The Treasury Committee launched the first stage of its ‘economic impact of coronavirus’ inquiry on 18 March when it issued a call for evidence on the speed, effectiveness and reach of the Government’s and Bank of England’s immediate financial responses to coronavirus.
In this stage of the evidence gathering, the Committee said it will examine the operational effectiveness, cost and sustainability of the support packages unveiled to deal with the crisis.
On 15 April, the committee took virtual evidence from the representatives of the FLA and UK Finance. What follows is an edited transcript of that evidence, shortened for brevity and includes only exchanges that relate to business support schemes.
Treasury Committee, House of Commons
Oral evidence: Economic impact of Coronavirus
Wednesday 15 April 2020
Mel Stride (chair), Conservative MP for Central Devon
Rushanara Ali, Labour MP for Bethnal Green and Bow
Steve Baker, Conservative MP for Wycombe
Harriett Baldwin, Conservative MP for West Worcestershire
Anthony Browne, Conservative MP for South Cambridgeshire
Felicity Buchan, Conservative MP for Kensington
Angela Eagle, Labour MP for Wallasey
Julie Marson, Conservative MP for Hertford and Stortford
Alison Thewliss, Scottish National Party MP for Glasgow Central & SNP Spokesperson (Treasury)
Stephen Jones, CEO, UK Finance
Stephen Haddrill, Director General, Finance & Leasing Association
Examination of witnesses
Chair: Good afternoon, everybody. Welcome to the Treasury Committee and our latest session on the economic impact of the coronavirus. I particularly welcome our two witnesses in the first of two panels this afternoon. Will the witnesses introduce themselves very briefly, starting with Stephen Jones?
Stephen Jones: My name is Stephen Jones. I am the chief executive of UK Finance, which is the trade association that represents about 270 banks, building societies, credit card companies and payment service providers across the UK. We act as a convenor across that industry, with expertise in relevant underlying markets—wholesale, retail, commercial, payments—and we have been working closely through the crisis with our members, regulators and Government as the responses to the crisis evolve.
Stephen Haddrill: I am Stephen Haddrill, director-general of the Finance and Leasing Association. We represent 166 finance houses in the personal lending area, lending to SMEs through leasing products, and motor finance. All total new lending each year is about £140bn, and about £200bn in total at the moment.
Chair: Information we received today is that UK Finance is saying that the loans going out at the moment total £1.1bn, which is 6,000 successful loans out of 24,000 applications. On the face of it, that sounds encouraging, particularly given that we started at a very low level initially, but when we look at places such as Switzerland, where 18,000 companies are being helped in this way, or Germany, where they seem to have got out about €7bn-worth of finance in this way, we still appear to be lagging some way behind where we could and should be. I would value your comment on that.
Stephen Jones: In the three or so weeks since the CBILS [Coronavirus Business Interruption Loan Scheme] has been put out there just over 20% of loans applied for to date have been granted. I point to the fact that the CBIL scheme is a very different one from the German and Swiss schemes, which are both 100% guaranteed schemes.
In that context, therefore, the credit assessment required by banks in deploying the money is much simpler. In the UK scheme, we have to decide as banks, as participants in the scheme: was the business viable on 31 December 2019? Does it have the capability, after the crisis, to repay the debt that it is proposing to take on? Is there security that it can make available to support the loan?
Since the clarifications to the scheme announced by the chancellor on 3 April, it is clear that all viable businesses now are able to access the scheme. Previously, those businesses who could have borrowed on arm’s length commercial terms were required to do so, and were denied access to the scheme. In that context, following the three weeks that we have had to deploy, we would like to see a bigger number; we are working extremely hard to increase it, and it is in everybody’s interest for every viable business that falls within the rules of the scheme to receive financing under the scheme as quickly as possible. All the accredited members under the scheme are doing everything that they can to make that happen.
Chair: You said you would like to see it bigger—we would like that, too. Do you have a number that you could put on that, for a week’s time, two weeks’ time and three weeks’ time?
