million regional CDFI fund. Some CDFIs are also exploring how they might become SFLG accredited. Processed: 19-03-2009 18:48:03 Page Layout: COENEW [E] PPSysB Job: 417244 Unit: PAG1

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Enhanced Business Support Measures RDAs are refocusing and boosting business support to address the impact of the economic downturn. These measures include some of the examples below.

Dedicated Events Some RDAs have held a series of specific events to respond to regional concerns around the economic downturn. emda, for example, has held a series of “Survive and Thrive” events, using private sector experts to run master classes to help business owners to understand how to manage their cashflow more sensitively; negotiate with Banks more eVectively; more eYciently manage their resources; and how to deal with any legal issues that may be caused by restructuring their business.

Manufacturing Advisory Service RDAs are ensuring that businesses continue to benefit from the Manufacturing Advisory Service by extending and strengthening the service. In particular there is a focus on process improvements to improve productivity and cash flow. In July the RDAs produced a national MAS Activity Report that demonstrated that the MAS service, per in depth consultancy project, produced a 17:1 gross return for the public sector. Yorkshire Forward and emda have approved investments of over £7 million respectively to enhance their MAS programmes which will enable a more comprehensive service to regional manufacturers. EEDA has boosted its investment in manufacturing, design and innovation services with an additional £1.7 million of ERDF funding. MAS pilots, trailing diVerent responses to the economic downturn, will be taken forward to oVer MAS at reduced rates in Yorkshire and Humberside and in the West Midlands.

Train to Gain RDAs are working with the Learning and Skills Council to secure increased flexibility for the Train to Gain programme to ensure employees have the skills and business knowledge they need and allow shorter, more relevant training. Yorkshire Forward has enhanced Train to Gain funding by £50 million to provide, for example, 100% funding for any training in cases of notified redundancy and a Job retention subsidy of £1,000 per person up to £500,000 if a new investor takes on otherwise redundant employees. NWDA are putting a £22 million package of support measures together, focussing on Leadership and Management and Mentoring.

Designing Demand SEEDA is adding a new element to the “Designing Demand” programme called “Immerse” which will provide intensive, extended design support to selected larger businesses. EEDA is rolling out a similar scheme, working with the Design Council and their manufacturing and innovation advice services.

Corporate Commitment to Support SMEs RDAs have committed to meeting the government’s target of paying invoices within 10 days. The LDA as part of GLA Group is also committed to paying SMEs within 10 working days.

Liaison with the Regional SME Base RDAs, through their private sector-led Boards, are close to the needs of businesses. RDAs have strong relationships with businesses of all sizes within their regions and with the regional arms of the principle business organisations. Indeed the RDAs organise themselves on a national basis to do this on behalf of the network, with lead RDAs cultivating strategic relationships on behalf of the network with the Confederation of British Industries, the Institute of Directors, the Federation of Small Businesses, the British Chambers of Commerce and with the Engineering Employers Federation. RDAs use these relationships to assess the level of priority that businesses place on an issue to help guide the development of responses and importantly to attain timely feedback on the impact of interventions. December 2008 Processed: 19-03-2009 18:48:03 Page Layout: COENEW [O] PPSysB Job: 417244 Unit: PAG1

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Memorandum submitted by the Finance and Leasing Association The Finance & Leasing Association (FLA) is the main representative body for the motor finance, consumer credit and asset finance industries. In 2007, our members provided £28 billion of new asset finance to the business sector and UK public services, representing almost 30% of all fixed capital investment in the UK. FLA members are likely to provide as much finance to UK businesses in 2008 as they did in 2007. SMEs use a range of diVerent sources of finance, and we believe that the financial support needed by SMEs reflects this range. Companies with 5 or more employees are just as likely to use asset finance (leasing and hire purchase) as term bank loans. Asset finance helps growing businesses with their cash flow, allows businesses to upgrade their equipment regularly, and is relatively low risk for both the customer and the provider. We believe, therefore, that the government should provide financial support to SMEs through asset finance. Such support for asset finance could be achieved in various ways. One, which does not require any cash from the government, is to make SMEs’ tax capital allowances available to asset finance providers, who would pass the benefits to their customers through lower rental payments. At present, capital allowances cannot be used by unprofitable businesses, which are often the very businesses that need the most financial support. We believe that any concerns about tax avoidance can be overcome. Other forms of support would involve extending existing and planned government schemes aimed at supporting the flow of finance to SMEs to cover asset finance as well as bank lending. We welcomed the fact that in the pre-budget report, the Chancellor referred to a new Small Business Finance Scheme, the name of which indicates that it may not be restricted to bank loans. But more needs to be done to ensure that suYcient funds are available to meet the increasing demand for asset finance. We have urged the Government to extend the current liquidity support and credit guarantee schemes to providers of asset finance who are not banks. With the right kind of Government help, the asset finance industry can play a more eVective part in helping SMEs weather the current diYcult economic conditions. 8 December 2008

Memorandum submitted by the Forum of Private Business

What is the FPB? The Forum of Private Business (FPB) was formed in 1977. We are a business support organisation that fights for the fair treatment of smaller businesses by decision-makers and support the profitable growth of our members. The FPB represents 25,000 UK-based businesses, which employ in excess of 600,000 people. We are active in Brussels and are supported by an all-party group of MEPs. The FPB provides a range of business services aimed at increasing member eYciency and profitability.

Business Opinion All of the FPB’s campaigns are based on the views of our members. We talk to our members in various ways, via surveys, by telephone and face-to-face contact. We also collect data electronically, which enables us to source opinions from hundreds of businesses within a matter of hours. The FPB works to bring businesses together with their own elected representatives. Members vote in a quarterly Referendum, adding comments for us to send to their MPs, MEPs, MSPs and AMs. Referendum is a tool that business owners have been using since 1977 to make their voices heard.

Executive Summary The FPB strongly believes that there is room for improvement in the provision and eVectiveness of financial support for small-to-medium enterprises (SMEs). Three issues are having an impact on the quality of financial services available for smaller businesses and ultimately, on the strength of the British economy. First, fewer and fewer lenders have a relationship with their customers that goes beyond the algorithms and balance sheets of the company. Second, personal guarantees on business loans are being required as security when further business assets may prove less risky. Third, the Government and lenders must acknowledge that financial advice must come from those sources trusted and relied upon by smaller businesses. Processed: 19-03-2009 18:48:03 Page Layout: COENEW [E] PPSysB Job: 417244 Unit: PAG1

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The FPB recognises that certain banks are already making commercial lending and support for small businesses a priority. Equally, there are some banks for whom SMEs do not figure as highly. We suggest that small businesses should be able to expect a similar standard of service regardless of where they bank, seek lending or go for financial advice. The quality and accessibility of financial assistance available through the Government, banks and trade bodies must improve as they continue to support small businesses in the challenges of the current economic climate.

Financial Support for Smaller Businesses A great deal has been said about the availability of credit for small business. The FPB acknowledges that banks are businesses and must run as such. However, the financial support available to small businesses is not limited to the lending available. The relationship with banks, securitisation of loans, and the provision of financial information can be just as important to the survival of the business. The key factor which we believe does the most damage to financial support for small businesses is the decline of strong working relationships between the banks and their customers. Decisions about finance and lending need to be made with a more accurate assessment of the business’s risk profile than is readily available from its balance sheet. Now, more than ever, banks should be attempting to understand the models and assumptions behind their small business customers. The second point focuses on the securitisation of loans and the use of personal guarantees for businesses assets. The FPB believes that lenders should not seek personal guarantees from small business owners until all business assets have been reviewed. The banks’ propensity to take personal guarantees does not accurately reflect the potential damage of defaulting on a loan secured in that way. Thirdly, the financial advice taken by small businesses must be targeted and accessible. Businesses should feel comfortable approaching any and all of their standard sources for financial support information. FPB research shows that accountants, bank managers and financial specialists account for the largest percentage of financial advice. Governments and banks should take advantage of the access provided by agents and trade associations to ensure that information on lending and financial options reaches the businesses who need it most. This document lays out the findings of two pieces of research carried out by the FPB in October and November 2008. One is a panel of members polled on a bi-weekly basis to gauge the state of the economic downturn. The second is a piece of joint research with the FPB and Graydon Credit Management which examines where small businesses get their financial advice and the quality of the advice provided.

Are Small Businesses being Impacted by the Recession? In November 2008, the FPB set up an panel of 100 members with the intention of polling those businesses every two weeks to more accurately test the breadth and depth of the economic downturn. The members’ businesses have an overall turnover of £193 million and borrowing of just over £61 million. The median turnover of businesses in the panel is £550,000 indicating that these are established employers. Last year 62% made a profit and 23% made a loss. In the first survey of members, our panel reported that banks are requiring additional security for loans; 37% have obtained borrowing using the security of their own homes, 20% the business premises and 20% the debtor book. This highlights the reliance on personal guarantees by the banks, and the increasing desperation of small business owners who are prepared to shore up their life’s work at the risk of their home. The early indicators from the most recent set of results36 show that the panel feels that the support provided by Government and the banks has deteriorated over the last two weeks by 30 and 48% respectively.37 The panel’s response indicates that the top issues for small businesses currently are “Lack of Orders” and “Business Confidence”, with “Banks’ Volatility/Lack of Financial Support“ coming in third.

ACCESS TO FINANCE

Improved 8% Deteriorated 28% No change 64%

Access to finance has deteriorated, but respondents mentioned that this was not simply rejection of finance but included additional banking fees and arrangement charges as well as their own ability to pay.

36 With 45% of the members reporting. 37 Figures quoted are: Improvement—Deterioration All response Processed: 19-03-2009 18:48:03 Page Layout: COENEW [O] PPSysB Job: 417244 Unit: PAG1

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IMPORTANCE OF LENDING

Loans 5% Overdraft 55% As important as each other 40%

The perception amongst the panel members is that overdraft facilities are more important to their business than term loans as they are looking to retrench their business. This makes the loss of overdraft facilities amongst business so much more harmful, particularly for those businesses which have not utilised an overdraft in the boom of the last 10 years.

TERMS AND CONDITIONS OF LOANS

Improved 14% Deteriorated 29% No change 57%

Few of the terms and conditions of the loans have become more stringient over the last month but the lending rate has not shown a significant change. Arrangement fees have gone up for some businesses, however others have reported drops in the overall amount that they have had to pay.

CHANGE TO AVERAGE LENDING RATE

First questionnaire Second questionnaire Mean lending rate 7.76 !0.02 Base rate figure has not changed in the period between questionnaires (3%).

A similar proportion have seen a tightening of the terms and conditions associated with overdrafts, but there has not been the same level of improvement.

TERMS AND CONDITIONS OF OVERDRAFT

Improved 9% Deteriorated 28% No change 63%

A number of businesses reported that the interest rate on their overdraft is to go up from 2.9% to 4.25% in January which explains why the lending rate has only increased slightly in this survey.

CHANGE TO AVERAGE LENDING RATE

First questionnaire Second questionnaire Mean lending rate 8.02 !0.39

ADDITIONAL SECURITY REQUIRED

Yes 14% No 86%

BANKING FEES

Increased 26% Decreased 2% Stayed the same 72%

As the research indicates, the last two months have shown that lending conditions are tightening as the economy deteriorates. While this will, of course, cause problems for many small businesses, the banks can ameliorate the worst of the damage through better understanding their small business client models and through more business-focused securitisation of lending. Processed: 19-03-2009 18:48:03 Page Layout: COENEW [E] PPSysB Job: 417244 Unit: PAG1

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Where do Small Businesses Turn for Financial Support?

Research Summary In October 2008, Graydon UK and the Forum of Private Business (FPB) polled members about their reliance on financial advice. Responses from 400 small and medium-sized businesses were analysed to determine how often such firms sought advice and how well it met their needs. Quality of advice from bank managers varied considerably. Some respondents were very happy with the advice provided by their bank managers, but there was concern about the high turnover of advisers, the fact that advisers were eVectively the best salespeople in the branch and that some were not even old enough to remember the last recession. Although the majority of respondents stated that they only sought advice on financial matters when they felt that they needed it, anecdotal evidence suggests that, when an organisation is proactive in providing financial advice, it is greatly appreciated by business-owners. One respondent said he wished he had been contacted last year by an adviser from the bank as the support he received recently was so useful. Key gaps in the provision of financial advice were identified by the very smallest employers (those with fewer than five staV) and those who only sought financial advice from banks, rather than a combination of advisers. Businesses reporting the highest levels of satisfaction with financial advice were those who had sought advice on a more frequent basis. Those who rarely received financial advice indicated that the advice they had received had been unsatisfactory.

WHO SMALL AND MEDIUM-SIZED BUSINESSES CONSULT FOR FINANCIAL ADVICE

Accountant/auditor 72%

Bank manager 47%

Financial consultancy/specialist 36%

FPB/professional members' 16% group

Business Link 12%

Internet 10%

Chamber of commerce 4%

No support 4%

Other 5%

0% 10% 20% 30% 40% 50% 60% 70% 80%

72% of owners of small and medium-sized businesses said that would consult their accountants for financial advice, 48% their bank managers and 36% financial specialists. Owners of firms considered to be most endangered by the current financial situation, such as those in retail and construction, were more likely to consult their bank managers for advice, indicating that industries which are perceived as risky are having to check with banks to see if they are credit-worthy. Respondents were not given the option of “would not seek support”; however, 15 business-owners stated that they would not seek financial advice as their finances did not warrant it. Businesses with more than 50 employees were more likely to seek support regularly, whilst those in business for more than 10 years were least likely to look for advice more regularly than just on an annual basis. Processed: 19-03-2009 18:48:03 Page Layout: COENEW [O] PPSysB Job: 417244 Unit: PAG1

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REASONS RESPONDENTS DO NOT CONSULT ACCOUNTANTS OR BANK MANAGERS MORE FREQUENTLY

I do not feel that I need it 60%

Lack of faith in his/her knowledge of my business 18%

I have received poor advice in the past 13%

I am too busy/do not have the time 11%

It is too expensive 9%

It is too far to travel to meet him/her 5%

He/she is never available 3%

Other 23%

0% 10% 20% 30% 40% 50% 60% 70%

Just over one in three respondents claimed not to consult their accountants or bank managers more regularly than once a year. A higher proportion of businesses did not answer this question. Many of these claimed to only receive financial advice when their accounts were being drawn up, suggesting that this was perceived as being regular support for their businesses rather than professional financial advice. Respondents generally felt that they did not need support on financial matters. This was particularly true of business-owners who had survived the last recession, who had a perception that the potential advisers had not. Availability of advice was not directly an issue, but some respondents did mention that the high turnover of advisers meant that advice was not as accessible as it could have been. Time was more of a key issue for construction companies, whose owners were typically on-site during normal oYce hours. It was also cited as an issue for recently established businesses, whose owners had not got into a routine of accessing financial advice. The other reasons cited were that respondents themselves were experts; that they used other experts, such as financial planners; that their banks did not come to them to oVer support; that there was no proof of the quality of advice; and that the advice they received was on an informal basis only. Processed: 19-03-2009 18:48:03 Page Layout: COENEW [E] PPSysB Job: 417244 Unit: PAG1

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MATTERS ON WHICH RESPONDENTS USUALLY SEEK PROFESSIONAL FINANCIAL ADVICE

Business planning 50%

Overdraft facilities 34%

Loan facilities 27%

Credit management 12%

Tax/Regulatory issues* 10%

Asset finance 10%

Lease financing 9%

Investments/business deposits* 5%

Personal finance* 5%

Pension related issues* 4%

Accounts* 3%

Factoring/invoice financing/Debt Collection* 1%

Other 5%

None stated/Unclear 11%

0% 10% 20% 30% 40% 50% 60% * Option not provided, but were frequent answers in the “other” category 50% of respondents sought external professional financial advice for business planning, to ensure that the financial stability was there for their businesses. Financial products, such as overdrafts and commercial loans, were the next most cited reasons for small business owners seeking financial advice. According to a recent Banking Industry Group report, commissioned by the Department for Business, Enterprise and Regulatory Reform, 42% of businesses used an overdraft facility in 2007 and 19% used commercial loans. Based on these levels of usage, there has been an increased interest in terms of loan applications, in particular, over the last year. One in 10 specified compliance with VAT, PAYE and other regulatory issues, even though this was not oVered as an option. This could be construed as being part of business planning, but the need for businesses to cite it separately illustrates the increasing burden of regulation on smaller firms.

