Small Business, Enterprise and Employment Bill
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Lord Newby (LD)
My Lords, as a Leeds United supporter, I begin by congratulating the noble Lord, Lord Mitchell, on the success of Spurs. As a young boy, everybody in my class supported either Wolves or Spurs, as this was a time when Spurs were doing rather well in the FA Cup more generally. I supported Spurs. This was a time when no one who lived in Leeds supported Leeds United, because they were not worth supporting. I graduated to better things but am very pleased that Spurs are still doing well. I also congratulate him on the work that he did on payday lending and getting the current legislation in place. I am sure that all noble Lords agree that that has been a beneficial change, and he was absolutely instrumental in bringing it about.
I am also grateful for the opportunity to discuss the issues raised by this group of amendments. I absolutely understand what the noble Lord is seeking to achieve, but I am not really convinced that they are necessary. Taking them in turn, Amendments 13, 14 and 15 would require that designated banks and credit reference agencies provide information about the criteria used to calculate the credit score of a small or medium-sized business customer. The Government agree that it is vital that businesses have the information they need in order to maximise their chances of securing finance. However, I believe that this is best achieved by improving transparency in the banking sector and by educating businesses to help them understand the impact their behaviours have on their credit scores—not through legislation.
The Government have introduced measures in order to make the banking industry one of the most transparent in the world. These include the requirement on the largest banks to disclose lending by postcode areas, the Federation of Small Businesses’ and British Chambers of Commerce’s new Business Banking Insight survey, commissioned by the Chancellor, which helps small businesses see which bank is best for them, and the independent appeals process, which allows any SME rejected for a loan to get a second chance.
There is a wealth of information in the public domain which businesses can use to understand the impact their behaviours have on their credit scores. This includes the information provided by the CRAs themselves, the Money Advice Service, the British Business Bank, charities and other information providers. An excellent example is the Business Credit Scoring Explained pamphlet produced by Professor Russel Griggs, chair of the independent lending appeals process, which is available on GOV.UK and the British Business Bank website. It is a surprisingly easy to read document. I would have thought that any small business seeking to understand how credit scoring worked would find it immensely useful. It is this wider sort of information that is most valuable and useful to SMEs, in our view, when they are considering how to improve their options for accessing finance.
The Government intend to continue to work closely with business groups, banks and CRAs, to build on the existing good work in this area, to help promote existing material and to create new, informative aids for businesses. However, CRAs and banks compete on the accuracy of the models and methods they use to assess risk. An obligation to reveal this proprietary information could undermine the competitive nature of these markets, which would be in nobody’s interest. Just as importantly, I am concerned that detailed models produced by banks and CRAs would be of little use to the average SME. Examples such as the pamphlet I have just referred to are much more suitable in my view and are of course already available.
Amendment 17 is intended to restrict the information that may be shared under the regulations to information specifically identified by the business. I assure noble Lords that this is already the policy intention. Clause 4 requires that businesses must have agreed to have data provided to CRAs. Our intention is that this agreement will have been given when signing the terms and conditions for a financial product, which is the process that businesses are used to. Therefore, we believe that this amendment is simply not necessary.
Amendment 18 aims to ensure that the Government analyse the costs of the measure. The Government have already published a regulatory impact assessment setting out the impact of the changes on banks, CRAs and businesses. It concluded that banks would incur upfront IT costs of £10.5 million and that CRAs would incur upfront IT costs of £3.5 million but that any ongoing cost of sharing these data would be negligible for established lenders. It also concluded that the measures will increase competition in the CRA market and the market for lending to SMEs, which would produce a downward, not upward, effect on prices charged for credit scores and the cost of lending.
I hope that I have been able to assure the noble Lord that these amendments are not necessary and that he will agree to withdraw the amendment.
Baroness Byford (Con)
My Lords, the noble Lord mentioned the whole question of the security of data sharing. I should just like to have confirmation from the Minister that Clause 4 covers that. There is sometimes a risk in sharing data that it can be to the disadvantage of a company, and that would be very unfortunate if it were to happen in this case. I was not sure whether the Minister’s response to the noble Lord, Lord Mitchell, covered that and therefore whether the Bill covers that point.
Lord Newby
The important thing is that information which a company has and which might be shared is shared only with the explicit prior approval of the company. As I was saying, this is one of the things that is often included in the terms and conditions of any agreement or relationship that the company has with the bank. Unless the company has explicitly said that it is prepared to have its data shared, they will not be shared. More generally, all the activity that we are talking about is covered by normal Data Protection Act safeguards.
Baroness Wheatcroft
My Lords, I just wish to raise a slight qualm that I have on this issue. I applaud the idea of data sharing and the theory that it would enable small firms to shop around for credit more easily in the Funding Circle that the noble Lord, Lord Mitchell, mentioned—it is one of those organisations that can respond very quickly if it gets the data that it needs—but Amendment 17 seems to offer the possibility of small firms picking and choosing which bits of the data are made available. We all support small firms but some do not always behave entirely honourably, and I would be very nervous about a proposal that allowed a small firm to say, “This little bit of the verdict on what I do can be relayed to a potential lender but not that little bit because that little bit tells a very different story”. Therefore, I think that we need to be clear that when we are saying that a small firm, or indeed any firm, can give its permission for data to be shown to an alternative lender, it needs to be the whole picture, otherwise we are in danger of getting to where we have got to now—with references to individuals, for instance—where the reference is meaningless. You are very lucky if the reference says, “You would be very lucky to get this person to work for you”, which of course can be interpreted in two different ways. People are now very nervous about committing anything on the basis of just a corporate reference.
