Access to finance has been a hot topic since the financial crisis.
We can all recall many articles 'bashing' the banks for what in some cases was undoubtedly atrocious behaviour. But the world has moved on. Credit isn't as easy to get anymore and no amount of not-particularly-constructive bashing is likely to change that.
We know the government is taking action to address a number of other access to finance problems but its interventions to support SME access to bank finance are narrow in scope (e.g. Enterprise Finance Guarantee) or temporary (Funding for Lending). There is more to do.
Pre-crisis, the flow of cheap finance masked the fact that the UK needs more choice in its banking sector. The relationship between banks and firms – particularly small firms – has become strained, and for some the damage has been lasting:
A higher proportion of bank loan applications from SMEs are declined in the UK compared with other countries; and
SMEs appear to be disengaging more and more from the UK banking system.
Access to finance matters because we need to see SMEs invest and grow for the future. We see this as central to achieving our ambition of having more globally focused companies expanding in the UK, one of four key strands of our modern industrial strategy, The Route to Growth.
Solutions need to address the underlying problem of a lack of competition in SME banking in the UK. The availability, cost, and terms and conditions of bank finance are all impacted by this problem.
Banking has been the subject of a lot of policy debate lately, particularly with regard to the government's proposed business bank. We've done some thinking of our own. While we're not calling for a business bank as such, we do think there's a role for the governnment to act to support SME access to bank finance.
We recommend the government implements the following actions:
1. A focused 3 month review on what more can be done to encourage private competition in SME banking considering the following:
Options for encouraging switching including introducing a time and cost limited incentive matching the savings SMEs can make from switching banks, and account number portability.
Options for lowering barriers to entry for new banks including licensing arrangements, and making cost information easily and comparably available to inform SMEs' choice of banks.
Options for lowering the costs of establishing a branch network for new entrants and small existing banks including making use of existing infrastructure.
Whether a referral of SME banking to the Competition Commission is warranted now (rather than considering this in 2015 as Sir John Vickers has recommended).
2. Establish a new challenger retail bank, to be run commercially with no state subsidies or guarantees, initially targeting lending to UK SMEs and with the following features:
Being run by bankers in a similar way to other high street banks and offfering a similar set of products on the market to other banks, i.e. no subsidised products;
Competing for businesses from the same pool of current and potential borrowers/users of banking services i.e. customers not suitable for bank debt would not be targeted.
Government could bring in private investors at the start or sell off a 49% stake to the private sector once the bank was up and running;
Government would hold its 51% shareholding until competition has picked up to prevent the new institution from being taken over by the incumbents.