RATING OF THE QUALITY OF FINANCIAL ADVICE RECEIVED BY SMALL BUSINESS OWNERS

Do not know, 13% No reply, 1% Very good, 21% Very poor, 2%

Poor, 12%

Good, 52%

73% of owners surveyed felt that the financial advice that they received was good or very good, with just 14% stating that it was poor or very poor. 13% of respondents stated that they did not know about the quality of financial advice as they had not received any recently. Using a scoring system of !2 for very good, !1 for good, "1 for poor and "2 for very poor, it is possible to analyse the satisfaction with financial advice on a variety of criteria. This is shown in the chart below, where the mean score was 0.77. A score of 1 implies that the financial advice was good, whilst 0 means that the advice was neither good nor poor. Processed: 19-03-2009 18:48:03 Page Layout: COENEW [O] PPSysB Job: 417244 Unit: PAG1

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MEAN SCORE FOR THE QUALITY OF FINANCIAL ADVICE

Base 0.77 Manufacturing 0.79 Construction 0.77 Wholesale, retail 0.77 Business services 0.76 Other sectors 0.73 No employees 0.80 1 to 4 employees 0.49 5 to 9 employees 0.80 10 to 49 employees 0.95 Over 50* 0.65 Under 3 years in business* 0.82 3 to 9 years in business 0.82 Over 10 years 0.74 Regularly seek financial advice 1.12 Seek advice more than once a year 0.88 Seek advice rarely 0.05 Combination including Accountant and Bank Manager 0.80 Advice sought from Accountant only 1.04 Advice sought from Bank Manager only 0.24 Advice sought from other advisors 0.82 No advice sought* -0.14

-0.4 -0.2 0.0 0.2 0.4 0.6 0.8 1.0 1.2

There were no significant variances in the perception of quality of financial advice from businesses in diVerent sectors. The smallest businesses surveyed, as well as those with more than 50 employees, were most likely to rate financial advice received as being below the overall average. Owners of established businesses were less likely to score the advice that they received highly, particularly those who had survived the last recession. The more regularly advice was sought, the more highly it was rated. Those who received advice from their accountants only rated the quality of advice higher than those who received advice from bank managers only, or a combination of bank managers and accountants. This indicates that the advice received from bank managers was rated lower than the advice from accountants. Advice from bank managers was rated as relatively poor; however, this may be due to the recent negative media stories or the quality of the products they currently provide. Bank managers were more likely than other professional advisers to approach small and medium-sized business owners to oVer advice. Some businesses praised this proactive approach, but for other business owners this illustrated their orientation towards sales rather than advice. Firms in high risk sectors (businesses under three years old, retail, hotels and restaurants, construction) were also more likely to seek advice more regularly. In a small number of cases, this was due to the conditions of invoice financing or factoring. Processed: 19-03-2009 18:48:03 Page Layout: COENEW [E] PPSysB Job: 417244 Unit: PAG1

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USAGE OF FINANCIAL ADVICE IN LAST 12 MONTHS AND ANTICIPATED USAGE IN NEXT SIX MONTHS

2007/8 4% 29%

2008/9 4% 38%

-10% -5% 0% 5% 10% 15% 20% 25% 30% 35% 40%

SMEs anticipate more financial advice will be required in the next 12 months compared to the last 12 months, indicating that they are expecting market conditions to get worse, if anything. Those who used other advisers such as the FPB or other membership organisations or business link were the most likely to have received additional support in the last 12 months and are most likely to increase the amount of support they receive in the next 12 months.

CURRENT AND PREDICTED FREQUENCY OF USAGE OF FINANCIAL ADVICE

Last 12 months Next 12 months Stayed Expected Expected Expected to Base Increased Decreased the same increase decrease stay same Quarterly or more 19% 36% 1% 63% 51% 4% 45% regularly 2 to 3 times a year 35% 42% 4% 54% 47% 4% 48% Once a year (separate from 16% 23% 3% 74% 31% 2% 68% audit) Only when the accounts 11% 19% 5% 77% 28% 7% 65% are being drawn up Never 7% 0% 12% 88% 4% 8% 88% Do not know/on an 13% 14% 6% 80% 27% 4% 69% infrequent basis Base 392 113 17 262 148 17 227

Small and medium-sized businesses fall into two groups; those who have received support more than two or three times a year and those who receive support less frequently. Businesses in the former category have received more support in the last 12 months than they would usually and this trend is expected to continue over the next year. So that small businesses receive the most accurate and relevant financial support, the Government and banks should ensure that all possible routes are covered in the provision of financial information.

Conclusion

There is clearly a growing need for financial support for small and medium-sized businesses. As these businesses begin to feel the eVects of the recession more clearly, the provision of sound financial advice, as well as the cost and availability of credit, may mean the diVerence between survival and insolvency. 8 December 2008 Processed: 19-03-2009 18:48:03 Page Layout: COENEW [O] PPSysB Job: 417244 Unit: PAG1

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Memorandum submitted by Growthwire

1. Introduction Growthwire is the “oYcial” newswire of the Growth Markets Organisation (GMO), based in Melbourne. GMO has been established to promote awareness of and liquidity for the 80 or so stock exchanges worldwide that specialise in bringing growth companies to IPO. Growthwire is UK domiciled and began its global roll-out in June 2008 with the mission to release the flow of information between companies and investors in order to enhance liquidity. However, most relevant to the evidence presented to this session of the Business and Enterprise Committee, is that Growthwire has also been built to attract, organise, collate and distribute the mass of information generated by the global small-cap/high volume start-up to pre-IPO private equity market, one million capital raisings worldwide at any one time, with a good share of a potential $17.5 trillion in available capital, which we have defined as “entrepreneurial investment”.

2. “Helping” SME’s The focus of this session is on how SME’s can be “helped”. However, we take the view that SME’s, and the entrepreneurs who drive them, have always delivered half of GDP and more than half of all jobs without help from anyone. It is only in the past two decades that things have become progressively more diYcult for them. This was caused, most specifically, by flawed legislation in the 1986 “big bang” Financial Services Act, exacerbated by FSMA2000. Whilst liberating the City and its mainstream markets, with consequences we are now having to deal with, both these Acts eVectively cut oV the vital flow of risk capital from wealthy, seasoned entrepreneurs into wealth creating SME’s. Simultaneously, promoting the received wisdom that bank loans are the only way to fund a business. The first step towards rectifying this situation was achieved with the introduction in March 2005 of “self- certification” Amendments to FSMA2000 (Financial Promotion Orders 2001) which, eVectively, allowed wealthy and successful entrepreneurial investors to remove themselves from the protections oVered to mainstream investors by the Acts. These Amendments are the reason Growthwire is domiciled in the UK.

3. Bank Lending to SME’s The traditional security for lending to SME’s is the family homes of the entrepreneurs that lead them (directors guarantees). It is essential that there is some level of security as, depending on whose figures you believe, between 40% and 60% of start-ups fail, usually in year three as a result of inexperience, under- capitalisation, or both. In our view, which should be verified by the banks, some banks are pulling back on their exposure to the SME lending sector because: (a) The collateral value of property is falling and envisaged to continue falling for the foreseeable future. (b) The inherent risk of lending into the SME stratum is already well established. (c) Good banking practice in the current economic climate dictates an even more cautious approach to this higher than average risk lending sector. (d) Some banks that have received “rescue” re-capitalisation feel a responsibility to taxpayers who have provided funding from the public purse.

4. Guaranteeing Small Business Loans There has been talk of extending the Small Business Government Loan Guarantee Scheme, which was established to assist those with no assets against which loan funding could be secured to start their own businesses. The EU has already made £4 billion of SME loan guarantees available to UK banks and HM Treasury is considering extending this facility with additional funds. In both instances, this is taxpayer’s money being risked in the commercial, high risk lending business and, in the UK’s case, quite possibly funded with loans secured by the government itself. In our view, a process fraught with risk at many levels. Whilst sympathising with the plight that many SME’s now find themselves in if the banks, with all their experience of lending to SME’s, are adopting a super-cautious approach at this time, is it prudent to risk taxpayers money guaranteeing loans that the banks are not prepared to underwrite themselves? Also, what will be the checks and balances to ensure that the banks do not draw down on the guarantees for even lower risk loans? Also, the question that will be asked by many is: Does any chancellor have the authority or mandate to risk taxpayers money in this way? Processed: 19-03-2009 18:48:03 Page Layout: COENEW [E] PPSysB Job: 417244 Unit: PAG1

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5. Alternative Funding Source The White Paper presented with this evidence highlights the “entrepreneurial investment” culture, and we will not repeat here what is already presented in the White Paper itself. However in addition to that, the following data is relevant: (a) Research in June 2008 by the Scorpio Partnership, a specialist strategic advisor to the global wealth management industry, revealed that there is now US$17.4 trillion of private wealth under management worldwide. (b) A report in November 2007 by IFSL (International Financial Services London) said: “The main source of growth in private wealth originates from those involved in building successful businesses… entrepreneurs that have become millionaires”. (c) In October 2007 the British Bankers Association reported that alternative investment is now in the investment mainstream for wealthy individuals. (Growthwire—“alternative investment” includes private equity investment in early-stage companies by wealthy, successful entrepreneurs). (d) Anecdotal data from Australia and the USA, combined with extrapolated data from the Cruickshank Report into Competition in UK Banking in 2000 and more recent research using Companies House and private company shareholder data, indicates that there are some 10m wealthy entrepreneurs who would invest in one million capital-starved growth companies, worldwide, at any one time. In the UK, these figures are c250,000 and c50,000 respectively (the latter is probably higher at this time). Deal values vary between £10,000 and £5 million with a “peak” of around £250,000 which is a funding gap that banks, even in normal circumstances, cannot provide. (e) Research from various sources over two decades is consistent in showing that deals must be easy to identify, have a professional interface to the transactions and protect the investors’ identity until they are prepared to reveal it, all of which Growthwire provides. In the light of all the evidence, we believe that risk is best handled by those who know how to manage and exploit it—the entrepreneurs themselves. It is from within the entrepreneurial investment culture that risk capital for wealth creating enterprises has always been provided. This has only ever been supported or augmented with bank lending and various forms of asset finance. As already explained, this long established culture has been undermined by flawed legislation over the past two decades.

6. The Flaw Explained “Financial Promotion Orders” in the 1986 and 2000 Acts were written by mainstream market advisors and legislators in the interests of mainstream market participants. The “financial promotions” referred to were, eVectively, investor protections incorporated into IPO’s and other mainstream financial documents and products. However, the law of unintended consequences meant that the core document in the entrepreneurial investment culture, the business plan, was also swept up by this legislation and within two or three years following 1986, the free circulation of business plans (information, essential to liquidity) ceased. The legislation meant that in the event of an entrepreneurial investment failing, as many do, the investor would have recourse to whoever had passed the business plan onto him. No-one was prepared to take this risk and so business plans began to gather dust in the oYces of accountants and business consultants from where distribution usually began. The 2005 amendments have set the stage for the return of the entrepreneurial investment culture where risk, and the informed exploitation of risk, is a natural part of the process. This is explained further in the Growthwire White Paper accompanying this evidence.

7. Conclusion and Proposal It is diYcult to be precise, but we believe that in the UK there is some £5 billion of “entrepreneurial investment” funding available to capital-starved SME’s, right now, from wealthy, successful entrepreneurs and corporate venturers. The Growthwire “engine” is now rolling out worldwide as a normal commercial media enterprise. However, were it to be made freely available to the UK SME/entrepreneur community this huge, latent capital resource could be rapidly released into wealth creating SME’s. There would be no need for government to oVer “help” in any cash form other than to provide and promote this facility, “white labelled” perhaps as a DTI or HM Treasury initiative. Entrepreneurial investors themselves will decide, in the light of their own market knowledge and wealth creating experience which deals are of interest to them and suit their own business interests prompting them to invest either with cash, through corporate venturing or a mix of both. Processed: 19-03-2009 18:48:03 Page Layout: COENEW [O] PPSysB Job: 417244 Unit: PAG1

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In eVect, entrepreneurs themselves deciding which enterprises have wealth creating value, rather than banks or civil servants administering a taxpayer funded loan guarantee scheme—in a high risk lending stratum. When deals are completed the banks will need no encouragement to lend, bearing in mind that the borrowers will be properly capitalised and, invariably (and equally valuable), with a seasoned entrepreneur on the Board introducing wealth-creating experience as well as capital to the enterprise. In reality, many deals are conditional on bank participation before capital is released into the company. Indeed, such an initiative could well position the UK to be the first to emerge from the coming recession with a genuine “community” of SME’s, entrepreneurial investors and banks working together towards recovery and onward growth. 8 December 2008

Memorandum submitted by The Institute of Chartered Accountants in England and Wales

Introduction The Institute of Chartered Accountants in England and Wales (ICAEW) is pleased to be able to submit written evidence to the Business and Enterprise Committee as part of its current inquiry into financial support for small and medium size businesses (SMEs). As a public interest body, the ICAEW is committed to working with Government and regulators as well as wider market participants in order to help restore business confidence. The SME sector forms a vital part of the UK economy and its resilience in the current climate will be a key factor in terms of the speed with which the economy begins to recover. Many of the ICAEW’s 132,000 members either advise or run SMEs and this submission draws upon their insight and expertise.