Lord Newby
I think, my Lords, that that concern is dealt with by the fact that approval or agreement that data might be shared tends to take the form of being included in the standard terms and conditions of the bank, so one will not be able to pick and choose. One will be presented with a standard form that states, “You agree to the following forms of data being used”. There will not be much scope for negotiation as to which data are open for discussion.
Lord Mitchell
I should like to respond to the Minister by thanking him for his support on the subject of payday lending. There were some dark days in this three-year campaign, and he and I had private meetings in which he gave me a lot of encouragement. Me saying that from this Dispatch Box will have totally ruined his career, but he was very supportive and for that I am grateful. I thank him for the points he made, which are helpful. We will, of course, come back to all this on Report. I beg leave to withdraw the amendment.
Lord Newby
Lord Newby
My Lords, these amendments make a number of technical changes to Clauses 4, 6 and 7 to ensure that the credit data and finance platforms measures work as the Government intended. The amendments also specify the commencement date for the Government’s cheque-imaging provisions.
Beginning with the amendments to credit data and finance platforms, Amendment 16 is a clarificatory amendment to Clause 4 to ensure that banks do not deliberately circumvent their obligations to share credit data with credit reference agencies. Amendment 20 would ensure that the regulations under Clause 4 may require credit reference agencies to provide all the data obtained by them under the credit data measure to the Bank of England, not only data provided by designated banks.
Amendments 22, 23 and 29 would allow the Government to accept the recommendations of the Delegated Powers and Regulatory Reform Committee that any future change to the regulations made under Clauses 4, 5 or 7 be subject to the affirmative rather than negative procedure.
Amendments 27 and 28 would ensure that providers of invoice discounting and factoring services are covered by the definition of “finance provider”. This allows them to benefit from government measures to improve access to credit data and to implement platforms for rejected small business finance applications. Providers of invoice discounting and factoring are a key part of the financing landscape for smaller businesses and it is essential that they are able to benefit from these measures.
Finally, Amendment 103 specifies the date for the commencement of the provisions enabling cheque imaging in the UK as 31 July 2016. This amendment will therefore help ensure the banking industry delivers this payments innovation to customers as quickly and ambitiously as possible. The Government are tabling this amendment to help ensure that the benefits of cheque imaging are delivered to a clear, fixed and timely schedule. I beg to move.
Lord Stevenson of Balmacara
My Lords, the Opposition are happy to accept the great majority of what has been produced in this group. We see the logic of the amendments and understand their rationale. It is sometimes amusing to find the Treasury in a situation in which it appears not to have been quite as convincing as it ought to have been in its submissions to the DPRRC. The noble Lord made a good fist of it but it must have been a bit galling to realise that in some ways the mighty writ of the Treasury, which normally runs everywhere, got washed away by the firm rebuttal of the idea that somehow a Henry VIII clause, when introduced by the Treasury, was okay but not when it was introduced by others. I am glad to see that the changes made here bring back a more coherent and consistent approach. Other than that, this is a welcome step forward.
Lord Flight
My Lords, as I have already pointed out, Amendment 25 really goes with Amendment 5. Very simply, and hence why it comes up in this section of the Bill, it endeavours to slightly widen the size of SME which can benefit from the provisions on credit information availability by substituting the R&D tax credit definition of an SME for the definition currently pertaining in the Bill.
There is quite an important point here, which is that the crucial measure of the ability of a company to command lending services is really its EBITA. Most companies with an EBITA below £5 million have problems in sourcing capital investment finance. Basically, the argument runs that the definition used for an SME is really too small and that small and medium-sized businesses are in just as much need of assistance in sourcing credit and investment as are smaller companies.
Lord Newby
My Lords, I begin by repeating that the Government are completely committed to ensuring that SMEs can access the finance that they need to grow and create jobs. That is why the Bill seeks to build on the progress that the Government have already made on this agenda by bringing forward further innovative solutions to ensure that businesses can borrow and succeed. These include ensuring that alternative lenders can access credit information on smaller businesses to help them make lending decisions, and creating a new process for rejected smaller businesses to be offered the opportunity to use government-designated platforms that will help match them with alternative lenders. I will go through the amendments in turn.
Amendment 18A relates to providing financial advice as part of the finance platform offer. The new process provided for by Clause 5 has been designed to address a specific problem affecting smaller businesses’ ability to secure finance: namely, the evidence suggests that a smaller business will go straight to its main bank when it needs to borrow. If the banks says no, the business will give up its search there in the belief that it is already at the end of the road, as the noble Lord, Lord Mitchell, pointed out when we discussed an earlier amendment. However, alternative sources of finance for smaller businesses are coming on stream all the time.