Secondly, you mentioned the 100% guarantee situation. That would bring with it some element of moral hazard: if banks have no skin in the game and are not at risk at all, and they are playing with taxpayers’ money, can one expect them to behave entirely responsibly? Do you recognise that problem? How much of a problem do you think that would be if the Government introduced 100% guarantees?
Stephen Jones: I recognise the problem. In identifying a scheme where the Government are guaranteeing 80% and are requiring firms to undertake credit assessments of proposed borrowers on the way in to the scheme, the Government are expressing a very different risk appetite and parcel of businesses that they wish to support under the scheme than is being expressed for smaller businesses in Germany and Switzerland.
There, a risk decision has been taken—they want everybody more or less that was viable going into the crisis to receive that money, and they want them to receive it fast. That is not the decision we have taken in the UK; that is a decision for Government to take. We work within the rules of the scheme as they currently exist. Banks have 20% risk exposure; they are also required to assess the Government’s 80% risk exposure on the Government’s behalf in making the credit assessment.
Were the Government to want to support more businesses, including those that might not otherwise be able to repay debt after the crisis, it might be possible to change that guarantee level in the scheme. Banks would then not be required to undertake a full credit assessment. But I recognise your analysis of the moral hazard that that represents.
There will be more unsuccessful businesses that are able to access credit under the scheme, and possibly a greater risk of fraud. It is possible that we need a combination of the two: at the very small end of the SME market, perhaps loans below £25,000, where there is huge volume and probably the biggest backlog, making the scheme simpler for that kind of borrower might be a solution that we would look at. I would urge a few more days of patience, as we see how the data pan out and how much more we are able to deploy at pace, before any re-engineering of the scheme is done.
Felicity Buchan: As I see it, businesses are looking for three things from the banking sector. They are looking for sufficient capacity; they are looking for quickness of turnaround; and they are looking for the loans to be on reasonable, non-exorbitant terms. Do you think the banking sector is delivering on those three criteria?
Stephen Jones: I do think the banking sector recognises that it needs to be the transmission mechanism for the solution in this crisis, that it is not part of the problem in this crisis, and that it has an opportunity to make good some of the ills of the past. I see behaviour day in, day out that is designed to support customers, whether through the rapid deployment of CBILS—as rapidly as it can be deployed, given its terms and the speed at which it was required to be engineered—or through other measures. Those include lending to borrowers who are not eligible under CBILS, normal payment holidays and forbearance being shown to existing borrowers in respect of their existing debt, and advice when it is required by businesses to decide what the best course of action is.
What the vast majority of businesses in our economy are enduring at the moment is a horrendous shock to our economy and to those businesses. The banks very, very much want to be seen to be, and to act as, part of the solution to make that shock as manageable as it possibly can be. I would, however, stress the remarks made by the Chancellor—that not all businesses will survive this crisis. There were businesses that went into the crisis that were not strong. In a normal year over the last five years, around 12% of all businesses have failed and been wound up. We need to ensure that we are engineering solutions that give the greatest chance to the greatest number of potentially viable businesses, and which give them the opportunity to trade through and trade out of this crisis when eventually the recovery comes. I am absolutely convinced that the industry is doing everything it can to make that happen.
Felicity Buchan: I have heard that only two banks are offering essentially overdraft facilities under the CBIL scheme. Would you like to see that extended, with more banks providing those facilities?
Stephen Jones: There is a problem for some banks who were not previously active in the sub-£25,000 loan range—whether that was a term loan or an overdraft—in mobilising themselves to do so. From a regulatory and legal perspective, it is quite a complex space to operate in. If you were not operating at that size of loan on the existing British Business Bank operational rails, it is quite hard to set that up safely. There are significant conduct penalties for getting that wrong at the smaller end, and, believe it or not, the Consumer Credit Act also applies to smaller businesses.
Many small businesses at the smallest end have not borrowed, historically. If you have banked a business customer for many years, but that business customer now comes to you to undertake a loan for the first time, you also have to undertake full KYC—know your customer—checks on your customer for the first time. Those are all aspects of our regulatory and legal framework, designed in peacetime to protect small businesses and to ensure that they can navigate the financial system as safely as possible, that actually cause some difficulty in deploying quickly and at pace today at the smaller end of the market, which you point to.
