HC Deb 16 November 1992 vol 214 cc116-22

Motion made, and Question proposed, That this House do now adjourn.—[Mr. David Davis.]

10.13 pm
Mr. Michael Bates (Langbaurgh)

I am grateful for the opportunity to talk about the banks' code of practice, and in particular about the speed and extent to which interest rate changes are being passed on to my constituents—especially businesses.

I believe that the policy presented over the past two or three years by my right hon. Friend the Chancellor of the Exchequer—a policy of reducing interest rates—represents the best way of stimulating economic activity. It is a welcome move, and has been supported by hon. Members on both sides of the House. Over the past two years, base rates have fallen from some 15 per cent. to 7 per cent., providing a welcome boost to industry, to small businesses and to the consumer.

Along with many of my hon. Friends—a handsome number of whom are present this evening—I am worried about the findings of a recent survey. The survey shows that, although base rates have fallen by some eight percentage points, the cost of borrowing for small businesses has fallen by only about 2.66 per cent. over the corresponding period. If we take the figure that is being widely used, each reduction of one percentage point in the base rate provides the economy with a £1 billion boost. It is also said that that produces a saving of some £200 million for small business.

Given that the survey is accurate—I have no reason to doubt that; the figures have been confirmed by people who have written to me from many parts of the country, and I am sure that my hon. Friends' mail bags contain the same information—the economy is being short-changed to the tune of some £5.5 billion in terms of interest rate reductions. That is twice the transport budget. Moreover, small business is being short-changed to the tune of some £1 billion. I want to make it clear to the banks and other lending institutions concerned that that apparently widespread practice is unacceptable.

Mr. Nigel Evans (Ribble Valley)

A small business in my constituency started up in 1990 paying interest at 3 per cent. over base rate in June that year. When it closed down in May 1992 and it looked into its charges a month later, it found that it had been paying up to 9.2 per cent. above base rate, having not been consulted by the banks involved. Much of the confusion involving businesses arises from the fact they simply do not know by how much the interest that they are paying exceeds the base rate. Ought not the banks to include in statements, on a regular basis, the amount of interest that they are charging businesses?

Mr. Bates

My hon. Friend has raised a pertinent point, with which I shall deal later. He speaks with great experience, having been in business himself and become acquainted with the problems encountered by small businesses in their relations with banks.

A constituent of mine, who runs a small business, received a letter from a bank, headed "Interest rate margins". It stated: We are presently taking stock of the markedly adverse economic conditions with which all of the Banks are now having to contend, and we find that all of our major competitors have been sharply increasing their interest rate margins across their lending books over the last year or so taking advantage of the fall in … rates … We … have found ourselves increasingly out of step, and belatedly and with a degree of regret we do feel that we now have to increase our lending margins". When we hear from the bank chiefs, they tell us that that kind of thing does not happen now. They say that we now have banking codes of practice—even on banking charges. We see all that in nice advertisements on television. There is conclusive evidence, however—dating from only two weeks ago—that such activities are happening on an alarming scale. That evidence is backed up by the Federation of Small Business and by the Forum of Private Business, which regularly surveys some 20,000 private businesses up and down the country.

Two particular aspects in that letter cause concern. The first is the practice of applying fixed minimum lending rates—that is, above the minimum lending rate set by the Bank of England and subsequently agreed to by the high street banks. Fixed minimum lending rates can often be in the region of 10 or 11 per cent. today when bank rates should be 7 per cent. That is why many businesses are still paying 16 or 17 per cent. in interest rate charges even though base rates are 7 per cent. That is an extremely heavy burden to put on the backs of small businesses. As I said earlier, it is entirely unacceptable.

Mrs. Angela Browning (Tiverton)

Does my hon. Friend agree that another burden that banks put on small businesses is that they often exercise the right to impose a floating charge on a loan? When businesses experience difficulties, therefore, the banks are able to pick and choose which assets should be liquidated, which results in many businesses that could have overcome their difficulties going bankrupt and having to be wound up.

Mr. Bates

I am grateful to my hon. Friend. She has made a valid point, which I know is the result of a great deal of experience and noble service with the Small Business Bureau.

My second point concerns interest rate differentials, from which we can draw another conclusion. Interest rate differentials are being used, in effect, as an insurance premium. The banks say openly that they assess risks and then increase the margin appropriately. That is a short-sighted view. If a small business borrowed a large amount of money and is therefore overdrawn at the bank, it is highly unlikely that the profitability of that business, or its chances of survival, would be improved by increasing the interest rate burden on it. We ought, surely, to be considering reducing the interest rate burden on that business. That is the best way to ensure that it stands the best chance of survival in our present difficulties and that it will be in existence in a few months' time to repay its loan and pay back some of the interest charges.