The new process will address this problem by requiring banks to offer businesses that they reject for borrowing a new option alongside making an appeal or going to see a broker. To be clear, going to designated platforms will be a route that rejected businesses can take alongside or in tandem with existing avenues available to them, such as seeking professional advice. It is right therefore that the platforms process remains focused on addressing the issue of access to finance, which is where the real problem is. Of course, platforms will also be able to add additional services on top of the minimum legislative requirements—the Government want to give platforms freedom to compete with each other to offer the best possible service. My noble friend will therefore be pleased to know that the Government’s discussions with the industry have indicated that the majority of providers interested in securing designation intend to support advice for businesses as part of their value added services. However, we do not believe that adding the specific amendment that he suggests is something that we should contemplate at this point.
Amendments 19 and 24 relate to parliamentary scrutiny. I hope that noble Lords will be reassured by, and be happy about, the government amendments that we have just debated, which accept the recommendation of the Delegated Powers and Regulatory Reform Committee to move to the affirmative procedure. The only thing I would say about Amendment 19 is that, in speaking to it, the noble Lord said something slightly different from what the amendment says. The amendment says that the Government should report on the number of times the regulations are used within a year. It does not say that it should be a broader report of the sort that he suggested in his speech. It is unlikely that these provisions will be used many times in a typical year, and the very fact that they will now be dealt with by affirmative resolution means that Members of both Houses will have a much clearer sense of exactly what has happened in any given year, because those who are interested in them will have been debating them.
Lord Stevenson of Balmacara
My Lords, I understand the logic of what the noble Lord is saying and the rationale for what the Government are doing, and that there will be consultations around this. However, the point that he has just made surely exposes the gap. If a medium-sized company, not a microbusiness, has a CRA purporting to report on it in a way that is factually incorrect or gives the wrong impression, is the only redress to take it up directly with the CRA?
Lord Newby
Going to the CRA is the logical first port of call, is it not? We are talking about cases here where a company believes or knows that the CRA has incorrect information about it on its books, and it will be in the interests of the CRA to correct any mistakes. As I say, the complaints procedure is part of the designation. We are making sure that the CRAs are open to complaints and have a proper way of dealing with them. The other limb to the argument relates to the role of the Financial Ombudsman Service. The noble Lord is suggesting an extension to the remit of the FOS in terms of businesses, which is a considerable change that you would contemplate only as part of a larger possible review of the role of the FOS in terms of businesses more generally. This is a very narrow area, and to extend the remit of the FOS in respect of firms just for this, and to nothing else, would look slightly odd.
Amendment 25 relates to the definition of small and medium-sized businesses. I apologise to the noble Lord, Lord Flight, that I was unable to be here for the earlier discussion broadly around this issue. The definition that he is suggesting is the one used by Her Majesty’s Revenue and Customs for the purposes of the research and development tax credit. Although I hear his arguments, I would point out that the £100 million figure is very much the outlier in terms of accepted definitions of SMEs. The definition used by HMRC for R&D tax credits is tailored to that one specific policy and flows from the fact that most research and development is done by larger companies. I do not believe that it would be appropriate here.
The turnover figure used in the current definition in Clause 7 is widely accepted as the threshold for an SME. It is used in the Companies Act, by the Bank of England for reporting purposes, and for the Funding for Lending scheme. It is used by various government schemes such as the lending appeals process and is used by the British Business Bank. There is no rationale for dramatically expanding it to businesses with a turnover of up to £100 million. As noble Lords will be aware, these measures are designed to address market failures that disproportionately affect the smallest businesses: namely, a lack of credit information and a lack of awareness of alternatives. These problems do not affect larger companies in the same way. The Government have proposed and consulted on a measure aimed at small and medium-sized businesses. This amendment would go considerably beyond that.
The existing simpler definition in the Bill, based on turnover, mirrors that used by the Bank of England. We believe that it is the most appropriate definition for legislation that applies to banks as they have visibility of the turnover through the company’s primary account and are already used to applying the similar definition used for the Funding for Lending scheme. I would note, however, that even larger companies outside the definition of SME businesses will benefit from the measures in the Bill. For example, a larger company will still be able to apply directly to a designated platform to seek a finance provider. The Government therefore consider that the existing turnover threshold of £25 million is the appropriate place to draw the line for the legislation. I hope, therefore, that the noble Lord will be willing to withdraw his amendment.
Lord Leigh of Hurley
I thank my noble friend the Minister. I hear what he says but I would make the point that, as the noble Lord, Lord Stevenson, said, we are entering uncharted waters here. We really do not know how this will work. My amendment would therefore allow for the possibility that the system was not working well, with unhappy companies that want to borrow money the second time around finding the system to be too complex and too much of a muddle and being hassled, shall we say, by too many finance providers. It would simply allow the Treasury the option to suggest that advisers are included in their options. I would encourage the Minister to reflect upon that, but for now I beg leave to withdraw the amendment.
Lord Newby
Lord Newby