Felicity Buchan: I have heard that certain big banks are just refusing to lend to certain sectors—for instance, financial services. Is that your experience?
Stephen Jones: I can’t comment specifically on financial services. I represent a number of non-bank financial services providers who are a critical part of the system and who do need financing. Many are financed through bank lines and then inter-securitisation structures, and those funding structures are not working at the moment because the underlying markets are not working. We are in very detailed discussions with the Treasury and the Bank of England to try to design a scheme that will enable those incredibly important credit transmission mechanisms—often to underserved segments of the consumer and SME market—to continue to operate, because we need them to operate coming out of this crisis. I do recognise this somewhat. I wouldn’t say that it is banks not lending to non-banks; I do not recognise that construction. But I do recognise that for non-bank specialist finance providers who rely on wholesale funding, their funding models are not working at the moment.
Angela Eagle: Mr Jones, do you think, given your experience to date, that the coronavirus business interruption loan scheme is actually too complex to achieve its aim, which was to save businesses forced to shut because of the lockdown?
Stephen Jones: I’m not sure that was the aim, given the terms on which it was deployed. I think its aim was to save viable businesses that have an opportunity to survive and that will have the capability to repay the debt that the civil scheme requires them to take on. That is certainly the scheme that we have been asked to deploy.
I think that if risk appetite is greater than that and the Government wish to provide greater means for more businesses to survive the crisis, then potentially the scheme could be made simpler, and it could be made a little more generous, in order that more businesses have the opportunity to survive.
However, I do believe that within the parameters of CBILS, given the time, it will be shown to succeed, particularly for mid and larger SMEs. At the smaller end of the SME market, where, as referenced, there are operational difficulties, we are working very hard to deal with as many as we can in as automated a fashion as we can. However, that is difficult, and the scheme is not the same as the equivalent scheme, for example, in Germany, which is called Schnellkredit. That was actually launched today, with 100% Government guarantees for the smallest of SMEs.
Angela Eagle: Do you think that it is really possible to define, in such unprecedented circumstances, what a viable business is, when the Government have, for the very understandable reason of saving lives in an unprecedented global pandemic, effectively told the economy that it has got to be on hold? How on earth do you decide what a viable business is in that circumstance?
Stephen Haddrill: That’s an historical judgment, I think, rather than a forward-looking one. If the business has been successful up until now, I think it is worthy of support, rather than trying to use a crystal ball to identify what is coming up.
The other thing is that, as Stephen [Jones] said, there is this big non-bank sector that the Finance and Leasing Association represents. It is very keen to lend, but it is having trouble accessing the capital markets in order to take forward that lending. And of course, in many cases the FLA has very long-term customers, so they are able to form a judgment about those customers—there are also some quite deep relationships—and they will want to keep them alive. So, I think this non-bank issue is a really important one, and we need to have the schemes widened, speeded up and so on, so that they can be brought into the mix.
Angela Eagle: And is the bottleneck the British Business Bank and its capacity to accredit new lenders?
Stephen Haddrill: It is an issue about the speed of accreditation. They have put a lot more people on.
Angela Eagle: I think they had two originally—stunningly—and they now have 25. Is that what is going to save the British economy?
Stephen Haddrill: No, I think they need to go further. Our members have offered to give them staff to help—trained underwriters who could support them. I also think the process needs to be looked at. It is not just about new people. It is about whether the governance around decisions being taken—which, to use Stephen’s earlier phrase, is a peacetime process—can be speeded up; that ought to be considered. There are other things. The Term Funding Scheme from the Bank of England for SMEs (TFSME) flows into the banks. It does not flow into the non-bank sector, so we need something similar for the non-bank sector.