I was interested to learn today that one bank has announced that it is to abolish the practice of charging fixed interest rates and minimum lending rates. I am absolutely delighted that at the eleventh hour that bank has decided to do so. Far be it from me to suggest that nothing sobers the mind of a banker so much as the threat of adverse publicity, but if the threat of adverse publicity provokes banks to take positive action, many of my hon. Friends and I are more willing to make many more similar comments and remarks.

I have talked to a bank manager in my constituency who had worked there for 35 years—that was in the days when bank managers looked after businesses, as opposed to being financial services providers. He said that he used interest rate differentials for one purpose only: when there was an increase in the amount of administration in connection with the handling of the account. In relation to risk, he said that there were only two types of lending—good lending and bad lending, that one lends to the good and that one avoids the bad. That seems to me to be a breath of fresh air and a bit of common sense that could well be adopted by many of the banks in their present dealings with small businesses.

Small businesses face considerable problems in their dealings with the banks. In many cases, they are held over a barrel by the bank in question. Their ability to negotiate is severely constrained. Many high street banks behave somewhat like a cartel, in that they will not accept any movement in cases where there is an overdraft or a lending problem. Their ability to move or negotiate is virtually non-existent. It therefore falls upon elected officials, politicians, Ministers and the Government to express disapproval about such action at every opportunity so that the banks are provoked into action.

Mr. Gary Streeter (Plymouth, Sutton)

Does my hon. Friend agree that a further disgrace is that small business men cannot telephone their bank manager or go to see him without being charged for the privilege and incurring an arrangement fee?

Mr. Bates

My hon. Friend makes a valid point about the excessive charges of banks. That takes us back to the point of bank charges not being thoroughly understood by the customer. Much more clarification, certainly for small business, is necessary.

Banks should realise that, by treating small businesses as equals and by entering into partnership with them, they could be of much assistance to those businesses and could help the economy to recover. That would be a welcome sign. Interest rates for credit card purchases are 26 to 30 per cent. What incentive is that to restore confidence in the high street, to bring customers back to high street shops, thereby encouraging and stimulating those necessary businesses?

Mr. Rod Richards (Clwyd, North-West)

My hon. Friend will agree that the high street banks are flying in the face of Government policy by increasing their margins on loans. Does he agree that they are fuelling the recession by not financing perfectly sound economic proposals, in order to protect themselves, at a time when they should be expanding lending?

Mr. Bates

I agree with my hon. Friend. So many of the high street banks are behaving not like high street banks but like back street money lenders. That does no service to the banks or to their customers.

I ask my hon. Friend the Economic Secretary to urge our right hon. Friend the Chancellor to call in the banks again to make their role in the economic recovery abundantly clear and to highlight the problems that have been experienced by small businesses. When my right hon. Friend the Chancellor last called in the banks, there was a flurry of activity, with hastily produced codes of practice and banking charters. I see no reason why we should not see a similar flurry of activity, which not only might benefit customers, small business and the economy but would do much to enhance in many people's eyes the tarnished reputation of many high street banks.

10.28 pm
The Economic Secretary to the Treasury (Mr. Anthony Nelson)

I congratulate my hon. Friend the Member for Langbaurgh (Mr. Bates) on an outstanding speech on a subject that is of much interest to hon. Members on both sides of the House.

Mr. Nigel Evans (Ribble Valley)

This is an extremely important debate that has attracted interest among many Conservative Members, yet if one looks across at the empty Benches opposite one sees that no Labour Member is present and only one Liberal Democrat. That is shameful, because Opposition Members talk about the recession, the pressure on employment and jobs, yet not one is present tonight.

Mr. Nelson

My hon. Friend is right. I was trying to be generous. The hon. Member for Rochdale (Ms. Lynne) is a worthy opponent and we are delighted that she is here today.

My hon. Friend the Member for Langbaurgh has tonight proved himself a doughty champion of small businesses. He has spoken for small businesses throughout the country—for the proprietors, for the directors and for the many who work for them. We all know from our constituencies that many of them have been through a tough time in the past couple of years. Many undoubtedly feel aggrieved on occasions about the treatment that they have received from the banks. We know that because people have written to us. My hon. Friend put the case so well this evening that I am sure that the message will go out to all the banks which are, I am sure, following this debate.

It is a sign of his power of persuasion and of the compelling arguments mustered by my hon. Friend that not only am I here, in a minor capacity, to answer the debate, but the Chancellor of the Exchequer gave undertakings to the Treasury and Civil Service Select Committee today, the Prime Minister has been making a speech on this very subject at the Mansion house tonight and, as my hon. Friend mentioned, a bank has already taken action. That is a remarkable response to my hon. Friend's initiative in obtaining this debate. I congratulate him wholeheartedly.

