Adam Tavener takes a recent report on mainstream banks to task and argues that it is a gross oversimplification to suggest that the creation of a national investment bank will solve our productivity issues.
A recent report by think tank Civitas covered the usual ground with respect to the availability of finance to the UK’s SMEs and encouraged the creation of a new national investment bank to replace the existing British Business Bank (BBB), for whom it had few kind words.
As a surprise to me, the report cites the ‘market failure’ of the mainstream banking sector as being the source of our worryingly low productivity, and strongly states that the BBB is ‘not fit for purpose’.
I have to disagree – you simply can’t draw a direct causal link between productivity and the ease of obtaining credit.
Yes, to an extent a business may have to borrow to invest - typically in better technology - but, if the business is creditworthy most of this type of equipment comes with some sort of vendor finance package as standard, so the need to approach a reluctant bank is rare.
If, of course, the business isn’t particularly creditworthy then access to more credit is moot, as more fundamental questions need asking. Either way, I think it is a gross oversimplification to suggest that the creation of a national investment bank will solve our productivity issues.
That said, there is no question that ten years of bank retrenchment did hurt some small business. This was a market failure and the creation of the BBB was part of the government response to this, as was the creation of the mandatory bank referral scheme.
It is my opinion that the way BBB has chosen to distribute its funding, through pari passu arrangements with existing non-bank lenders, thus increasing market liquidity at minimal risk to taxpayer funds, is both sensible and commercially sound, which is why it returns a profit. To generate a profit whilst facilitating an extra £4bn of SME finance is quite a long way from ‘not fit for purpose’.
The report suggests that there remains a shortage of available funding for small business. Tosh. The SME lending marketplace is currently awash with non-bank lenders all trying desperately to get funds out of the door and to work in the marketplace.
The real market failure is simply the lack of awareness that (still) a depressingly large proportion of would-be SME borrowers have to what their real alternatives are. This is where accountants and other business advisers could really play an important role.
For instance, it is surely far better to address this issue by ramping up the understanding of, and adoption of, the existing bank referral legislation amongst both SMEs and their advisers than it is to introduce yet another lender into an already saturated marketplace.
The Civitas report holds up the German KfW state-owned investment bank as a good example that the UK should follow. Maybe, but on closer inspection, KfW was established in 1948 as part of the Marshall Plan, and there is no doubt that it was successful. But, when you are starting with such a low bar and an effectively clean sheet of paper, pretty much any progress looks like a success.
So KfW is 70 years old this year. According to the last figures that I could find its SME lending division provided €20bn (£15bn) of funding in 2015. Set that against a typical year’s UK SME finance provision in excess of £150bn and it doesn’t feel like that big a deal. Useful, yes, but not a game-changer, especially after seventy years on the job.
Their chosen method of distributing loan funds is very similar to BBB as well. Essentially, they use the main banks as their distributors, as opposed to the BBB focussing on non-bank lenders, but the risk sharing and commercial underwriting processes are the same. However, KfW does provide up to 80% of the funding requirement as opposed to 50% over here. Based on the similarity of model one could reasonably predict that BBB would be facilitating far more than an inflation-adjusted £15bn in 60 odd years’ time.
If Civitas really want to resolve the current market imperfections they should get behind the programme that is already in place and shout very loudly that there are already many really good non-bank financing providers just waiting to fund SMEs, and it’s now up to the government, the big banks, and all advisers (not just accountants!) to the small business community to make sure that business owners understand and are aware of these options.
This shift will drive a healthy marketplace, increase competition and, based on their premise, not mine, help improve productivity. That’s got to be better than yet another quasi-governmental entrant into the SME lending space.
About Adam Tavener
Adam is founder and chairman of Clifton Asset Management Plc, the innovators behind the Pension-led funding brand (www.pensionledfunding.com), providing high quality non-bank finance to SME's across the UK. Clifton employs approximately one hundred staff in their headquarters near Bristol.
Currently almost 2,000 businesses have used Clifton for pension-led funding. With over £260million of pension-led funding provided to these SMEs, Clifton is now one of the largest alternative funding providers in the UK, and it was recognised at the Business Moneyfacts Awards 2014 as the Best Alternative Funding Provider in the UK.
The Clifton Group of companies also includes Pensioneer Trustee’s Morgan Lloyd (www.morgan-lloyd.co.uk) and Wealth Management and Employee Benefits business, Clifton Wealth Ltd (www.clifton-wealth.com).
Adam and Clifton were the catalyst for the creation of the Alternative Business Funding (ABF) collaboration and non-bank funding portal - www.alternativebusinessfunding.co.uk. The portal unites the country's top non-bank funding providers to exchange rejected applicants for credit between themselves. In 2014, ABF successfully lobbied BIS and The Treasury to introduce legislation to force the major banks to pass over the details of rejected SME applicants to the non-bank sector.
In the course of developing the ABF collaboration Adam was part of The Treasury working group created to deliver the new bank referral legislation. As well as HMT, Adam has advised the British Business Bank, Downing Street and The Department for Business, Innovation and Skills.
In 2017, HM Treasury, acting on the advice of the British Business Bank, appointed ABF as one of the Government’s designated finance platforms for the Bank Referral Scheme.
Adam is a CBI regional council member.