Executive Summary 1. In the current economic climate, banks are understandably more cautious about new lending as well as the renewal of existing finance. They are also under conflicting pressures on whether to improve capital ratios or to increase access to finance for businesses of all sizes. (1.1) 2. Research undertaken by the ICAEW indicates that this is likely to have a material impact on the ability of SMEs to weather the current downturn, in particular as a result of finance becoming more diYcult to secure. ICAEW interviews with businesses and firms across the UK support this research. (2.1) 3. In the context of this limited availability of credit, SMEs can act to improve their position by taking steps to improve their management of working capital. (2.6) 4. For the proportion of SMEs who require a statutory audit, there is an additional challenge of reporting “going concern” uncertainties. Market conditions in 2009 are likely to result in a higher proportion of company disclosures, together with an increase in the number of modified audit reports, as compared to previous years. (3.3) 5. The ICAEW believes that there are practical steps that can be taken by Government, regulators and the profession to help mitigate the risk of damaging misinterpretations of company disclosures and modified audit opinions by investors, credit reference agencies and finance providers. (3.8) 6. While the recent Pre-Budget Report (PBR) contained some welcome measures for SMEs, the ICAEW has concerns regarding the eVectiveness of both the headline VAT rate change and the Government’s access to finance package as measures designed to help improve the credit environment for SMEs as well as the wider economy. (4.1, 5.1) 7. The Government’s Lending Panel, also announced in the PBR, needs better sources of independent data if it is to fulfill its monitoring role eVectively. (6.1) 8. The ICAEW is committed to working with Government, business bodies, banking institutions and the SME sector in order to help publicise information and good practice designed to improve financial management during the current downturn. (6.2)

1. Challenges facing the Banking Sector 1.1 Given the current economic climate, banks and wider financial institutions are understandably more cautious about new lending as well as the renewal of existing finance. Lending to businesses becomes more risky as a result of poor trading conditions and falling assets prices. Consumer lending becomes more risky as job insecurity increases. Processed: 19-03-2009 18:48:03 Page Layout: COENEW [E] PPSysB Job: 417244 Unit: PAG1

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1.2 The banking industry is also facing conflicting challenges. The political community wants to see increased lending to small businesses. Regulators have encouraged banks to improve their capital ratios. Both are legitimate demands. 1.3 If banks increase their lending levels this raises the risks they accept, capital requirements rise and capital ratios weaken—which is why lenders are likely to be increasingly unwilling or unable to make new loans to SMEs or guarantee that existing financing arrangements will be renewed. 1.4 While the recent Government re-capitalisation of banks has helped to stabilise the financial positions of a number of major institutions, it is not yet clear whether these interventions will be suYcient to significantly stimulate bank lending.

2. Challenges facing SMEs 2.1 The ICAEW Quarterly Business Confidence Monitor suggests that, in the increasingly challenging business environment, access to finance is becoming more diYcult and careful cash flow management is essential for all sizes of entity. 2.2 The 2008 Q4 UK Business Confidence Monitor shows that three in every 10 firms (30%) report that access to capital has become a greater challenge to their performance over the last 12 months—up from 12% last year. This trend is apparent across all sizes of business. Firms are also increasingly likely to report that bank charges have become more of a challenge to business performance—up to 20% this quarter from 13% in Q3.

IMPACT ON ORGANISATION’S PERFORMANCE—CHANGE VERSUS 12 MONTHS AGO

% Greater challenge Q4 2007 Q1 2008 Q2 2008 Q3 2008 Q4 2008 Your access to capital 12% 16% 20% 23% 30% Bank charges 14% 12% 13% 13% 20% Late payment from customers 19% 18% 18% 22% 28%

2.3 As the economic slowdown takes hold and access to credit remains constrained, late payment from customers is emerging as another major challenge for business—28% of firms identify this as a greater challenge than a year ago (up from 22% in Q3). Further information about the ICAEW Business Confidence Monitor is contained in Appendix Two. 2.4 Qualitative research undertaken by the ICAEW in October and November also suggests that businesses are facing significant diYculties with regard to late payment of commercial debts as well as withdrawn or reduced credit insurance facilities. In addition, businesses complain of increased arrangement fees for finance facilities and increased interest changes as finance providers widen margins as part of the re- pricing of risk. Further qualitative analysis is contained in Appendix One. 2.5 What is clear is that banks are becoming more cautious about lending and are taking a much firmer line with companies than in recent years. They face a particular diYculty in lending to the SME sector due to its diversity and its size and as a result tend to classify customers according to their size and assessed credit risk. For many SMEs, bank lending decisions are based on credit analysis supported by an automatic decision support system (ie using a score card), supplemented by a final decision by a relationship manager. There is generally no fixed review process to assess the credit risk of smaller business while SME are often unable to build a continuous relationship with bank staV. 2.6 In this context smaller entities can act to improve their position, in particular, by adopting improved practices for managing working capital.38 Further, where possible, SMEs should take steps to reduce their risk profile, for example by improving the quality, quantity and transparency of information they provide to lending institutions. SME companies are required to provide financial reports whether they are audited or not. Other SMEs will use financial reporting information for specific ends such as engagement with HMRC or for investment purposes. 2.7 An SME’s management of its working capital will form part of a bank’s lending decision. Banks will want to see cash flow forecasts, as well as historical accounts to be able to verify that a company has suYcient cash flow to service a debt going forward. Anecdotal evidence suggests that SMEs, especially unincorporated sole traders, often have diYculty managing their cash flow properly. Such entities need to be extra diligent about sound financial management in the current climate. In particular, they should focus on managing working capital, which includes: proper cash flow forecasting, taking into account the impact of unforeseen events, market cycles, loss of customers, early request for payment by creditors and late payment of debtors.

38 Working capital management refers to the management of current or short-term assets and short-term liabilities. Components of short-term assets include inventories, loans and advances, debtors, investments and cash and bank balances. Short-term liabilities include creditors, trade advances, borrowings and provisions. The major emphasis is, however, on short- term assets, since short-term liabilities arise in the context of short-term assets. Processed: 19-03-2009 18:48:03 Page Layout: COENEW [O] PPSysB Job: 417244 Unit: PAG1

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2.8 There are a number of other common practices which need to be reviewed in the current context: — SMEs can often improve their basic credit management—how they chase up their debts, the speed at which they invoice for goods or services, and the payment monitoring arrangements they have in place to check invoices on a regular basis. — Some SMEs could improve reporting of financial performance coupled with better forecasting systems of future trading and cash flow. — Many SMEs are inappropriately financed, placing too much reliance on term loans and overdraft, to the exclusion of factoring and invoice discounting, leasing and hire purchase. — Some businesses concentrate on trying to achieve good seasonal or quarterly results. Concentration on performance in this way can lead to lack of attention to working capital performance. — Many SMEs fail to prepare or put in place financial contingency plans to help tide them over unexpected events. — It is crucial that SMEs work to maintain good credit ratings and a credit file that demonstrates to others that they have successfully managed credit previously. Having a good credit rating helps to reduce the cost of borrowing and makes it easier for an SME to access funds. — Good communication with customers and suppliers is essential in avoiding disputes. Collaboration and understanding of respective positions can go a long way in helping to manage working capital. 2.9 In 2006 the ICAEW set up the SME Funding Adviser Scheme under the chairmanship of Sir Michael Snyder, Partner at Kingston Smith and former Chairman of the City of London Policy and Resources Committee, and with the active involvement of BERR and HM Treasury. The objective of the scheme is to ensure that businesses receive independent advice on the most appropriate form of business finance out of the range of available options and to assist businesses to meet finance provider requirements for financial reports and forecasts (profit, cashflow and balance sheets etc). 2.10 For the larger end of the SME sector, the Corporate Finance Faculty of the ICAEW has established a“Fundraising on AIM” forum—a free platform for businesses to attend aimed at fast growing, young companies considering flotation as well as those looking for further funding. 2.11 The Faculty’s “Funding for SMEs” forum provides information on all aspects of the “funding ladder”: bank finance, government schemes, angel/venture capital and flotation. The Faculty also publishes good-practice guidelines and is currently working with DBERR to produce comprehensive guidance on government funding schemes (debt and equity).

3. Challenges for audited SMEs 3.1 All publicly listed companies and companies that exceed a threshold of staV numbers, turnover, or assets are required to be audited. In addition, banks or lending institutions may require businesses to be subject to an audit as a term of a loan agreement. According to Companies House, 143,600 companies in total submitted full audited accounts during the 12 months to 31 March 2008. 3.2 Although publicly listed companies are generally large businesses, a proportion of companies that exceed the audit threshold and a significant number of audit-exempt companies that opted for an audit to fulfil the terms of loan agreements will be SMEs in terms of the general definition of staV numbers (under 250). Listed SMEs are significant engines of economic growth while SMEs that are audited for other reasons are likely to be ambitious, high-growth businesses. 3.3 Given the current economic environment, the ICAEW anticipates that a higher proportion of 2008 year end annual reports, compared to previous years, are likely to contain disclosures relating to “going concern”—ie the company’s ability to continue in business for the foreseeable future. Similarly, the auditors will need to refer to the directors’ disclosure of this uncertainty in the audit opinion. 3.4 The ICAEW welcomes the guidance for directors recently issued by the Financial Reporting Council (FRC) regarding going concern and liquidity risk disclosures in the current diYcult economic climate. The guidance emphasised that many companies will be faced with increased uncertainties and that these need to be disclosed in an open and transparent fashion. The forthcoming Accounting Practice Board (APB) bulletin on emphasis of matter will also provide guidance for auditors when they consider these issues. The ICAEW has encouraged the APB to publish guidance as a matter of urgency, prior to the end of the year so that auditors are able to plan their audit work accordingly. 3.5 The ICAEW believes that, in many cases, potentially damaging investor reactions to these disclosures and modified audit opinions may be caused by misinterpretations of the information—and as such may be avoidable given suYcient market understanding and awareness. 3.6 In particular, investors and other users of financial statements need to be aware that, even in those cases where the directors have concluded that there are going concern material uncertainties, it does not mean that the company concerned will cease to continue. Going concern uncertainty is less important in many ways than the nature of the uncertainties and the proposed management response. Processed: 19-03-2009 18:48:03 Page Layout: COENEW [E] PPSysB Job: 417244 Unit: PAG1

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3.7 Further, if auditors conclude that a material uncertainty remains which may cast significant doubt on the company’s ability to continue as a going concern and this uncertainty has been adequately disclosed in the financial statements, the auditor will modify the audit opinion by including an “emphasis of matter” explanatory paragraph highlighting those disclosures. Such a paragraph does not aVect the auditor’s opinion, which is modified but “clean” or unqualified. This distinction is very important. 3.8 Faced with the challenge of going concern the ICAEW recommends that the Government, regulators, the accountancy profession and banking industry work together to help ensure that: — banks and lending institutions make every eVort to raise awareness about the diVerence between modified and qualified audit opinions; — directors and auditors follow the APB guidance; — where modifications occur, investors and other businesses respond in a measured and advised manner; and — media reporting of emphasis of matter paragraphs should avoid using misleading or emotive language that gives the impression that a qualified audit opinion has been issued. 3.9 The ICAEW encourages wide public dialogue and parliamentary scrutiny of the going concern uncertainty issue in order to advise and educate the wider market. A full briefing on the going concern issue is included in Appendix Three.

4. Assessing the impact of pre-budget report on small business finance 4.1 While there were a number of welcome measures for small business in the PBR the ICAEW has concerns regarding the likely eVectiveness of both the headline VAT rate change and the Government’s access to finance package in substantially improving the credit environment for SMEs. 4.2 In regards to the temporary reduction in the VAT rate from 17.5% to 15%, the ICAEW is concerned that: — at a macroeconomic level, the temporary reduction will have only a minor impact on consumer purchasing behaviour, particularly for low income consumers; — for many businesses the administrative burdens and costs of pricing transition will outweigh any likely benefits; and — for those businesses that hold prices and thereby benefit from the VAT reduction, the eVects of that advantage will be small compared to other cash flow diYculties—for instance as caused by falling demand or higher import prices due to the falling pound. 4.3 The ICAEW supports the Government’s eVorts to improve access to finance for SMEs announced in the Pre-Budget Report. However, given the relatively limited scale of intervention and the significant amount of time that it will take to set up and market new finance facilities, the ICAEW questions the overall impact on business confidence that the proposed measures will provide. 4.4 In the Pre-Budget Report, the Government announced: — The creation of a Small Business Finance temporary guarantee scheme to enable up to £1 billion of new Government supported lending by banks. — An Export Credits Guarantee Department’s temporary scheme to support a £1 billion facility to provide smaller exporters with better access to short term working capital. — An RDA Loan Fund totalling £25 million, modelled on the Advantage West Midlands transition loan fund to help businesses over the next six months. — A capital fund of £50 million providing equity or quasi-equity to SMEs who are overleveraged. 4.5 In the overall context of bank lending of £54 billion to SMEs, according to the British Bankers’ Association figures of 30 September 2008, the packages announced oVer only limited assistance to the financing diYculties faced by SMEs. The ICAEW awaits details about how all of the above measures will work, ie when they will be available and how businesses will access them. 4.6 Within the overall small-scale equity market the proposed capital fund scheme does not represent a significant intervention. The ICAEW would also draw attention to the lack of previous experience for RDAs (apart from Advantage West Midlands) of RDA Loan Fund schemes to assist businesses in diYculties. Consequently we are concerned about the amount of time it will take to set up the appropriate structure to administer and market the scheme. 4.7 The Government also highlighted an EU announcement that the European Investment Bank (EIB) will make a £1 billion fund available to SMEs in the UK by the end of 2008. There are only three banks utilising the existing EIB funding—Barclays, Alliance & Leicester and Close Brothers. Their use of the current facility is on a significantly lower scale than that now proposed. Some banks, who are not part of the current scheme, have expressed interest in negotiating a facility with EIB, however these negotiations will take time. Even when these facilities are in place it will take time for the new banks to train staV, market the scheme and start receiving applications. Processed: 19-03-2009 18:48:03 Page Layout: COENEW [O] PPSysB Job: 417244 Unit: PAG1

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5. Wider pre-budget report measures designed to help business 5.1 The ICAEW welcomes the Government’s announcement to introduce flexible payment arrangements which will help taxpayers struggling to pay tax bills. This approach will build upon HMRC’s approach to tax debt problems experienced by farmers during the Foot & Mouth crisis. We believe that this system worked well in ensuring the financial survival of many farmers who otherwise may have faced ruin. 5.2 The ICAEW also welcomes the proposal to extend loss relief carryback from one year to three years. This should help businesses oVset current losses against earlier profitable years and thereby receive a tax refund. This announcement reflects a similar measure introduced in 1991 at the time of an earlier economic downturn. The three year carryback was maintained until 1997 when the carryback period reverted to one year.

