Moved by Baroness Hayman of Ullock
473: After Clause 214, insert the following new Clause—“Regional mutual banks(1) The Secretary of State must report to Parliament, within 3 months of the date of the passing of this Act, on existing barriers to the establishment of regional mutual banks in the United Kingdom.(2) The report must consider—(a) current capital adequacy requirements,(b) other limiting features of the current regime,(c) regional mutual bank structures in jurisdictions outside the United Kingdom and the adoption and adaptation to the United Kingdom of best practice, and(d) the use of dormant assets as seed capital for the establishment of such regional mutual banks.”
My Lords in the absence of the noble Lord, Lord Holmes, I shall move this amendment on his behalf.
One particular problem that has dogged us for decades is the lack of funding, including sufficient credit facilities, to our critical SME community. We know that SMEs are considered to be the backbone of the economy, the largest private employer, the large companies of tomorrow and so on, but despite this, the funds have never really flowed through from our traditional financial services sector to support SME activity and rightful ambition. The British Business Bank put it perfectly in its March 2022 report:
“Historically, SMEs are underserved by the finance sector, and often don't have the same characteristics that banks and other lenders like about large corporations. This includes lengthy credit histories, detailed audits and financial accounts, and a large portfolio of assets for collateral on debts. For start-ups, whose business models are unproven and yet to be deemed creditworthy, these problems are even more pronounced”.
This is not a universal problem experienced by SMEs around the world. It is done differently elsewhere. In Germany, for example, in 2021 SME funding was more than €600 billion; in the UK in the same period, it was just £57 billion. Even when all the necessary adjustments are applied, it is not a great picture, nor a growth picture. It is hardly surprising then that we are seeing a post-Covid trend of SMEs moving away from the traditional financial services sector. Again, the British Business Bank has noted:
“After the end of the coronavirus loans facility in March 2021, an interesting trend to emerge was that SMEs began to move away from large banks for their finance needs. Instead, challenger and specialist banks made up 51% of lending in 2021, compared with 32% in 2020”.
When it comes to the regional dimension, it just gets worse for SMEs, with those in London receiving over 70% of equity investment, with just 30% for the rest of the UK. This is obviously not great news for the economy, but it also results in lower levels of community and differing levels of well-being. How can we level up this country if we do not urgently address this issue of the extreme and unacceptable regional funding differentials for our SMEs? Although a perennial problem, it is raised now because there are two important pieces of legislation that provide an opportunity to do something about it: the Financial Services and Markets Bill, which has been going through your Lordships’ House; and the levelling-up Bill which is before us. I think a critical need for regional mutual banks is an essential part of the solution.
The clear intention of the amendment in the name of the noble Lord, Lord Holmes, is threefold: first, to dramatically increase financial inclusion for our SME businesses; secondly, to develop an effective patient capital ecosystem across the UK; thirdly, to reignite the positive reality of friendly societies and mutuals. The amendment would force the consideration of current capital adequacy requirements. Are they fit for what we want across all potential financial service models?
It is also essential that such potential sources of regional finance are seen very much against the backdrop of digital transformation. Such banks need a physical presence in all our communities, with business bankers ready to support customers at each growth stage. Benefits must also encompass full digital functionality, alongside the physical. If got right, such banks could bring to bear another element of the financial and digital inclusion story, with the financial inclusion potentially driving the digital.
None of this is about lowering thresholds for SME finance. If we support SMEs by increasing the range and number of regional mutual banks, then the banks will do what they do best and SMEs will thrive, as will the communities and the towns and cities in which they are based. Through this single intervention, one of the fundamental planks on which levelling up will come will have been effectively laid.
As we build our way out of Covid, there could barely be a better moment to consider the benefits of regional mutual banks, built in our great communities with close customer connections and, crucially, with an interest and a stake in all those future economic, social, individual and organisational stories of success. We need regional flows of finance to enable and empower more, and more regionally diverse, SMEs. Regional mutual banks can be an essential part of delivering this, and the Government should look very carefully at the amendment of the noble Lord, Lord Holmes, and consider including it within their levelling-up brief. I beg to move.
My Lords, this country used to have many regional mutual banks. One still remains, in name anyway: the Yorkshire Bank. That is a testimony, I think, to its importance within the great county of Yorkshire. What has been a sad reflection of what has happened in the country in terms of banking is that it is now dominated by the five great big banking consortiums. That is partly why the presence of so-called high street banks in our towns and small towns across the country are disappearing, to the detriment of many people who live there and certainly many businesses there.
Regional banks play a huge role in North America and in many parts of Europe, where they flourish. So this is a really important amendment to ask the Government to look again at what they can do to stimulate regional mutual banking once more. Think how lucky you would be if you lived in Surrey and had a Surrey Bank that might be as powerful as the Yorkshire Bank—and the Yorkshire Bank is in Yorkshire. The big benefit of regional mutual banking is that it can focus its attention to the benefits of the businesses within its region. They can provide capital to small businesses on terms on which they can flourish. That cannot and does not happen with the big banks. The scale of what small businesses need is not really catered for by the big banking consortiums.
I do not want to repeat all the arguments made by the noble Baroness, Lady Hayman of Ullock, in favour of regional banking, except to say that I agree with her. I hope that, when the Minister responds, she will be able to say how important it is for levelling up—which, funnily enough, is what this Bill should be about—to have a way in which there is better access to capital by a bank which understands the regional economy and understands the businesses that work within that region and how they can better perform by having access to capital on terms determined by an understanding of the geography, economy and society of that area.
My Lords, Amendment 473, tabled by my noble friend Lord Holmes of Richmond, and ably moved by the noble Baroness, Lady Hayman of Ullock, would require the Secretary of State to report to Parliament—within three months of the day on which this Bill is passed—on the existing barriers to the establishment of regional mutual banks in the United Kingdom. I want to make it clear that the Government are supportive of the choice provided by mutual institutions in financial services. They recognise the contribution that these member-owned, democratically controlled institutions make to the local communities they serve and to the wider economy.
However, regional mutual banks are still in the process of establishing themselves here in the United Kingdom, with some now in the process of obtaining their banking licences. It is, therefore, too early to report on the current regime and any possible limitations of this for regional mutual banks. I know that my noble friend Lord Holmes was interested in how regional mutual banks have performed in other jurisdictions and how we could use these examples to consider the UK’s own capital adequacy requirements. In this instance, international comparisons may not be the most helpful to make. The UK is inherently a different jurisdiction, with different legislative and regulatory frameworks from those in the US, Europe or elsewhere.
Abroad, some regional mutual banks have been in existence for centuries and have been able to build up their capital base through retained earnings. In the UK, regional mutual banks are not yet established and are continuing to progress within the UK’s legislative framework. However, the Treasury is continuing to engage with the mutuals sector and other industry members to assess how the Government can best support the growth of mutuals going forward. I hope that this provides sufficient reassurance for the noble Baroness, Lady Hayman of Ullock—on behalf of my noble friend Lord Holmes of Richmond—to feel able to withdraw the amendment.
I thank the Minister very much for her response. I suddenly thought that I probably should have declared my interests as a member of the Co-operative Party and as someone who believes very strongly in the benefits of the mutual model. I am sure that the noble Lord, Lord Holmes, will read Hansard very carefully. In the meantime, I beg leave to withdraw.
Amendment 473 withdrawn.
Amendments 474 and 475 not moved.