Rushanara Ali: Mr Jones, I want to pick up on the points that have been made. In terms of the broad thrust of what you are saying, what is your sense of how small businesses are ultimately being treated? If we take the long view of how small businesses ended up suffering in the last financial crisis, you spoke about survival, and it feels like there is a narrative—it is not your narrative—of survival of the fittest, but the impact on different groups of businesses will be different. Larger businesses—quite understandably, because of strategic interests—are going to get more help faster. They will be able to overcome some of the barriers you mentioned.
You touched on the 100% guarantee. Can you be more explicit? Should the Government make a strategic decision about saving those small businesses, particularly the ones on the frontline that are essential to our communities? Do you think the Government should step in and support them, at least for the foreseeable future, because they did not start off with a level playing field and this is exacerbating those inequalities? Do you think the Government should take action now, in the light of what you and your colleague have said?
Stephen Jones: First of all, the SME community and the smaller end of the SME community are the vital backbone of business in the United Kingdom. I think they will be absolutely critical to our successful emergence from this crisis, and I believe that we should do everything we can to provide the support that enables that economic capacity and enables the personal and social issues associated with businesses failing to be avoided as much as they possibly can be. Where you define the limit in terms of businesses to support and not to support is ultimately, in the current circumstances, a matter for Government, rather than for me as a spokesman for the banking industry. The banking industry will do everything it can to support as best it can, within the parameters that it has. Ultimately, banks are lending depositors’ money, so unless there is a measure of support for greater risk appetite and trying to get the money back at the end of the crisis, they cannot lend to businesses that they perceive to be likely to fail through the crisis.
Rushanara Ali: Basically, your message to Government is—I am putting words in your mouth—“Get your act together on this essential section of our economy, which employs millions of people, and banks will step in and address it, but don’t attack banks when we are doing the best we can in the circumstances.” Sorry, I know that those are my words, but is that essentially what is happening?
Stephen Jones: I would never say, “Government, get your act together.” We are in unprecedented circumstances, and the range of measures that has been introduced not just in lending but in rates and jobs is incredible—it is unprecedented. Those are being deployed at speed and at pace. I also think that the Government is listening. I am absolutely convinced that, as circumstances emerge and as, visibly, we see those support packages that are working more or less better, Government will adapt to the circumstances as they are seen out there on the street.
Anthony Browne: For the record, I should declare that I used to be chief executive of the British Bankers’ Association, the predecessor body to UK Finance. Are there any other groups of customers that fall through a gap?
Stephen Jones: The Government hopes to deploy [CLBILS] in the next couple of weeks, certainly this month, for businesses with a turnover of above £45m but below investment grade status. Investment grade companies have access to capital markets and the Bank of England commercial paper programme. Capital markets are slowly resuming for issuers in that space. I am probably missing something, but that strikes me as being the spectrum of businesses, from the small to the largest, and where the gaps are. I think CLBILS will largely bridge the gap between the existing CBILS programme and the commercial paper programme that is already out there, but we need to see the full details as that is deployed in order to be sure of that.
Stephen Haddrill: I do think that access to the CCFF [Covid Corporate Financing Facility] for the non-bank sector would be extremely helpful to them. As I said before, I think that they themselves are struggling to raise money. The other point I would make is that so much of the focus at the moment and so much of the financial support is about forbearance—it is about just keeping businesses alive by deferring loans, deferring payments and so on. I feel we need to work out where we are going to be in three to six months’ time. How will we get investment money into business and not just money to keep them alive? I think that could turn out to be quite a big gap if we do not think about it clearly beforehand.
Anthony Browne: Stephen Jones, you mentioned—and Stephen Haddrill followed up with—the observation that the regulations are peacetime regulations, things like the due diligence that you need to do on KYC [Know Your Customer] and other regulatory requirements. Are there any particular regulations that you think should be suspended now to help facilitate lending to small companies?