6. The lending panel and wider cooperation 6.1 The Lending Panel, announced in the PBR, to improve monitoring of lending to households and businesses should include representations from SMEs, company directors, auditors and lending institutions. The ICAEW recommends that the Lending Panel obtains better data if it is to fulfill its role of monitoring lending to business. Current information consists of high-level aggregate data from the Bank of England and the British Bankers’ Association. Independent, statistically robust data is required to inform its monitoring of lending, particularly to the SME sector. 6.2 The ICAEW is keen to work with the government, business bodies and banking institutions in order to provide information to the SME community to raise awareness of the importance of sound financial management in the current climate. In particular, this information should focus on managing working capital, which includes: proper cash flow forecasting, taking into account the impact of unforeseen events, market cycles, loss of customers, early request for payment by creditors, late payment of debtors.

APPENDIX ONE

THE IMPACT OF THE CREDIT CRUNCH ON UK BUSINESSES

Introduction In October and November 2008 ICAEW Regional Directors visited chartered accountants in business and practice across the country. Issues relating to the economy were also discussed at length during meetings of 10 Regional Strategy Boards across England and Wales. This report assembles grass-roots evidence from finance professionals dealing with the many ramifications of the recession. This can be summarised by a comment from a member in the East of England: “The situation appears to have deteriorated significantly in the last 6-8 weeks. In September there was a feeling that only certain sectors, such as property and banking were being aVected. Now there is significant lack of confidence spilling into most sectors and businesses are looking to cut their costs”.

The Availability of Finance The banks are unwilling extend credit and they are exercising their right to call in overdrafts. More damaging, for individuals, is that they are also calling in personal guarantees—West Midlands. In the case of a company supplying home-ware, the bank reduced the overdraft by one-third and refused to re-assign a personal guarantee on the departure from the board of the guarantor. As a direct result, the company called in receivers. The personal guarantee is being exercised and the business is unlikely to be sold as a going concern—West Midlands. The re-valuation of assets is having a serious impact. The view among SMEs is that banks should take a longer view of their viability by accepting that property prices will stay low for some time. A lower property valuation should not be a reason to withdraw support if there is no pressing need to realise the value of the assets—West Midlands. Banks are still reasonably loyal to long-established customers. However, they are widely thought to be using the pretext of the financial crisis to shed their riskiest debts—West Midlands. Banks are refusing to fund the cash-flow needs of SMEs. Owner managers are putting their own money back into their companies. But there is a limit to how much they can aVord and how long they will be willing and able to do so—West Midlands. A manufacturing company which employs 110 people has been asked by a leading bank to pay oV its £75,000 overdraft. It is likely the company will close as a result—West Midlands. A leading bank wants to renegotiate the existing loan to a charity with a very strong asset base from base !1.5% to Libor !3.5% and charge four times the normal arrangement fee—West Midlands. Processed: 19-03-2009 18:48:03 Page Layout: COENEW [E] PPSysB Job: 417244 Unit: PAG1

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A solicitors’ practice found a leading high-street bank withdrawing its overdraft and oVering no further advances—West Midlands. A leading high-street bank pulled an overdraft for a small business when its overdraft was temporarily at zero. In this case, staV agreed to work unpaid for one month before the business received money due from a major customer—West Midlands. Banks are raising their interest rates, fees and charges. Because of the downturn, predicting sales, profits and cash flows has become more uncertain. There is therefore greater risk, and this is making the banks more cautious—Wales. Many businesses are turning to Finance Wales who are reported to be very busy (Finance Wales is a small investment bank, set up with European funding, and managed by the Welsh Assembly). There is a feeling that Finance Wales will be more understanding of the diYcult economic position; their interest rates are higher than banks, but they will lend unsecured, which banks will not—Wales. Corporate finance activity has practically ceased. This is regarded as the consequence of the banks’ refusal to lend. “Corporate finance has died. There’s no money out there”—East Midlands. Certain corporate finance deals are still happening, such as the sale and purchase of large corporates’ non- core businesses, at the £25 million to £50 million level. However, good deals are failing to happen because they cannot be financed—East Midlands. The relationship between the small business and its bank is very diYcult at the moment because the local corporate banker appears to have no authority and is micro-managed by his/her head oYce—East Midlands. The banks are pretty loyal to existing customers but are largely shut to new business—East Midlands. Personal guarantees are often required where they were not expected and the amount of security demanded is higher than anticipated. “At the moment things are hard if you are borrowing”—East Midlands. When Advantage West Midlands announced a £4 million turnaround fund for SMEs in financial diYculty, the agency received 100 enquiries in two and a half days—West Midlands. There have been no first-hand reports of businesses being refused renewal of an existing overdraft or loan but plenty of examples of their being refused relatively small increases in borrowings, often to cover short term cash requirements—East Midlands. Smaller firms trying to raise money were experiencing diYculty and it was reported that any firm needing to renegotiate finances over the next 12 months “would be in for a big shock”—South East. “Banks are closed for business at the moment”. They are being accused of levying exorbitant fees. A general comment was that the banks really need to do something now to break the deadlock—South East. Smaller firms are experiencing diYculty raising funds. There is concern about activities of banks. It is diYcult for SME clients to find funding despite bank claims that they are lending. Also, banks are consistently changing local personnel making it diYcult to establish working relationships—South West. A medium-sized construction company successfully re-negotiated its credit facilities with its bank. But there was a considerable delay between the date of the meeting and the final decision which left the business teetering on the edge of a financial black hole—West Midlands. There is no evidence yet that the Credit Crunch is beginning to ease. The liquidity that the Government has pumped into the banking sector is not yet flowing through into easier terms or access to working capital—Yorkshire & Humber. There have been frequent reports of clients being moved from overdrafts to term loans and/or invoice finance even if facilities are not due for review—especially those clients who are going to their bank to request an extension of an existing line; this may well result in a complete renegotiation of all banking facilities, and an unwelcome increase in rates charged—Yorkshire & Humber. Trade credit is drying up: nervous creditors are analysing accounts and cutting credit limits; equally, the availability of leasing or factoring finance is not easy—Yorkshire & Humber. That said, almost all lenders say that they are open for business, and we were given examples of two corporate finance deals that have completed safely, with no more than a 0.5% increase in the rates being oVered—Yorkshire & Humber. Interest rates charged by banks still high, bad debts are increasing. The costs of defaults will be three to four times pre credit crunch levels. There will be insolvencies among large businesses. Consumer confidence is underpinned by house price inflation—London. Smaller firms report that there is still CF activity, but fewer deals are happening. More work around the renewal of finance, where banks are variously reported as being far too risk averse and charging higher interest than previously—4%–5% over base is the norm where it was 2%–3% over base. To add further fuel, renewal fees are also being increased significantly by banks—Northern region. Processed: 19-03-2009 18:48:03 Page Layout: COENEW [O] PPSysB Job: 417244 Unit: PAG1

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Small businesses with bank overdraft facilities coming up for renewal are finding rates increased from 2% above base rate to 4.5% above base rate as a minimum. This applies to all sectors and is soon expected to have an impact on small business profitability—East Midlands. Interest rates are far more geared to risk than they used to be and “risky” customers will be charged significantly more than 4.5% above base rate—East Midlands. Banks’ fees for arranging overdraft and loan facilities have increased enormously. One interviewee reported increases of “thousands”. Another reported the most extreme case he had ever heard of—an arrangement fee of £1,500 last year had grown to £30,000 in the summer of 2008 on a facility of £3 million— East Midlands. At the larger end of the market, one example given was an arrangement fee in negotiation of £2-3million on a facility of £50million, which must be renewed in six months time when another fee may very well be charged—East Midlands. Businesses have examples of overdraft and loan facilities being increased between 2% and 4% upon renewal and arrangement fees vary from £1,000 for relatively small amounts to 5% for amounts over £100,000—North West.

Knock-on Effect on SMEs

Cash-flow Stable businesses finding issues paying VAT bills, and diYculties finding funding from banks. This combined with increasingly late payment, likely to cause business failures—South West. Cash-flow has slowed as everyone is delaying paying bills—South East. Bad debts, and the time to taken to pay and be paid for goods and services have all increased. Respondents felt that on balance the delays were, as yet, more a result of prudence and caution than an inability to pay— but this situation may well change. Several accountancy practices are working closely with clients facing challenges –in many of these cases there will be one or more recent invoices still unpaid; there is a looming choice between increasing exposure from continuing to act in the hope of nursing the client through, or seeking to reduce exposure but making it more likely that the client will fail as a result—Yorkshire & Humber. Chartered Accountancy firms report that clients are concerned about cash flow or already experiencing cash flow diYculties. One partner with a portfolio of medium and large businesses reported that approximately 20% of his clients were currently breaching their bank facilities or struggling with their cash position. Their only option is to trim their costs and their workforce—East Midlands. Late payment is becoming more of a problem. Businesses desperate for sales are reluctant to turn down orders and are having to chase debts more assiduously—East Midlands.

HMRC Many practices found HMRC were not exactly sympathetic! Some small businesses are struggling to pay VAT bills but HMRC using discretionary powers to penalise. This is putting small firms out of business unnecessarily. Given some leeway these businesses are viable—South West. The more punitive powers of HMRC towards businesses already experiencing cash flow diYculties, is reported to have resulted in business failures. There are two specifics: The first relates to late payment of VAT which, after three consecutive late payments, results in massive surcharges on the business; the second concerns HMRC’s powers to withdraw the Construction Industry Scheme as a consequence of the employers’ late payment of PAYE, causing severe and sometimes fatal damage to a business’ cash flow— East Midlands.

Credit Insurance Credit insurance has been highlighted in relation to the US car-manufacturing giants but it is becoming a serious problem for SMEs, who insure their credit risks for peace of mind and sometimes because it is a condition of invoice discounting—West Midlands. “If insurers withdraw credit on a whole industry or whole territory basis, rather than after a proper assessment of the individual companies concerned, the wheels of commerce will slow down even faster and the feared recession will become even more a self-fulfilling prophecy”—West Midlands. Processed: 19-03-2009 18:48:03 Page Layout: COENEW [E] PPSysB Job: 417244 Unit: PAG1

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Prospects for 2009

No-one believes that this will be a short recession. The underlying causes and the lack of real solutions means that the recovery will be retail led, and it will take some time to restore consumer confidence. Most companies are looking at the first quarter of 2010 before any real signs of recovery and a few, mainly in the corporate events and hospitality sector are predicting a gloomy 2012—North West. Business Links report that the number of New Start businesses has not dropped in the last two months but there has been a 70% drop in the number of enquiries. This is expected to lead to a sharp downfall in new Starts in early 2009—North West. At the moment very few businesses show signs that they might not pull through a recession though weak businesses are struggling, including early start-ups and/or undercapitalised businesses—South East. There is evidence to support the fact that Liverpool has bucked the trend to some degree but this is due largely to 2008 being the year of European Capital of Culture. Many believe that the city will have a harder time than other areas of the North West in 2009–10 as the reality of the recession hits home—North West. Many companies are deciding not to replace staV who are leaving and will rely on “natural wastage” as far as possible. However, many believe that redundancies will be inevitable as the recession settles in during 2009—North West. It is believed that the majority of job losses in the financial sector in Manchester and the wider North West related directly to the recession will probably occur post Christmas period whilst those associated with the re-structuring process will be seen throughout 2009 and even into early 2010—North West. Some companies feel that the pipeline of business is running out and are concerned about what might happen in three to six months. However, for some clients in the South East business is still booming. Practices are not seeing businesses adopting large scale redundancy programmes but the first enquiries on how to manage such programmes are trickling in—South East. While members are aware of many businesses attempting to reduce their employee numbers, large-scale job losses are still rare; it is more usual at the moment to look for early retirements, or to seek not to replace a person who leaves—Yorkshire & Humber. The current situation will not change at least until Q2 2009; it is not known when everything is going to be stabilised, confidence is knocking everybody—London. Insolvency practitioners say demand for their services is still only “steady” rather than overwhelming. However, they believe this is because many personal and corporate insolvencies are being postponed until after Christmas, either on the grounds that the festive season might just provide a financial lifeline or, in the case of individuals, that they may as well eat, drink and be merry while they can—West Midlands. Start up enquiries are increasing. The RDA announced a £10 million package of measures recently, including assistance for start up businesses. There is no sense from members that these enquiries include an increased proportion of distress start-ups—Northern Region.

APPENDIX TWO

THE ICAEW BUSINESS CONFIDENCE MONITOR The ICAEW has been conducting the UK Business Confidence Monitor since June 2003. The BCM provides a snapshot of the state of the economy informed by our members; chartered accountants who advise and run businesses of all sizes across every economic sector in the UK. It is one of the largest and most comprehensive quarterly reviews of UK business confidence—c1,000 interviews each quarter among senior business professionals across all UK regions, commercial sectors and sizes of businesses. Reports and other materials are distributed to a wide range of national and regional public policy stakeholders, reaching the highest levels of government and parliament, including the Bank of England. The BCM provides a robust tool on which government and regional authorities can base decisions for developing both business and economic policy.

APPENDIX THREE

ICAEW GOING CONCERN POLICY BRIEFING, 4 DECEMBER 2008

Going concern

ICAEW calls for greater understanding of the going concern uncertainty expected in 2008 audited financial statements. Processed: 19-03-2009 18:48:03 Page Layout: COENEW [O] PPSysB Job: 417244 Unit: PAG1

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1. The “going concern” basis “That the business entity is viewed as continuing in business for the foreseeable future with neither the intention nor the necessity of liquidation, ceasing trading or seeking protection from creditors pursuant to laws or regulations”.39 Financial reporting is at the heart of modern markets and the going concern basis is a fundamental concept in financial reporting. Normally, assets and liabilities are reported on a going concern basis—ie that the company will continue for the foreseeable future. Company directors must prepare financial statements on a going concern basis unless they intend to liquidate the business or to cease trading, or have no realistic alternative but to do so. In deciding whether the going concern basis is appropriate, directors examine existing budgets and forecasts, assess borrowing requirements, and review other information as needed. Directors are required to take into account all available information about the future which is at least, but not limited to, one year from the date of approval of the financial statements. This is an exceptionally diYcult task in the current market climate. The auditor evaluates the directors’ assessment and considers whether there are events or conditions which may cast significant doubt on the company’s ability to continue as a going concern. As a result, the auditor may seek further audit evidence. If, after obtaining further audit evidence, a material uncertainty remains which may cast significant doubt on the company’s ability to continue as a going concern and this uncertainty has been adequately disclosed in the financial statements, the auditor will modify the audit opinion by including an “emphasis of matter” explanatory paragraph highlighting those disclosures. Such a paragraph does not aVect the auditor’s opinion, which is modified but “clean” or unqualified. Alternatively, where disclosures are deemed not to be adequate, the auditor will issue a qualified opinion and provide the required additional disclosures.

