Small and Micro-Business Borrowing — Question for Short Debate

Part of the debate – in the House of Lords at 4:23 pm on 24 May 2012.

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Photo of Baroness Kramer Baroness Kramer Liberal Democrat 4:23, 24 May 2012

If I take interventions I will not get through my speech, so I am going to carry on.

I refer anybody questioning the barriers that come through the regulator to a very good piece called Street Cred by Civitas. It is a bit melodramatic, but it underscores all the difficulties that people face. I have talked with people in the US, and they reckon that it takes roughly six months and costs $2 million to get a new bank started. That is a very different situation.

The Government must develop a specialised bank licence and an appropriate set of capital requirements for small local-community banks undertaking the social impact obligation. We need off-the-shelf packages for small bank start-ups to provide economies of scale, including basic regulatory approval, working software and other forms of support. The US does it-it is called "bank-in-the-box". We need a regime to enable banks that fail to be dealt with quickly as that gives confidence, especially to the regulator, to lower entry barriers. The Banking Act 2009 failed to do that. The FDIC in the States does a far more effective job. We have to introduce such a regime. I do not see signs of it but I hope that it will come. We should also deal with the VocaLink payments system, which is owned by a cartel. There are many regulatory barriers and failures in the system. Their removal could make a fundamental difference to what we do.

I wish to make two suggestions. First, RBS is, frankly, an albatross around the Government's neck. If RBS's branch network were used to create a community banking network, we could see a massive and rapid step change in this area. Secondly, we should examine what kind of lending high street banks undertake, see where the gaps are, and whether they are genuine gaps. It seems to me that there is an argument for saying to those banks, "We are not going to make you undertake this lending but we will have you fund someone else who can through capitalising a local community bank".

In the time I have left I wish to say a few words about the innovative online lending platforms. I am not talking about companies such as Wonga but about the platforms that have investors on the one side and borrowers on the other and offer non-exploitative lending rates. They are new in the field and have grown up in the past two years-for example, companies which offer crowd financing and peer-to-peer financing. I am sure that noble Lords find that term hilarious. This industry has significant potential but is begging for stronger regulation. There is an enormous fear in the industry that a couple of cowboys might come in and create havoc, resulting in terrible headlines, investors fleeing and the regulator intervening in an incredibly heavy-handed way. It is crucial that the Government provide a more constructive regulatory framework which is proportionate and does not stifle the industry's growth but which engenders confidence in the industry so that it can move forward.

I do not want to pretend that the Government have done nothing in this area. I am sure that the Minister will list what they have done. I acknowledge that things have been done but not on the scale that is necessary to support our SME sector. It is vital that the Government understand the limitations of the high street banks instead of constantly telling them that they should lend to these companies. They will not and cannot do that. The Government must have a coherent plan to fill this vacuum and must enhance the opportunities for local banks and quality online lenders. One of the problems is that there is no one in the structure of government at the moment who leads on this issue. It is split between BIS and the Treasury, and within the Treasury there must be five Ministers covering different parts of it. The Government should identify a champion to try to resolve this problem and take it forward. If they do not, we will not sustain our small businesses which are the backbone of our economy and we will give all the space to our competitors.