Small Businesses (Hansard, 26 January 1993)

§ Mr. Lamont

In recent months much concern has been expressed both that banks have been failing to pass on cuts in base rates to their small business customers and more generally that they have acted in a way that is damaging to the small business sector. That concern has been brought home to me in many letters from small firms and in representations from MPs. I therefore asked the Batik of England to repeat the survey of bank lending to small businesses that it undertook in June 1991. I have discussed the results with the main clearing banks and the president of the British Bankers Association.

The Bank has now carried out its study and I am placing a copy of its report in the Library. The main findings are:

the number of small business accounts is about 4.1 million, of which two-thirds are in credit;
around a quarter of continuing borrowers (ie those who were borrowing both in June 1991 and November 1992) have seen their bank facilities reduced, against a third who have seen an increase;
around 60 per cent. of small business borrowers benefited from the full 4.5 per cent. reduction in base rates seen between June 1991 and the completion of the survey, and around a further 10 per cent. actually saw their borrowing margins reduced. Margins widened on 30 per cent. of accounts, about half by more than 0.5 per cent.;
there has been little movement in average margins, but there is a wide variation in average margins between different banks;
three banks operate minimum interest rate floors, but none have yet come into play;
the trend towards greater implementation of fees and charges has been maintained and some banks have raised their levels;
the proportions of lending at fixed rates and for specified terms (as opposed to overdrafts) has increased slightly.

The Bank's survey is the most comprehensive and recent guide to the interest rates charged by banks to small businesses. It confirms, as did the survey in June 1991, that the majority of small businesses have seen their interest rates come down in line with the reductions in base rates over the last year. This finding is supported by the Nottingham university study recently published by the Forum of Private Businesses. This is welcome news, because it means that the benefits of falling interest rates are being passed through to small businesses which have a vital part to play in bringing about economic recovery.

I welcome the moves a number of banks have made to increase the number of borrowers on term rather than overdraft finance. That can bring greater certainty to borrower and lender alike. I believe there is also a place for more fixed rate lending. I was disappointed, therefore, that the survey showed that interest rates offered on fixed rate loans had remained very much higher, at around 15 per cent., despite the fall in base rates and longer-term market rates. I am pleased that several banks have reduced their fixed rates since then and I hope that they will keep these rates under review.

Although the broad picture on interest rate margins is reassuring, there is no doubt that many small businesses remain dissatisfied with their banks, so, when I met the bank chairmen and chief executives, I explained the concern that has been expressed in letters to me and others.

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The banks stressed the importance of the small business sector to them. They pointed out that the number of complaints is small by comparison with the overall number of customers and transactions and that tensions are bound to arise between banks and some customers in a recession. They argued also that they have had to make heavy provisions for losses on loans to small businesses and that they have to take that into account in their judgments on credit risk and pricing.

I pointed out that the complaints that I have received bear more widely on the quality of service offered to small businesses. It was in response to such complaints that I asked the banks to publish codes of practice for their small business customers and set out seven principles which codes should satisfy. All the major Scottish and English clearing banks have now produced such codes. Small firms and their representatives have generally welcomed this development and the willingness by banks to work to ensure greater transparency in relationships with customers. I know that the banks will continue to keep their codes under review and to assess how their relationships with their customers might be further improved; recently, for example, Lloyds substantially revised its code in response to customer pressure. I am pleased also that all the banks have introduced—or will introduce in the course of 1993—pre-notification of charges. This is a further positive step.

One important element of each code is to set up a clear procedure by which small businesses can take up complaints which cannot be resolved at branch level. The chairmen of the banks have assured me that they ensure that such complaints are looked into closely. Most have established special units to this end and the chief executives and chairmen themselves review a large number of cases personally. These procedures deal successfully and quickly with a great many complaints by explaining the basis of decisions clearly or by putting right mistakes that have been made. I hope therefore that small businesses, and MPs and others with whom they may correspond, will take up complaints directly with the banks, if necessary at the highest level.

There will, of course, be a number of customers who remain dissatisfied. Many will dispute the banks' judgment on how much they should be lent or on what terms. Such arguments have to remain a matter of negotiation between the banks and their customers. It is not for the Government or any other third party to second-guess the banks' commercial judgment on such matters.

However, a number of complaints I have received allege maladministration, for example charging incorrectly or the changing of terms without proper warning. In most cases, complaints of this sort can be resolved through the banks' internal procedures. But in the minority of cases where that is not so, personal customers and unincorporated businesses can take their case to the banking ombudsman. Small incorporated businesses cannot.

The Jack committee on banking services in 1989 recommended that the ombudsman scheme should be extended to cover incorporated businesses because they often faced identical problems and constraints. At that time, the change was resisted by the banks and not accepted by the Government. In view of the continuing level of complaints, I have taken the matter up again with the largest banks and with the president of the British Bankers Association. They have agreed that the scheme should be extended to cover small incorporated businesses 623W with a turnover of less than £1 million a year. They will now propose this change to the council and board of the banking ombudsman.

Given the continuing interest in the financing of small firms, I have also asked the Bank to continue to monitor from time to time developments in the provision of bank finance to this sector.