2. What is the issue? Given the current economic environment, the ICAEW anticipates that a significantly higher proportion of 2008 year end annual reports are likely to contain disclosures relating to going concern and liquidity, together with an increase in the number of modified audit reports, as compared to previous years. The nature of the market reaction, and the full market implications of a rise in these disclosures and modified audit opinions, will be heavily aVected by the levels of understanding and awareness regarding the cause of this likely rise. If investors and others do not respond proportionately to emphasis of matter paragraphs explaining going concern uncertainty, and do not take into account the current exceptional economic circumstances, the issue has the potential to undermine wider business confidence.

3. Why are modified audits expected to rise? The economic environment is currently challenging, with low levels of business and consumer confidence. The ICAEW 2008 Q4 Business Confidence Monitor found that UK business confidence had fallen for a sixth consecutive quarter to reach the lowest level since the monitor began. Commercial and domestic property value, which underpins a large proportion of credit facilities, has been falling. In addition, adverse trading conditions have negatively impacted on profitability and cashflow. These factors all reduce the likelihood that lending institutions, already inclined to be more risk averse, will renew existing credit lines. This may well result in directors concluding that there is a need to disclose that a material uncertainty exists that leads to significant doubt on the company’s ability to continue as a going concern. Similarly, the auditor will need to refer to the directors’ disclosure of this uncertainty in the audit opinion.

4. How might businesses and investors react to modified audit reports? If the wider market is insuYciently prepared and readers of audit opinions do not understand why a company is including going concern or liquidity risk disclosures or why an audit opinion has been modified, there is the potential for a number of damaging eVects: — A funder/lender may react by withdrawing or declining to renew credit facilities, damaging an otherwise viable business that may be reliant on those credit arrangements. — In some cases, a modified audit opinion could be interpreted as businesses having breached loan covenants. — Suppliers may stop or interrupt providing credit facilities to a business, disrupting its trading activities. — Landlords may seek to enforce break clauses in property lease arrangements. — General business confidence and investor sentiment may be damaged.

39 Paragraph 3 of International Auditing Standard (UK and Ireland) 570 Going Concern. Processed: 19-03-2009 18:48:03 Page Layout: COENEW [E] PPSysB Job: 417244 Unit: PAG1

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5. The importance of wider market understanding of going concern uncertainty Market participants need to be fully aware of what emphasis of matter paragraphs mean in the current business environment. Investors and other users of financial statements need to be aware that, even in those cases where the directors have concluded that there are material uncertainties, it does not mean that the company concerned will cease to continue. Going concern uncertainty is less important in many ways than the nature of the uncertainties and the proposed management response. Conversely, where the directors have concluded that there are no material uncertainties, and the auditor concurs, it does not mean that the company is guaranteed to continue in business until the date of the next financial statements. The ICAEW believes that, in many cases, the damaging potential reactions to modified audit opinions, summarised above, may be caused by misinterpretations of the “emphasis of matter” in those modified audit opinions—and as such may be avoidable given suYcient market understanding and awareness. The ICAEW welcomes the guidance for directors recently issued by the Financial Reporting Council (FRC) regarding going concern and liquidity risk disclosures in the current diYcult economic climate. The guidance emphasised that many companies will be faced with increased uncertainties and that these need to be disclosed in an open and transparent fashion. The forthcoming Accounting Practice Board (APB) bulletin on emphasis of matter will also provide guidance for auditors when they consider these issues. The ICAEW has encouraged the APB to publish guidance as a matter of urgency, prior to the end of the year so that auditors are able to plan their audit work accordingly.

6. Background to audit reports and the role of company directors and auditors All publicly listed companies and companies that exceed a threshold of staV numbers, turnover, or assets are required to be audited. In addition, banks or lending institutions may require businesses to be subject to audit as a term of a loan agreement. Although publicly listed companies are generally large businesses, a proportion of companies that exceed the audit threshold and a significant number of audit-exempt companies that opted for an audit to fulfil the terms of loan agreements will be small and medium sized businesses. According to Companies House, 143,600 companies submitted full audited accounts during the 12 months to 31 March 2008. Directors have a requirement to prepare the financial statements on a going concern basis unless they intend to liquidate the business or to cease trading, or have no realistic alternative but to do so. In making these assessments, if management is aware of material uncertainties that may cast doubt on the entity’s ability to continue as a going concern, they need to disclose these uncertainties within the financial statements. They may however conclude that the financial statements cannot be prepared on a going concern basis. This also needs to be disclosed with details of why the business is not a going concern and highlight the basis on which the financial statements are prepared. The auditor reviews the information used by directors in drawing their conclusion that the going concern basis is appropriate. The auditor also considers disclosures about going concern and liquidity risk made in financial statements. If the auditor concludes that the disclosures are not adequate to meet the requirements of accounting standards, including the need for financial statements to give a true and fair view, they are required to qualify their opinion and to provide their reasons for doing so. Where a material uncertainty exists that leads to significant doubt on the company’s ability to continue as a going concern, the auditor has the following choices: Where the directors have concluded that the going concern basis is appropriate: — Where the uncertainty has been adequately disclosed in the financial statements, the auditor will issue an unqualified opinion, modified by including an emphasis of matter paragraph. If there are significant multiple other material uncertainties, auditors may disclaim their opinion instead of adding an emphasis of matter paragraph but these material uncertainties can relate to matters other than going concern. — Where the uncertainty has not been adequately disclosed in the financial statements, the auditor will issue a qualified opinion, stating the reasons why, or give an adverse opinion. Where the directors have concluded that the going concern basis is not appropriate: — Where the directors have followed an alternative basis, to which the auditor agrees, and have provided adequate disclosure in the financial statements, the auditor can issue an unmodified report (in relation to going concern) Such situations are rare. An audit opinion without reference to going concern is not a guarantee that a business is a going concern. For further details on the processes for assessing going concern uncertainty for audit opinions, please see the Financial Reporting Council guidelines.40

40 http://www.frc.org.uk/images/uploaded/documents/Bulletin2006 6%20web%20optimized.pdf and The Auditing Practice Board’s International Standard on Auditing (UK and Ireland) 570 (ISA (UK and Ireland) 570) Going Concern guidelines for auditors. Processed: 19-03-2009 18:48:03 Page Layout: COENEW [O] PPSysB Job: 417244 Unit: PAG1

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The FRC, in its press statement of 27 November 2008, says that it: “recognises that the global liquidity squeeze and its impact on the wider economy increases the challenges for directors in preparing corporate reports this year . . . more time may need to be spent by directors and audit committees planning the year end activities, reviewing key assumptions and models used in financial reporting and in reviewing the significant accounting and disclosure judgements”. The FRC has therefore published an Update for directors of listed companies on reporting on going concern and liquidity risk. The ICAEW plays a key part in making sure that the responsibilities of all parties are clarified and understood whether they be directors, auditors or other third parties (such as investors and lenders).

7. Recommendations The government, regulators, accountancy profession and banking industry should work together to help ensure that: — banks and lending institutions make every eVort to raise awareness about the diVerence between modified and qualified audit opinions; — directors and auditors follow the APB guidance; — where modifications occur, investors and other businesses respond in a measured and advised manner; and — media reporting of emphasis of matter paragraphs should avoid using misleading or emotive language that gives the impression that a qualified audit opinion has been issued. The ICAEW encourages wide public dialogue and parliamentary scrutiny of the going concern uncertainty issue in order to advise and educate the wider market. December 2008

Memorandum submitted by Lloyds TSB

1. Executive Summary — Lloyds TSB lending to SMEs has grown by 18% this year. — SME Charter launched to cement Lloyds TSB’s commitment to SMEs during the economic downturn. — Relationship banking at the heart of Lloyds TSB’s strategy. — Experienced relationship managers committed to providing Lloyds TSB’s SME customers with expertise and support. — Lloyds TSB remains well funded and secure and is committed to serving its customers through the diYcult times ahead.

2. Lloyds TSB Group 2.1 Lloyds TSB is one of the UK’s leading providers of financial services. It is currently the only UK Bank to hold an “Aaa” (triple A) Investment Grade Rating from Moody’s which reflects its prudent risk strategy. In addition, Global Finance Magazine rated Lloyds TSB as the sixth safest bank in the world based on its creditworthiness, making it the highest ranking British bank. Lloyds TSB has also been voted Britain’s most trusted bank for eight years in the Readers Digest poll. 2.2 Lloyds TSB Commercial serves business customers, across Great Britain, from one-person start-ups to larger, established enterprises with a turnover of up to £15 million. It serves 250,000 charity and “not for profit” organisations and has over 650,000 small and medium sized (SME) business customers throughout Britain. SMEs are as important to Lloyds TSB as they are to the wider economy. Over the last 12 months, Lloyds TSB has opened accounts for approximately 100,000 new start-up businesses and has been recognised for its support of SMEs through the following awards: — Finance directors have selected the Commercial and Corporate Banking business as Bank of the Year for the past four years in the Real FD/CBI FDs’ Excellence Awards. — The National Association of Commercial Finance Brokers’ recently chose Lloyds TSB as the Commercial Bank of the Year and Commercial Mortgage Lender of the Year. Processed: 19-03-2009 18:48:03 Page Layout: COENEW [E] PPSysB Job: 417244 Unit: PAG1

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3. Proposed Acquisition of HBOS 3.1 The Committee will be aware that Lloyds TSB has announced that it intends to acquire HBOS. The transaction is subject to regulatory and shareholder clearance, however, we anticipate that the proposed acquisition will complete in January 2009. Lloyds TSB is at an early stage in working out precisely how it will bring the two organisations together, however, Lloyds TSB believes that the combination of Lloyds TSB and HBOS will provide an enhanced ability to support and serve consumers and small businesses.

4. Current Issues Facing SMEs 4.1 Small businesses are facing a tough time at the moment. Consumer and business confidence has declined and this is directly impacting demand for their products and their income. At the same time, SME’s supply costs are increasing. 4.2 The situation is being exacerbated by SME’s suppliers who are in turn reducing the amount of credit that they’re providing and larger businesses who are extending payment terms so that they take longer to pay. All these factors are squeezing cashflow which is being put under pressure. Lloyds TSB welcomes the Government initiative to ensure public sector invoices are settled within 10 days. 4.3 In research recently commission by Lloyds TSB, SMEs said that falling income (profit margins) and cashflow were the top two threats that they faced. Access to credit was the third largest concern for all SMEs. However, for customers of Lloyds TSB, access to finance fell to 6th place after interest rates, road fuel prices and energy costs. This is evidence of the Bank’s commitment to SMEs and reflects the 18% growth made in lending this year. 4.4 The economic diYculties facing SMEs have coincided with the current lack of confidence in the financial markets, where both wholesale funding and capital have become increasingly scarce resources. Some banks have experienced diYculties and still continue to face diYculty in accessing liquidity as a result of the global credit crunch. In the wholesale markets the availability of term funds (ie funding with maturities of over two years) has fallen dramatically. Funding with shorter maturities is not available in suYcient volume to substitute the secured funding that was available before the credit crunch and is very expensive: the three month London Interbank OVered Rate (LIBOR) is still some 1.3% above the Bank Base Rate. Lloyds TSB continues to have access to the markets because of its triple A rating. Furthermore, the worsening economic outlook has also prompted the regulator to raise the amount of capital banks are required to hold and to strengthen their capital ratios. This adds significantly to the cost of providing loans. 4.5 This combination of funding and capital issues has led to a reduction in the number of lending institutions available to either businesses or individuals who use personal finance to help support their business. Building societies and smaller banks have scaled back their commercial aspirations. Many specialist lenders are no longer taking on new business and overseas banks have also retreated from the UK. This has resulted in a substantial reduction in the number of commercial mortgage providers in the UK. Also, small business owners often look to their home as a source of raising capital for their business, however, falling house prices has made this even more diYcult. 4.6 There is, therefore, a mismatch between supply and demand for lending to SMEs. Apart from the reduction in lenders, those businesses that need to borrow may well be of a lower credit quality than previously had been the case, due to the recessionary pressures they face. In particular, falling demand means lower sales and that puts direct pressure on overdraft limits. If businesses need to increase their borrowing, they are often doing so from a weaker asset position (falling values on fixed assets, both property and machinery) and a poorer trading statement. 4.7 Media speculation about the lack of available lending to small businesses, despite data to the contrary, means that some businesses believe they will not be able to increase their borrowings. The media coverage may be dissuading them from approaching their bank. The main challenge now facing SMEs is to adjust business plans in the face of a more diYcult economic environment and to talk to their bank.

5. Relationship Banking 5.1 Relationship banking is at the heart of Lloyds TSB’s strategy. That means working with and understanding the financial and non-financial needs of its customers, building a relationship with them to help them grow and prosper. Lloyds TSB Commercial’s mission is to be valued by customers, worthy of their loyalty, and trusted partners for the lifetime of their business. In support of this mission, Lloyds TSB takes pride in a “through the economic cycle” approach to credit policy, which means stability, thereby helping and working with customers through the good times and the bad. 5.2 Lloyds TSB is in a strong, safe and secure financial position. It is well funded and has a prudent lending profile—favouring a long-term approach. One test of Lloyds TSB’s relationship model is whether it is able to quickly respond to the short term borrowing needs of its business customers. Because of the strength of its financial position, Lloyds TSB has been able to continue lending and SME customers are better placed to survive and thrive because of this. Processed: 19-03-2009 18:48:03 Page Layout: COENEW [O] PPSysB Job: 417244 Unit: PAG1

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5.3 Lloyds TSB staV, especially customer facing relationship managers, are essential in ensuring that Lloyds TSB can make its model deliver for customers. Lloyds TSB prides itself on the experience of its relationship managers. Over 60% of managers have been with the bank for more than 20 years. This means that customers benefit from having managers who have faced previous economic downturns and are, therefore, more knowledgeable in advising businesses on how to survive the current threats. 5.4 Lloyds TSB actively promotes this relationship banking approach and recently launched a six point charter for small businesses. The Charter was launched to inject much needed business confidence into the SME market. Lloyds TSB is committed to continuing to support customers by doing everything possible to ease the pressure facing small firms. The measures in the Charter take the Bank’s existing customer approach a step further and mean that businesses that bank with Lloyds TSB have the best possible support for the challenges to come: The Lloyds TSB Charter for Small Businesses 1. Future reductions in base rate in 2008 and 2009 will be passed on in full to Lloyds TSB Commercial’s customers. 2. Lloyds TSB will not change the price or availability of overdrafts during the period of a customer’s agreement (typically 12 months) as long as their accounts are maintained within agreed terms and limits. 3. Lloyds TSB will agree to any reasonable request for short term finance and do what we can to support any viable business through temporary diYculties. 4. On renewal of an overdraft facility, Lloyds TSB will only change the limit or the price if the risks associated with that customer have changed materially. 5. Small business borrowing will not be switched from base rate to LIBOR. 6. Lloyds TSB will host a series of 120 business advice seminars across the UK to provide expert guidance and support for small firms and to strengthen local networks of business professionals.