The interventions by my hon. Friends the Members for Ribble Valley (Mr. Evans), for Tiverton (Mrs. Browning), for Plymouth, Sutton (Mr. Streeter) and for Clwyd, North-West (Mr. Richards) were also extremely good. They reflected the widespread concern which is evident from the letters I receive as Economic Secretary and which goes well beyond the House.

My hon. Friend the Member for Langbaurgh spoke about the economy and about small businesses being short changed. He spoke especially about his concern about the setting of fixed minimum lending rates. He said, rightly, that the banks must be the friends and not the foes of small businesses. He called for the banks to be called in, which is exactly what my right hon. Friend the Chancellor announced today to the Select Committee.

I know that there has been especial concern in recent weeks about reports that some banks have been failing to pass on to their small business customers the full benefits of the reductions in interest rates. My right hon. Friend the Chancellor has already made plain his wish that the banks should pass on the benefit of interest rate cuts, not only to small business customers, but to all clients who borrow money. I am pleased to have the opportunity tonight to reiterate my right hon. Friend's views.

The exercise that the Treasury and the Bank of England conducted last year found that banks do pass on cuts automatically to customers whose borrowings are linked to base rate, although there was clear evidence that banks seek to widen margins if they feel that the risk—to— reward ratio has moved against them, when facilities come up for renewal or when customers seek to increase their loans. That is classic territory for commercial negotiation, and not for Government intervention.

Banks cannot be expected to lend unprofitably, but given that the recession has increased the risks for many small businesses, it is in neither side's interests for the burden on the customer to be increased to unsustainable levels. The price for borrowing must reflect the needs of both banks and customers, and both sides need to recognise that.

There is evidence that that recognition is happening. In the face of some fierce pressure from the media, NatWest and Barclays announced only last week that they were reducing the interest rate floors which they had previously included in lending agreements with small businesses. Although that is not an area in which the Government can take direct action, we take seriously the complaints that are levelled at the banks, even if they concern matters for the market to solve. As my right hon. Friend announced to the Select Committee this afternoon, he will ask the Bank of England to have another look at the area. He intends to go through it again himself with the chairmen of the individual banks. I hope that that satisfies my hon. Friend.

That said, there is evidence that market forces work, as the announcements by NatWest and Barclays show. Those are not the only recent examples.

Mr. David Nicholson (Taunton)

I hope that the Chancellor, in pressing the point on the banks, will also stress to them that we are increasingly entering a highly competitive European market and that British banks should consider how European banks treat their small business customers.

Mr. Nelson

My hon. Friend introduces a most important dimension into the debate and I am obliged to him. Incidentally, this is not the only occasion on which my hon. Friend has raised the issue. He has spoken of it on several other occasions and I am grateful for what he has reiterated tonight.

The issue of the banks' treatment of small businesses is not a new one. As part of last year's Treasury and Bank of England investigation into the subject, my right hon. Friend the Chancellor asked the chairmen of the major banks to consider drawing up a code for their small business customers. As my right hon. Friend made clear to the House in July last year, he had told the chairmen that the very least that customers had a right to expect from their banks was adherence to seven basic principles, which were: that the terms and conditions of accounts should be fair and reasonable; that the terms and conditions should be notified to customers in advance—a point made in an intervention this evening; that customers should be given a full written statement of the standard tariffs of charges applicable to their account; that they should be specifically warned in advance about any charges not covered by the standard tariff; that customers should be given a clear explanation of the basis on which interest is to be charged; that terms and conditions of an account—other than the interest rate—should not be altered without adequate prior notice in writing; finally, that customers should be given a clear explanation of how complaints may be made about decisions taken at local level.

The bank chairmen, in response, assured my right hon. Friend that those principles were already reflected in their existing policy, but undertook to see what more could be done. Since then, six banks have produced codes of banking practice for their business customers, and another, the Bank of Scotland, one covering all customers. All of them are clearly written in plain English and reflect the seven principles.

It was not my right hon. Friend's objective when he met the bank chairmen last year to persuade them to produce identical codes. Indeed, many of them are different. Business customers can now look at the services on offer and decide which best meets their needs.

Some of the letters I receive, however, have suggested that the Government should go further and carry out their own review of banks' codes—either because of complaints that particular banks regularly fail to live up to the teens of their codes or because the codes do not go far enough. I do not believe that that is a suitable job for the Government. Our role is to ensure that a framework is in place which encourages open competition and allows small business customers a choice. Having played a major role in encouraging banks to draw up their codes, the Government feel that customers themselves must make it clear to the banks if the codes do not meet their requirements.

Question put and agreed to.

Adjourned accordingly at twenty-four minutes to Eleven o'clock.