Stephen Jones: At the smaller end, I mentioned the three areas, and the Consumer Credit Act is the most difficult. It is a very arcane piece of 1974 legislation. The liability associated with getting your statements wrong—in the wrong format and at the wrong time to borrowers—means that the loan is completely unenforceable. So the risk-reward of taking a risk with the Consumer Credit Act and getting out there and making the loans that you want to make to businesses at the smaller end of the spectrum is pretty horrendous for firms in relation to that piece of legislation. But I recognise that, as we are operating in wartime, the opportunity to properly reflect on the Consumer Credit Act and change it, which is something that we have all talked about for many years, and doing that at haste in the current environment, might be difficult. But I would point to that particularly.
I think that the FCA, in terms of its own rules in the consumer credit space as they relate to smaller businesses, is showing flexibility, which I applaud, just as it has been showing flexibility around consumer forbearance in the unsecured space where it has suspended some of its CONC [Consumer Credit sourcebook] rules which would otherwise have made that forbearance difficult. I certainly think that we need to look at the Consumer Credit Act as soon as we can. It has all sorts of perverse consequences. It did not work in peacetime and it certainly does not work in wartime.
Steve Baker: We are going to see some very large sums of money moving to people, often desperate, looking to survive in this crisis. Many of us will remember [RBS & NatWest’s] GRG [Global Restructuring Group] and other scandals that have taken place. Moral hazard has already come up. To what extent are you persuaded that the institutions making these loans have the right culture and, more importantly, the incentives today to ensure that the people actually handling these loans make the right decisions and do not put their own interests first?
Stephen Jones: I believe that there are no disincentives to doing the right thing on the frontline. I think the industry recognises that it has a unique opportunity to restore its reputation, particularly with the SME community, in the light of some of the scandals that you reference. What I see and what I hear on the frontline every day are a bunch of extremely motivated and very hard-working individuals who are incentivised and motivated to do the right thing and to be seen to be doing the right thing. I really, really hope that we will not see anything like the repetition of the previous history to which you referred.
Julie Marson: Do you think that, from day one, we have learned anything from the previous schemes that will enable lending under that scheme to be ramped up more quickly where it is needed?
Stephen Jones: Lending to bigger companies is inevitably more bespoke. I think the intention is that lending should be not necessarily all on an interest-free basis but should reflect the implicit risk—that there will be a Government element to guaranteeing some of the credit risk associated, making it easier for the banks to make loans of the size the businesses may require. The fact that we have had a couple of weeks to talk about it with Treasury officials and with the Government has given banks a little more time to prepare than they had previously. Inevitably, the original CBILS programme was delivered at very great speed and there was less time to prepare. I am hoping that the smaller volumes, the more bespoke nature of the CLBILS programme and the fact that we have a little more time to prepare will make it easier to deploy but, again, it is not all going to go out of the door on the first day. We need to be careful about the promises made in respect of the scheme.
Chair: Stephen Haddrill, do you wish to share any further thoughts with the Committee?
Stephen Haddrill: Just a couple, yes; thank you very much, Chairman.
First, over the last 10 years we have seen, in the re-emergence of the non-bank and the independent sector, a sector that the FCA itself regards as very innovative and that is lending to people who are close to it. It is very close to the customer. Whatever can be done to support it is really important.
Secondly, the supply of credit is so fundamental that it has to be speeded up, and the supply chain of credit has got to be shortened. At the moment you have Bank of England support going into the main banks, which might then pass it on to the non-banks, and they pass it on to their customers. Let us short-circuit that and get that Bank of England support or British Business Bank support directly to that sector.
The other area where speed can be compromised at the moment is, as Stephen [Jones] said, because of the Consumer Credit Act. In its latest guidance, the FCA has found some workarounds that work in the current three-month period. They work in that period because the FCA can say that it will understand that the regulations will be worked around and so on. But as we move out of that three-month period where you have a standardised approach to helping the customer, and into a period where I suspect there will have to be a lot of discussion with customers about whether they can really afford another three months, firms may be at greater risk of being accused of making the wrong calls in the future, and if they have not strictly followed the Act, they will be exposed to compensation claims.
I don’t think the CCA thing has been dealt with for the entirety of the crisis; it has been dealt with for the next two to three months at most. Finally, I would say that we all need to put our thinking caps on about what happens after the three-month period and do so as quickly as possible.