6. Lending to SMEs

6.1 Given the current economic challenges, there is understandably political, media and public concern about banks’ lending policies and particularly how this impacts SMEs. Lloyds TSB has no desire to reduce its support, either financially or in the level of relationship management. Lloyds TSB wishes to grow the business in this important sector and remains absolutely committed to supporting SMEs as set out below: — During 2008, total lending to SMEs grew by over 18%. — Lloyds TSB has continued to increase overdraft limits during the past 12 months (now 6% higher than one year ago). — Customers have increased their use of overdrafts during the past 12 months (over 10% higher than one year ago). — Across the portfolio, over 40% of the value of overdraft limits remains available for further drawdown. This indicates that there remains a significant level of credit available to SMEs to assist their day to day cashflow requirements. — Continuing the availability of undrawn facilities on overdrafts has capital and cost implications. However, Lloyds TSB is committed to keeping overdrafts available to ensure cashflow flexibility exists for SME customers. — Lloyds TSB has not moved businesses from Base Rate linked overdrafts to LIBOR based overdrafts. — Lloyds TSB was the first UK bank to commit to pass on, in full, the November and December Bank of England base rate reductions to SME customers. — The price which is written for new business is in line with the rates we have charged on existing lending to our customers. 6.2 Lloyds TSB expects its total lending to SMEs to continue to grow in 2009. However, businesses are expected to cut back their investment as they review their plans for next year. We are now seeing a much more cautious approach by customers in making business decisions and this is evidenced by reducing loan demand. 6.3 In line with a “through the economic cycle” approach to lending to business customers, the bank has not had to make any significant changes to credit policy, ie the criteria adopted when lending money to businesses. Because Lloyds TSB has been prudent in the boom times, it can help support businesses in these tougher economic conditions. Processed: 19-03-2009 18:48:03 Page Layout: COENEW [E] PPSysB Job: 417244 Unit: PAG1

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6.4 Lloyds TSB’s approach is to make lending decisions as close to the customer as possible. All business lending is conducted through our nationwide, dedicated team of relationship and business development managers. The majority of our lending is agreed and managed within local discretions, typically encompassing lending up to £500k. That local discretion was extended last year for businesses with a turnover of up to £15 million, (previously £2 million). 6.5 Lloyds TSB is committed to the Small Firms Loan Guarantee Scheme and volunteered earlier this year to work with the Department for Business Enterprise and Regulatory Reform (BERR) so they could undertake direct research with our managers in order to further understand how the scheme was operating. Last year, Lloyds TSB’s share of SFLG lending was in line with market share and, since the restrictions on lending to businesses over five years old were relaxed in March, the Bank has seen a 34% increase in volume and 45% increase in value of new lending under the scheme. 6.6 Going forward, Lloyds TSB intends to participate in the Small Business Finance Scheme, recently announced in the Pre-Budget report. We are also currently in discussion with the European Investment Bank on how best we can access that funding for our SME customers. 6.7 There will, of course, be instances when banks are unable to provide businesses with the finance they seek due to the financial position of the business and the outlook for their markets. Lloyds TSB is a responsible lender and will continue to ensure a customer’s ability to repay is evident. It is not in either the customer or the bank’s interests to lend money where there is a high likelihood of default. To do so would put us in breach of commitments to the BBA Statement of Principles and Business Banking Code which require us to ensure that we lend responsibly.

7. Supporting SMEs 7.1 Lending is of course only part of the service that we provide. Lloyds TSB believes it is equally important to ensure that local managers keep close to their customers and provide help and guidance to put them in the best position to weather the downturn. Lloyds TSB’s 1,400 relationship managers are based in 500 local business centres across Great Britain. They have a network of contacts with business support organisations and other professionals who can help customers with advice that help them weather diYcult times. 7.2 Lloyds TSB provide numerous customer guides on its website covering business skills, such as “Managing your Business” and “Financing”, including specific advice on “Planning for uncertain economic conditions”. The “Business in Britain” survey is published six monthly and shares insights and trends from thousands of companies. In addition, Lloyds TSB highlights support available externally such as the Business Link website and we are currently building links to BERR’s own cash flow guides. 7.3 In response to the supplier credit issues highlighted earlier and the longer trade terms, Lloyds TSB Commercial can provide invoice discounting and factoring facilities, which is an important means of providing much needed cash-flow. Lloyds TSB Commercial Finance is a leading provider of such facilities in the UK. 7.4 In 2009, Lloyds TSB is also launching a nationwide series of seminars, specifically focussed on helping customers manage through the current economic turmoil. 7.5 Lloyds TSB Commercial is fully committed to the Business Banking Code and applies the requirements of the Code to all of its customers with a turnover of up to £15 million, rather than just businesses with a turnover of up to £1 million.

8. Customers in Financial Difficulty 8.1 Lloyds TSB adheres to the Statement of Principles that governs how banks and small firms work together especially when there are financial diYculties. This includes a pledge to give reasonable notice of concerns and take a constructive approach. 8.2 Lloyds TSB will agree to any reasonable request for short term finance and do what it can to support any viable business through temporary diYculties. With local discretion for managers, allowing quick decisions to be made, the aim is to be able to support businesses through these challenging times. 8.3 Lloyds TSB has a good track record in identifying and helping struggling businesses survive downturns. The specialist help, through the dedicated Business Support Unit, means that: — 50% of higher risk businesses survive and come out of the support unit. — In 2007, Lloyds TSB was awarded Turnaround Financier of the Year by the Institute for Turnaround. 8.4 For those businesses that are more critically aVected, the Bank contributes to funding and refers customers to Business Debtline, an independent specialist business debt counselling service. As the economic environment becomes even more challenging, Lloyds TSB is committed to continuing to support customers by doing everything possible to ease the pressure small firms are now under. Processed: 19-03-2009 18:48:03 Page Layout: COENEW [O] PPSysB Job: 417244 Unit: PAG1

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9. Conclusion 9.1 Lloyds TSB has been able to maintain its support to this critical sector because building relationships with customers throughout the economic cycle is at the heart of its strategy. Our strong and secure funding position enables us to do this. 9.2 We are entering a more challenging period for the economy and Lloyds TSB will continue to support its customers during this diYcult time, ensuring that they have access to the finance, products, advice and relationships that they require. December 2008

Memorandum submitted by the Mayor of London

Introduction 1. In preparing the Economic Recovery Action Plan for London, the Mayor has met with business representative organisations and banks as well as reviewing the evidence on the availability of finance for small and medium-sized businesses in the capital. This submission includes: (a) evidence of the availability of credit in London for Small and Medium Sized Enterprises (SMEs); (b) views of business representative organisations in London; (c) perspective of the banks; and (d) recommendations for Action.

Executive Summary 2. Evidence from the Business Link in London service suggests that access to finance appears to be the major problem for all companies irrespective of size or sector, and it is the issue that needs to be addressed the most urgently. The Mayor has heard of banks refusing to increase overdrafts or even reducing existing overdraft facilities (even where SMEs are sound), banks re-pricing their fees when reviewing overdraft facilities and SMEs shutting down entirely, due to problems with credit arrangements with their bank. 3. A number of banks have provided details of their arrangements to support small businesses through the downturn and this is to be welcomed. The Mayor wants to see best practice and public commitments along these lines consistent across all the major banks. 4. The Government’s Pre Budget Report contains a number of measures that aim to help cashflow in small businesses and business overall by reducing costs. In particular the £5 billion package comprising the small business finance scheme and loans from the European Investment Bank should, if well and speedily implemented, give critical help to small firms in need. In light of evidence that there are behavioural inconsistencies at branch level in relation to new schemes available to SMEs, banks should confirm their commitment to implementing these support measures speedily and consistently.

Evidence of the Availability of Credit in London for SMEs 5. The Mayor has received information from Business Link in London, who deal with front line enquiries from SMEs. 6. Accessing finance continues to be the primary issue for London’s businesses. Client Service Managers in Business Link have reported a number of instances where banks have refused to increase overdrafts. They have also been advised by clients that when reviewing overdraft facilities that in some cases the banks are re-pricing their fees. In the past couple of months several of Business Link in London’s clients have had their overdraft facilities reduced, even though they report that their businesses were sound. 7. Three clients of one Client Service Manager reported that they were left with no alterative but to close their businesses due to the lack of funding support, one of which was a social enterprise that couldn’t access emergency funding. Another example of how a lack of access to working capital is aVecting businesses is an ethnic food manufacturer unable to fund the purchase of raw materials to fulfil orders. 8. The vast majority of calls from established business owners to Business Link in London’s contact centre again relate to accessing finance, many seeking advice on ways to raise finance via alternative avenues than traditional bank finance. There has been an increased number of enquiries about the Small Firms Loan Guarantee scheme and also requests for information on the measures to help SMEs raise finance announced in the 2008 Pre-Budget Report. Processed: 19-03-2009 18:48:03 Page Layout: COENEW [E] PPSysB Job: 417244 Unit: PAG1

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9. So far, problems that are being experienced by larger companies appear more likely to be related to accessing finance. A well-established, profitable importer/distributor of pharmaceuticals with a turnover of £18 million is having its £100,000 overdraft and invoice discounting facility re-priced by its bank. The company is trying to arrange a meeting with lending managers to conduct negotiations, rather than accept the bank’s carte blanche approach. 10. It remains a diYcult time for the property and construction sectors or those businesses relying on strong demand from these sectors. Similarly, businesses whose customers are based in the City are either suVering or predicting a fall in their turnover. 11. More wholesale and retail companies are feeling the eVects of the economic downturn. In one case, a client’s turnover has fallen by 50% in the past couple of months. 12. The hotel sector suVered a downturn in October for the first time. It does appear that trading conditions are becoming more challenging for restaurants too, evidenced by a lack of forward bookings for the festive season. This may be having a knock-on eVect on related sectors. A £2 million West London-based food manufacturer, supplying products to central London hotels, restaurants and quality food outlets has recently seen its turnover drop by 50%. 13. Feedback indicates that a broad spectrum of businesses providing non core/essential services that are not currently experiencing problems, fear they may do so, as the recession deepens. Examples include a training company and a beauty treatment business.

Views of Business Representative Organisations in London 14. 35% of London Chamber of Commerce and Industry members reported “increased conditions and/ or charges to their credit streams” in their October survey. 15. Many small businesses believe that strategic decisions taken at board level are not always passed down to branch managers. For example there are “behavioural inconsistencies” over the Small Loans Guarantee Scheme and the European Investment Bank schemes where branch managers either do not know about them or are unwilling to oVer them to customers. 16. The Federation of Small Businesses (FSB) reports that small businesses are net depositors of £55 billion with the banks while net lending to small businesses is £44 billion. This parity of deposits shows lending to small businesses to be low risk. 17. The CBI London Business Survey was carried out in the last two weeks of September and prospects are likely to have declined further since. The Survey found over a third of businesses questioned reported deterioration in the availability of capital (10% seeing deterioration as significant). The sectors reporting the most deterioration in availability of capital are one) banking, finance and insurance (67%), as well we hospitality, leisure, restaurants, retail (57%). Impact is seen as currently less for the transport, ICT and professional services sectors. However these three sectors are the most pessimistic about future business prospects (67%, 43% and 33% respectively). 18. The biggest problem from the CBI study, appears to be “Raising finance for capital investment” (46%), in particular for the manufacturing and construction sector. This is followed by “diYculties with working capital” (41%), specifically in banking and retail. 19. CBI comments that the Government’s Pre Budget Report business finance measures, the deferment of the 1% increase in corporation tax rates together with opportunities to reschedule tax payments should benefit small businesses. 20. The survey suggests that larger firms are, at the moment being hit harder than smaller ones (43% against 25%). 21. The FSB notes that business finance brokers are reporting that a major problem faced by SMEs is that the banks at branch level no longer have the expertise in the branch to assist small businesses. 22. London First suggests that over time the Government should explore whether there should be automatic stabilisers in banking regulation as elsewhere in the economy, so capital adequacy requirements rise in the boom times and fall in the downturn. Another important role for government is data collection: we need to understand what the aggregate lending needs of business are, and how they change with the business cycle and risk profiles change, and current data isn’t robust enough.

Perspective of the Banks 23. On 4 December 2008, the Mayor met with representatives of Abbey, Royal Bank of Scotland, HBOS, TSB, HSBC and the British Bankers Association. 24. A British Bankers Association survey shows that lending to small businesses grew by just under £1 billion in the third quarter of 2008. This was marginally lower than in the second quarter and in the corresponding quarter of 2007. Processed: 19-03-2009 18:48:03 Page Layout: COENEW [O] PPSysB Job: 417244 Unit: PAG1

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25. A number of banks have provided details of their arrangements to support small businesses through the downturn. This includes RBS that has committed overdraft facilities for small business with a turnover of less than £1 million and no rise in pricing of these facilities unless there is an associated rise in risk or breach in terms and conditions as well as establishing a 500 strong team of business advisers. 26. Lloyds TSB has committed to passing on interest rate cuts in full and not changing price or availability of overdrafts during the period of agreement (usually 12 months) and not changing terms on renewal unless risks associated with the customer have changed materially. 27. The banks noted there had been a massive reduction in the number of lenders active in the market over the last 18 months as secondary lending institutions had withdrawn from the market, and that SMEs were also being squeezed by their suppliers withdrawing credit terms, and their customers taking longer to pay them. They therefore consider that whilst the major banks are supplying as much credit to businesses as previously, the total supply has reduced whilst the need for credit has much increased. 28. The banks also suggested that given the downturn in demand in the economy, they considered many SMEs did not have a viable business plan in place to match the changed economic situation and therefore were not good credit risks, and the key step needed was often therefore for the SMEs themselves to review and update their business plans before seeking financial support. Some banks are supporting business advice seminars to try to assist this process.

Recommendations for Action 29. The Government’s Pre-Budget Report contains a number of measures that aim to help cashflow in small businesses and business overall by reducing costs. In particular the £5 billion package comprising the small business finance scheme and loans from the European Investment Bank should, if well and speedily implemented, will give critical help to small firms in need. In light of the evidence that there are behavioural inconsistencies at branch level in relation to new schemes available to SMEs, banks should confirm their commitment to implementing these support measures speedily and consistently. 30. Some banks have given certainty to business customers confirming they will not withdraw facilities but the rest of the sector needs to follow suit with some urgency. The Mayor wants to see best practice and public commitments along these lines consistent across all the major banks. 31. Banks should not prioritise lending to start ups against established businesses that might not have business plans etc but who have a record of financial responsibility. 32. Banks are in a position to contribute in a number of ways to achieving public policy objectives, for example in their employment and training practices (including handling of redundancies) and in providing finance for investment regeneration and this should also be encouraged. 33. Banks can also demonstrate their ongoing commitment to addressing longer-term structural market failures. The London Development Agency is seeking bank support for programmes such as Gateway to Investment, to help early stage High Growth SMEs to be better prepared to access equity finance from commercial sources and the Access to Finance programme which focuses on the strategic business barriers to growth faced by small and new businesses raising start up and development finance and in identifying and accessing new market opportunities. 34. The Mayor also considers that there are opportunities for banks to better understand and support mortgages for shared ownership, and that they can work with the Homes and Communities Agency to explore ways of helping people in mortgage diYculties to stay in their homes by taking an equity stake. December 2008

Memorandum submitted by the Specialist Engineering Contractors’ (SEC) Group We wish to thank the Committee for calling an urgent hearing into the diYculties faced by SMEs in the current economic climate. SEC Group represents the specialist engineering sector in the UK construction industry which comprises over 60,000 companies and a workforce of more than 300,000. The overwhelming majority of firms in the sector are SMEs. SEC Group is an umbrella body representing the following trade associations: — Association of Plumbing and Heating Contractors; — British Constructional Steelwork Association; — Electrical Contractors’ Association; — Heating and Ventilating Contractors’ Association; — Lift and Escalator Industry Association; and — SELECT (Electrical Contractors’ Association of Scotland). Processed: 19-03-2009 18:48:03 Page Layout: COENEW [E] PPSysB Job: 417244 Unit: PAG1

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During the Committee’s inquiry into the UK construction industry last year SEC Group made two lengthy submissions in May 2007 and December 2007 and also provided oral evidence. In those submissions and in our evidence to the Committee an overriding concern was poor payment practices in the construction industry. This was damaging the potential of SMEs to deliver to their full potential as well as adding substantially to their costs. The Committee’s report “Construction matters” responded to this concern by making a number of recommendations relating to retentions, the implementation of the Fair Payment Charter and project bank accounts. Since last year’s inquiry into the UK construction industry the economic climate has dramatically changed. The Prime Minister has confirmed that the UK economy is in recession. So far as construction SMEs are concerned the recommendations of the Committee in Construction Matters now have added urgency. Consequently, we have developed a 5-point action plan to help SMEs in the construction industry. After setting out the plan we will give a brief explanation of the actions we have listed. It is arguable that SMEs in the construction industry have greater vulnerability compared to those in other industries. For the most part the UK construction industry is bottom-up funded with SMEs in the supply chain, having carried out the work and/or delivered their services, being made to incur a lengthy wait before payments are made. The current problems experienced with bank lending are more acute in construction because it is diYcult for most SMEs to accurately predict the throughput of cash flow on the projects they are involved in. They are also exposed to the high risk of insolvencies up the supply chain without the means to protect themselves against this risk. Once goods and materials have been incorporated into the building or structure all title to them is lost. Furthermore, this problem is now made worse by the lack of availability of credit insurance.

Executive Summary 1. The problems faced by SMEs in construction, particularly poor payment practices, have already been well rehearsed in the inquiry held by the Committee into UK construction. However, the Committee’s recommendations in Construction matters have been given added urgency as a result of the diYculties experienced by construction SMEs in obtaining financing and credit insurance. 2. The economic crisis is having a greater impact on construction than on other industries. Construction activity has rapidly declined. Insolvencies in the industry are rising at a higher rate than in other sectors. These are exceptional times and require bold and progressive measures. 3. The Specialist Engineering Contractors’ Group—representing a sector comprising almost 60,000 SMEs—invites the Committee to endorse a five-point action plan summarised below: (i) Cash flow to SMEs to be addressed by the following measures: — Project bank accounts to become standard on all public sector projects. — Where project bank accounts are not in place, public sector clients should oblige all lead contractors to pay within 10 days; otherwise payments to sub-contractors will be made directly. — No retentions on public sector projects. — Advance and mobilisation payments to be made on public sector projects. — Lead contractors on public sector projects to provide bank guarantees or payment bonds to their supply chains. — The pay when paid exemption in section 113, Housing Grants, Construction & Regeneration Act to be repealed. (ii) All sub-contracts for public sector works to be no less favourable than the main contracts. (iii) One badge should now be instituted for pre-qualification on public sector works. (iv) An emergency task force to be established to accelerate public sector construction activity. (v) The Government to engage with private sector clients to obtain their support in helping SMEs.

Summary of the Current Problems 1. “Construction and property companies suVered more than a third of the UK’s insolvencies in the autumn” (Independent, 23 October 2008). Building and construction was worst hit with 21% of all insolvencies compared to 8% in financial services and 5% in the retail and wholesale sectors. Since the beginning of the year the construction industry has seen the sharpest fall in activity compared to other industries. 2. According to the leading credit insurer, Aon, underwriters are likely to completely withdraw trade credit facilities by the end of the year. The three largest credit insurers, Atradius, Euler Hermes and Coface— which dominate the market—withdrew cover from 12,000 policyholders last month alone. Processed: 19-03-2009 18:48:03 Page Layout: COENEW [O] PPSysB Job: 417244 Unit: PAG1

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3. Construction SMEs are now severely squeezed between the sharp fall in demand and severe cost pressures. There have been significant increases in materials costs and, more relevant to the Select Committee’s inquiry, a substantial increase in the cost of borrowing. Where SMEs are able to borrow, the cost of such borrowing has increased in many cases by approximately 25% over a year ago. For many SMEs borrowing facilities have simply dried up. 4. The consequence is that many firms are laying oV employees or reducing the working week. Existing apprenticeships are being prematurely terminated. There is now increasing anecdotal evidence that SMEs are under an enormous amount of pressure to reduce prices. In some cases, especially in the house building sector, SMEs have been pushed into reducing existing contractually-agreed prices by, in some cases, up to 15%. 5. In fact there are now more subtle attempts to delay payments. For example, the gap between completion of the work (and/or provision of the services) and the due date for the relevant progress payment is increasing. This is achieved, for instance, by stipulating a certain period between the date that monies are applied for and the due date for payment. Alternatively it is achieved by other ploys such as claims that the application for payment was deficient in some way or lacked supporting documentation. Furthermore, many firms are finding that final account bills are taking much longer to be settled with the bill often being reduced on a “take it or leave it” basis. Needless to say, it is becoming increasingly diYcult for SMEs to secure the release of retentions. 6. We welcome the following statement in the Pre-Budget Report: “There are currently significant delays for many small businesses receiving payment of their bills from the companies they supply. To help businesses manage their cash flow, the Government has announced that it will aim to pay its suppliers as soon as possible and within 10 days. This commitment has since been adopted by the Scottish Government, Regional Development Agencies (RDAs) and by a number of local authorities. The Government is working with NHS Trusts and the Local Government Association to extend this objective to the wider public sector”. (para 4.17) 7. The major problem in the construction industry is implementing this policy along the lengthy supply chains which are characteristic of the industry. The largest construction companies are poorly capitalised and are not in a position to pay their supply chains until they receive payment from their clients. Moreover, once such payment is received by them, their profitability is dependent upon the extent to which they can generate positive cash flow through maximising the length of time in which to retain their supply chain’s cash. 8. It would appear that it is a policy aim of Government to address this. Speaking in a debate in the House of Lords on 22 October 2008 Lord Mandelson, the Secretary of State for Business and Enterprise said: “Of the 10 Government departments we investigated, 88% of payments, totalling £58 billion, are now made within 10 days. I think that is a good record and a good performance. However, we want to do better because we recognise how important cash flow is to business survival. We want this performance to be reflected not only right across the public sector but among large firms as well, many of which have supply chains consisting of thousands of small firms, all of whose payments are dependent on the hub, the main company at the lead of that supply chain”. (emphasis added)

AFive-Point Action Plan for SME Survival in UK Construction 9. Our action plan is primarily directed at the public sector which is responsible for almost 40% of construction spend. But the Government should be give more proactive in encouraging private sector client organisations to implement the listed actions to the extent that they are relevant. The actions are as follows: (i) The following measures to be implemented to improve cash flow for SMEs: — Project bank accounts should become standard on all new projects unless a demonstrable case has been made out that they would not be cost eVective or practicable. — Where a project bank account is not in place public sector clients should oblige all their lead contractors to pay within 10 days, failing which they will make direct payments to sub- contractors. — No retention should be deducted along the supply chain on all new projects coming on stream; furthermore, there should be a review of all public sector projects to establish the extent of outstanding retentions along the supply chain with the aim of securing the release of the retentions immediately unless there is a current and genuine dispute over workmanship. — Where a significant amount of work (whether design, manufacture or assembly) is carried out oV-site, public sector clients should make advance payments in respect of such work and, in any event, should provide mobilisation payments to enable firms to gather together the resources needed for commencing work on site. More importantly, they must ensure that such arrangements are applied along the supply chain. Processed: 19-03-2009 18:48:03 Page Layout: COENEW [E] PPSysB Job: 417244 Unit: PAG1

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— Public sector clients should insist that lead contractors provide bank guarantees or a form of payment bond to their supply chains where the relevant sub-contracts are for the sum of £50,000 or above. — The pay when paid exemption in s.113 in the Housing, Construction Regeneration Act 1996 to be repealed (this enables a payer (usually a main contractor) to operate a pay when paid arrangement [against a subcontractor] in the event that a third party payer [the client] has gone into insolvency). (ii) All supply chain contracts in the private sector should have a fair and proportionate allocation of risk and, in any event, be no less favourable than the main contract between the client and contractor; (iii) It is now imperative that there should be one badge for pre-qualification for all firms working on public sector works based on compliance with core criteria relating to health and safety, financial standing and technical proficiency; (iv) The Government and industry should establish an emergency task force for construction to help reduce lead-times for commencement of projects by facilitating the use and deployment of integrated project teams; (v) The Government to be pro-active in persuading private sector clients to adopt the above measures.

Measures to Improve Cash Flow for SMEs [Action Point 1]

Project Bank Accounts 10. The Business and Enterprise Committee has already recommended that central Government procurers now make use of project bank accounts, where practical and cost-eVective. Working with Treasury and the DCLG, the Department for Business, Enterprise and Regulatory Reform (BERR) should now apply pressure on all public sector clients to establish project bank accounts as standard on their projects (unless demonstrated not to be practical or cost-eVective). This is an eVective way of ensuring that the Government’s 10-day payment period is implemented along the supply chain.

Direct Payments 11. Where project bank accounts are not in use, public sector clients should insist on a commitment from lead contractors on all new projects that they will pay their suppliers within 10 days. If that commitment can’t be given, it would not be appropriate to select that particular contractor for the project. Where the commitment is given but, in the event that payments to the supply chain are not made within this time period, the client should make direct payments to the supply chain. 12. To the extent that some public sector clients (such as NHS Trusts or local authorities) are not applying the 10 day rule they should, at least, be making payments within 30 days as required by the OYce of Government Commerce’s Fair Payment Charter which came into force at the beginning of this year. Under this Charter lead contractors and their supply chains are also bound to make payments within 30 days. Again clients should advise lead contractors that, in the event of payments not being made within 30 days, then payments will be made directly to the supply chain.

Retentions 13. In Construction Matters, the Business and Enterprise Committee advised that: “The practice of holding a retention . . . damages the cash-flow of smaller subcontractors and reduces investment in training and innovation. Government has other means by which it can ensure the sector delivers good quality products, for example where it has long-term framework arrangements in place. Given that the practice is at odds with the Government’s promotion of integrated working through the Common Minimum Standards and the Construction Commitments, we urge it to require all parts of the public sector to end retentions as soon as possible”. (para 143) 14. The Government’s response to this recommendation was, in substance, no diVerent from that given by the Government to the Trade and Industry Select Committee following that Committee’s inquiry into retentions nearly five years ago. At that time the Trade and Industry Committee rejected the Government’s response and insisted that retentions be phased out as soon as possible on public sector works with the Government leading the way. At present SMEs are funding retentions amounting to well in excess of £1 billion on public sector works. Given the amount of time it takes SMEs to obtain the release of these monies, the loss of interest and the overhead incurred in chasing retentions, the abolition of this practice would provide SMEs with much-needed support at this time. Processed: 19-03-2009 18:48:03 Page Layout: COENEW [O] PPSysB Job: 417244 Unit: PAG1

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15. Given that the time taken to obtain release retentions can be as much as two years (and in many cases in excess of that period) retention monies are always at substantial risk from insolvencies of firms further up the supply chain. This is no longer acceptable. In evidence to the Trade and Industry Committee on 17 October 2002, Mr John Alty (Director of Business Relations at the [then] Department of Trade and Industry) responded to the following question from Sir Robert Smith: “Can you see anything the Government can do to improve protection of the retention monies”? Mr Alty’s response was as follows: “This is something which Accelerating Change has picked up and there is a program of work to look at construction insolvencies”. At the time SEC Group invited the Department to support the project Mr Alty was referring to but that support was not forthcoming and the project did not take place. 16. In addition all public sector clients should now review outstanding retentions on all their projects. They should audit the extent to which retentions are outstanding along the supply chain. On completion of this review they should take steps to ensure that all outstanding retentions are released to all members of the supply chain without further delay unless there is a genuine dispute regarding a defect.

Use of Standard Contracts [Action Point 2] 17. Under German law public sector procuring authorities have to stipulate that the successful tenderer may not impose less favourable conditions (especially as far as payment arrangements are concerned) on its sub-contractors than the conditions agreed between the authority and tenderer. In fact, the European Union encourages contracting authorities to “include clauses in contractual documents to ensure that their suppliers pay their sub-contractors on time” (para 8, Commission StaV Working Document: European Code of Best Practices Facilitating Access by SMEs to Public Procurement Contracts, 25 June 2008). 18. In Construction Matters the Committee recommended that, led by the OGC, departments should use collaborative contracts (such as the NEC3 Engineering and Construction Contract) and “ensure that they are adopted throughout their supply chains” (para.132). In response the Government did not commit to any specific action to implement this arrangement. We believe that this recommendation should now be implemented without delay. Furthermore, all public sector procurers should now audit the contractual arrangements in place along their supply chains and challenge the use of bespoke sub-contracts or amended standard forms of subcontract. Bespoke contractual arrangements are simply aimed at transferring all risks to SMEs in the supply chain. 19. In the Pre-Budget Report the Government stated that: “It will . . . help SMEs get a fair deal when they are sub-contractors” (para 4.36). We suggest that this is achieved, initially, by insisting that sub- contracts included in the suite of contractual documentation used by the public sector client are used along the supply chain (provided, of course, that they represent a fair and proportionate allocation of risk). Furthermore, there should not be any lead contractor-generated amendments to the relevant sub-contract conditions.

One Badge for Pre-Qualification [Action Point 3] 20. In Construction Matters the Committee recommended that: “The Government must reduce the burden that multiple public sector prequalification schemes impose on construction firms, particularly SMEs” (para 276). SEC Group is currently surveying firms in the sector on the cost of pre-qualification. The questionnaire is attached as an appendix. We will inform the Committee of the results of the survey as soon as they become available. 21. The Government must now produce a “badge” that recognises compliance by firms with core criteria relating to health and safety, financial standing and technical proficiency. Such badge would promote mutual recognition between diVerent schemes; once a firm has obtained its “badge” it should not have to pre-qualify under other schemes. Moreover, all public sector clients must insist that only “badged” firms are used at both lead contractor and sub-contractor levels.

Emergency Task Force [Action Point 4] 22. The Pre-Budget Report announced that: “£3 billion of capital spending from 2010–11 will be brought forward into 2009–10 and 2008–09”. There is also the need to accelerate current programs in health and education (especially the Building Schools for the Future program) which have fallen behind their respective targets. Whilst the announcement in the Pre-Budget Report is very welcome, the practical diYculty is that the lead-in time for projects could be up to two years especially where traditional procurement processes are used. In the meantime many SMEs will have had to reduce overhead staYng and labour costs. Processed: 19-03-2009 18:48:03 Page Layout: COENEW [E] PPSysB Job: 417244 Unit: PAG1

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23. As the Committee acknowledged in Construction Matters the Government still has to make significant progress on abandoning traditional procurement strategies in construction and, instead, adopt delivery through project team integration—as required by the Achieving Excellent program, the Construction Commitments and the Common Minimum Standards. The lack of progress is due to a variety of reasons including inertia, lack of confidence, poor levels of training and insuYcient resources. 24. The business case for integration—recently published by the Strategic Forum for Construction— demonstrates that a key benefit is that the average lead-in time for commencement of construction activity can be reduced by many months. The business case also includes a more reliable method of measuring the extent of project team integration and its benefits for the project. The Government’s aim of accelerating construction activity can, therefore, be achieved at a faster pace and more eYciently through putting in place integrated project teams. 25. Our proposal is that, to help the Government accelerate existing (or delayed) construction programs and future programs within the £3 billion spend, there should be a joint industry/Government Emergency Task Force. A key role for the Task Force would be to bring together “integration facilitators” who would support public sector clients wishing to accelerate construction works by facilitating the successful procurement of integrated teams. They would help clients develop their success factors for projects and help them to measure outcomes to check that these factors have been realised.

Private Sector Clients’Support for SMEs [Action Point 5]

26. “In addition to its engagement with public bodies, the Government will continue to work with the private sector to encourage businesses to pay their bills promptly . . .” (para 4.18: Pre-Budget Report). We propose that the Government meets, as soon as possible, representatives of the top 100 of the UK’s highest spending private sector construction clients. All the actions in our action plan can be adopted by private sector clients with the exception of those relating to amending section 113 Housing Grants, Construction & Regeneration Act 1996 and the Emergency Task Force. Client representatives should be invited to commit to any of these actions in a major eVort to help SMEs in their supply chains.

Summary

27. We invite the Committee to endorse our action plan to support SMEs in the construction industry. Time is of the essence and, therefore, the Government will need to act promptly to put in place our proposed measures. Together with other representative organisations in the industry we remain willing to work closely with the Government to ensure that any measures adopted will be eVective in supporting SMEs which are now facing unprecedented challenges in order to remain viable. 28. Whilst these challenges have been exacerbated by the actions of the banking and insurance institutions, their provenance lie in deep-seated poor practices in the construction industry. The Committee is now fully aware of the state of aVairs in the industry but the solutions require immediate implementation. Our action plan is directed at achieving this by highlighting a series of practical measures that can be applied now.

APPENDIX

SURVEY ON THE COST OF PRE-QUALIFICATION The Government is inquiring into the burden on firms of pre-qualification. We along with others aim to make representations to Government to reduce the burden of multiple pre-qualification schemes. The purpose of this survey is to assess the costs to firms, in terms of time and money, of having to pre-qualify under the diVerent schemes. Please would you take a few minutes to complete the questionnaire below so that together with our umbrella body, the Specialist Engineering Contractors’ Group, we can actively represent the results to the Government. (Please insert a tick in the relevant boxes) 1. Size of firm (by annual turnover) Under £200k . £200k to £m . £m to £1m . £1m to £2m . £2m to £5m . £5m to £20m . £20m to £50m . £50m !. 2. How many pre-qualification schemes or lists have you found it necessary to subscribe to? (eg Constructionline, CHAS, Achilles, Exor, Sinclair etc)? 1 . 2–4 . 5–9 . 10–19 . 20–29 . Over 30 . None . (If you tick none, please go to question 8) Processed: 19-03-2009 18:48:03 Page Layout: COENEW [O] PPSysB Job: 417244 Unit: PAG1

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3. For each of your main client sectors, what proportion of their projects require you to subscribe to pre- qualification schemes or lists? Please tick one box in each line below. None A little Some Most All Do not work (0%) (1%–19%) (20%–49%) (50%–99%) (100%) in this sector Central government clients ...... Local authorities ...... Private sector clients ...... Main contractors ...... Other ...... If “Other” is responsible for all or most of your scheme requirements specify...... 4. Please indicate the total amount per annum of the fees paid to all the pre-qualification schemes you need to subscribe to. Under £200 . £200 to £500 . £500 to £1k . £1k to £2k . £2k to £5k . Over £5k . 5. Please estimate the total other costs (in addition to fees per annum) to your firm of meeting the administrative and audit/inspection requirements for these schemes. Under £2k . £2k to £5k . £5 to £10k . £10k to £20k . £20k to £30k . Over £30k . 6. How much time (ie. person days) per annum is spent in completing the paperwork for all schemes? Up to 1 day . 2–5 days . 2–4 weeks . Over 4 weeks . 7. Please write below any comments or observations you have on the issues raised in this survey. For example are any of the pre-qualification schemes particularly burdensome in terms of time or cost? Please continue overleaf if necessary. 8. If you wish to receive a short report of the results, please insert your email address below. Please fax or email this completed form to: [Trade Association to insert details] by [date]. Thank you very much for completing the questionnaire. December 2008

Memorandum submitted by The Survey Association

1. Introduction 1.1 This submission on behalf of The Survey Association (TSA) is further to your Committee’s call for evidence on financial support for small and medium-sized enterprises. 1.2 TSA is the trade association for commercial surveying companies in the UK and currently has over 120 members from around the country. Our members are experts in surveying, geomatics and underground mapping, and play a critical role in providing the spatial data needed for planning, housing and infrastructure. Our full and associate member companies together employ over 2,500 people and had a turnover in 2007 of almost £250 million.

2. The Impact of the Current Economic Climate on TSA Members 2.1 TSA welcomes this opportunity to provide evidence to the committee: we are aware that any member companies are currently experiencing financial diYculties given the challenging economic climate. We are well-placed to oVer our perspective on financial support for small and medium sized enterprises (SMEs) as the vast majority of our members fall into this category. About 90% of our members employ less than 50 people. 2.2 The current economic downturn is having a significant, and concerning, impact on our members. We are aware that a number of member businesses are making staV redundant, and we anticipate that up to approximately 50% of people working in the survey industry will lose their jobs over the next six months. This is challenging for individual employees and survey businesses not only in the short term, but also threatens the long-term development of the industry at a time there is already a shortage of skilled surveyors in the UK. 2.3 We are expecting around 20 member companies to go into administration as a result of the downturn. This will also therefore have an impact on the number of TSA members. We believe that the survey industry has not faced such tough economic conditions, and the ensuing negative impacts, for over 15 years. At present we do not anticipate that the demand for services provided by our members will improve for at least 12 months. Processed: 19-03-2009 18:48:03 Page Layout: COENEW [E] PPSysB Job: 417244 Unit: PAG1

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3. Impact of Government Measures on TSA Members 3.1 Given these challenging economic circumstances, TSA welcomes the Government’s commitment in the Pre-Budget Report to provide support for small businesses. We shall be monitoring closely the impact of these measures on our members. 3.2 In particular, we welcome the deferral of the increase in the small companies’ rate of corporate tax and call for this to be held at 21% beyond the 2009–10 financial year. While we see the establishment of the Small Business Finance Scheme as a positive step, we are keen for clarification on how the scheme will work in practice as we believe this could deliver significant benefits to our members in access to aVordable credit. However, we shall be scrutinising this closely as our members’ experience of the existing Small Firms Loan Guarantee Scheme has been that this has not greatly increased access to funding because of bureaucracy. 3.3 As our members carry out a significant amount of work for public sector bodies, to the value of approximately £80 million per year, we welcome the Government’s announcement of the establishment of a new online portal for all public sector contracts over £20,000. It will be important that this tool is easily accessible so that it delivers benefits to our members; we welcome this step to help reduce bureaucracy and maximise business opportunities for surveying companies. 3.4 In addition, we look forward to central Government and Regional Development Agencies delivering on their recent commitment to speed up payment to suppliers, as this will improve payment conditions for a number of our members. TSA looks forward to this commitment also being met by local authorities, following the recent letter from the Secretary of State for Communities and Local Government to the Local Government Association, as these bodies are also significant clients of about 50% of our members. 3.5 TSA shall be scrutinising closely the impact of the expected changes in lending criteria by banks to SMEs. We welcome that a number of banks have announced fixed interest rates on overdraft loans to small businesses, but given the volatility of current economic conditions, it will be important for the Government to monitor the impact of these measures on small businesses and keep the situation under review.

4. Long-term Solutions for TSA Members 4.1 While we expect that the Government’s package of support will have benefits for our members in the short to medium term, in these diYcult economic circumstances a commitment from the Government to increasing investment in infrastructure, such as roads and railways, will provide much needed long-term support for the survey industry. 4.2 Confidence in the housing market is key to supporting the survey industry, and it is critical for the future of our members’ companies that this recovers as soon as possible. In addition, it is disappointing that the Government is now scaling back its commitment to build 3 million new homes by 2020 by making this an “aspiration” rather than a target. This creates long-term instability for all of our members as this sector forms a significant part of their business. 11 December 2008

Memorandum submitted by Roger Williams MP and Mark Williams MP

1. Introduction 1.1 Ceredigion and Powys have the highest proportion of employment by micro-businesses (nine employees or less), 54.2% and 53.3%,41 the highest two figures in Wales, and around two-thirds of all employment in Ceredigion and Powys is in businesses with 49 employees or less. 1.2 In rural communities, small businesses are extremely important to the local economy, and the failure of a relatively small number of businesses in a localised area can make that area unviable, increasing the sense of rural isolation that is felt by many. 1.3 We have been in discussion with small businesses locally, both through surgeries, and through visiting businesses in our constituencies, and there are several areas they have asked us to raise for your consideration.

2. Business Rates 2.1 We have met with several businesses who have expressed concern at the eVect paying business rates at this time are having on their business. One suggestion that has been made by a business in Powys would be only to charge rates once a business is making a profit, as with corporation tax, though this may cause practical diYculties in terms of collection. However as the Government have allowed for VAT payments to be deferred, it may be useful for business rates to be deferred as well where possible.

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2.2 The link between Local Authorities and business rates could be looked at. Currently Local Authorities collect business rates, pay them to the Government (Welsh Assembly Government in Wales) and then receive money back through a formula. While the Government are planning to introduce a Bill to allow for LAs to increase charges to pay for large projects, which we are concerned about, it could be beneficial to allow LAs to set and collect rates, perhaps with a cap as per council tax, to allow them to reduce rates at times when there is a need to encourage the survival of business. We appreciate that this inquiry is looking at short-term assistance that can help businesses now, but we hope that long-term measures will not be discounted as part of the Committee’s recommendations.

3. Bank Lending 3.1 Concern has been expressed both nationally and locally about the lack of lending that is getting through to small businesses. We believe that the Government should look very carefully at either forcing banks to lend as part of the terms of the bank bail-out, or through Government lending, if this situation continues. We hope that the new Banking Bill will contain measures that allow us to respond to this continuing concern. 3.2 There has also been concern about banks changing their lending terms to SMES, including increasing overdraft interest rates and bank charges. This is a serious matter. We believe that as the Government have provided the banks with large amounts of capital, they should direct banks to respect the agreements they have previously entered into with businesses, and not change their rates and charges at the first opportunity.

4. Energy Bills 4.1 There is considerable concern surrounding the payment for energy bills. This is a widespread concern among individuals and businesses, but some businesses rely particularly on aVordable energy, and are being severely aVected by the increases. 4.2 We believe that action on energy bills needs to be approached from an individual as well as business level. Our view is that the Government must put pressure on the energy companies to reduce their prices immediately,and if this is not forthcoming they must very seriously consider using legislation or other means to force the companies to reduce their bills. 4.3 The price of oil is falling and we would expect some reductions in energy prices in the New Year. It is vital that pressure is put on the companies to ensure that their price reductions are in line with the significant reduction in the price of wholesale energy.

5. Public Procurement 5.1 Concern has been expressed to us that Public Procurement policies are often not as transparent as they should be, and can work to exclude new and small businesses. We believe that action is needed to open up procedures as soon as possible. Again, we recognise that this is more of a long-term issue, but we hope that this will be included after the excellent working the Committee has already done on this issue. December 2008

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