Examination of Witnesses

Enterprise and Regulatory Reform Bill – in a Public Bill Committee at 10:40 am on 19th June 2012.

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Dr Adam Marshall and Mike Cherry gave evidence.

Q 36

Photo of Graham Brady Graham Brady Chair, Conservative Party 1922 Committee

We have just half an hour for this session. Will the two witnesses identify themselves for the record? It may be helpful to the Committee if you indicate whether there are particular aspects of the Bill on which you would prefer not to answer questions because they are outside your specialty.

Dr Marshall: Shall I start? I am Adam Marshall. I am director of policy and external affairs for British Chambers of Commerce. I am very happy to take questions on any aspect of the Bill.

Mike Cherry: I am Mike Cherry. I am the policy chairman for the Federation of Small Businesses, and we would not have any comments to make on executive pay.

Q 37

Photo of Iain Wright Iain Wright Shadow Minister (Business, Innovation and Skills)

Good morning, gentleman. The purpose of the Enterprise and Regulatory Reform Bill is to support growth in the British economy. Does it do enough to support growth? What other measures should be in the Bill to allow that to happen?

Dr Marshall: I start by saying that many of the measures in the Bill are indeed welcome, and build on recommendations that we and other business organisations have made. For example, tribunal reforms, the establishment legally of the Green investment bank, and a number of other factors in the Bill are positive moves forward. However, it will be clear from many of the comments that we have made in the press in recent days that we would like additional and more radical measures to support growth in the economy. I completely understand if the Government have a particular legislative agenda that they must get through in the Bill, but we would like to see those measures taken forward at the earliest possible opportunity.

Q 38

Photo of Iain Wright Iain Wright Shadow Minister (Business, Innovation and Skills)

Like what? Can you summarise for the Committee what they are?

Dr Marshall: Of course, we would like to see the establishment of a business bank solve some of the issues of access to finance, which particularly plague new and growing businesses—those with a big investment to make but who do not necessarily have a track record—and more innovative ways of getting resource into infrastructure, something that I know the Government have concentrated on, but to date we have not seen the fruits of that work.

Mike Cherry: We broadly welcome a lot of the things in the Bill. Clearly, for most of our members the legislative burden from employment legislation and other regulatory burdens has a hugely disproportionate impact on small businesses predominantly. We welcome the initiative around the Green investment bank, and we would like further consultation on how that will be implemented and how it can benefit small businesses. We also welcome the discussion around employment changes and the changes to employment tribunals. As to whether it goes far enough, no of course it does not at the moment. We need confidence to be restored, and we need further initiatives for growth, but this is a good start.

Q 39

Photo of Iain Wright Iain Wright Shadow Minister (Business, Innovation and Skills)

Thank you, Mr Cherry. You mentioned the Green investment bank. What additional measures should be put in place to allow the bank to  effect real transformational change to help the competitiveness of our economy? In particular, should clause 2 of the Bill explicitly mention small and medium-sized enterprises to allow the Green investment bank to support UK SMEs in terms of the transformation to a low-carbon economy?

Mike Cherry: If I may start on that, yes it should mention SMEs because we see them as a critical part of any supply chain, and they need stimulating as much as larger businesses. The problem we have with this is, first, we have reservations about whether there is enough money to support the Green investment bank going forward, and we think that a lot more money probably needs to go into it to ensure that it works comprehensively.

Q 40

Photo of Iain Wright Iain Wright Shadow Minister (Business, Innovation and Skills)

I am sorry to interrupt. Do you think that on that basis the bank should be allowed to borrow as quickly as possible, to lever in private sector money?

Mike Cherry: Yes, we do. As to SMEs, we have some real reservations about how this will work in practice. For instance, we would be really concerned about there being primary contractors and business not being able to go down the supply chain into the smaller businesses. However, clearly, there is some market failure around trying to stimulate the economy, and that is why the Government are introducing this. We would always advocate that where there could be market failure, a change, particularly around consumers and what they need to do to support the carbon agenda, should be welcomed.

Dr Marshall: I agree with Mike—I would love to see many SMEs actively involved in the supply chains of these projects, but I would be concerned if the bank’s objects were so narrowly and prescriptively drawn that it could not have the appropriate flexibility that it needs in future.

Q 41

Photo of Iain Wright Iain Wright Shadow Minister (Business, Innovation and Skills)

On that point, do you think that at the moment it is the opposite end of the spectrum? Are the objects of the bank in clause 2 so big that they can invest in anything—even in a new coal-fired powered station?

Dr Marshall: No, I do not; I would make the opposite point. We regard the objects, as written, as broadly appropriate, but they could be interpreted too narrowly following the passage of the legislation. We want any projects with the potential to have either a direct or indirect positive impact on the environmental sustainability of our future economy to be included in the bank’s scope. You might see some counter-intuitive things emerge, such as a clean fossil fuel investment or a road project, both of which could improve those aims. I would be very careful not to draw the objects narrowly, and that is a matter for the Bill.

The second thing that must go hand in hand with the measure is some consistency and long-termism around energy and infrastructure policy. That is something that I am perfectly happy to put at the door of both the previous and the current Governments. We do not have enough long-termism in the system. Policies change too much and political cycles become the determinants rather than the long-term needs of the economy and the environment. It has been no different in British politics in the past 20 years, and a longer-term approach will make the bank work better, but equally, it will make our infrastructure work better for business.

Q 42

Photo of David Mowat David Mowat Conservative, Warrington South

Mr Cherry, you mentioned that you would like specific reference to SMEs in the Bill. Would you set a size limit on turnover in the drafting? How would you do that?

Mike Cherry: It is very difficult to be as prescriptive as that, because businesses can have a small number of employees and a high turnover, and a large number of employees and a low turnover, so any definition would be too prescriptive. It is critical to ensure that SMEs in general can access the funds and carry out the work themselves. We need to see that rather than so-called large suppliers getting all the cake and divvying it out disproportionately so that SMEs do not have the advantage of supplying.

Q 43

Photo of David Mowat David Mowat Conservative, Warrington South

Just so that I understand, when you said that you would like to see reference in the Bill itself, that was an operational matter rather than a legislative one.

Mike Cherry: Indeed, yes.

Q 44

Photo of David Mowat David Mowat Conservative, Warrington South

Okay. Do SMEs have a particular problem with getting access to finance? I know that everyone has an issue with finance at the moment, but I mean getting access to green finance. Is there a specific problem that we are trying to solve?

Mike Cherry: I could go on for a long time about access to finance, but I will not; I will restrict my answer to the question. Anything that can stimulate access to finance for small businesses is imperative at the moment. If such access is available through the Green investment bank, it is to be welcomed for those engaged in that sector or sectors.

Q 45

Photo of Geraint Davies Geraint Davies Parliamentary Assembly of the Council of Europe (Substitute Member)

Do you agree that, alongside the Green investment bank, there should be a strategy for focusing procurement into green products, in particular to SMEs? I think I am right in saying that 70% of procurement in Wales is through SMEs, but it is something like 7% in England. Dr Marshall said something about a business bank and the big problem being that some businesses have a trajectory of forward orders, but do not have collateral and cannot borrow from banks. They try to expand and then go bust. In the green sphere, however, is there a case for the Government’s taking a joined-up approach between procurement on the one hand and productive capacity on the other, focused on SMEs? Otherwise, we might end up with a load of German companies coming in and doing green projects, with people saying, “We’ve done what we can”, and there are no British jobs.

Dr Marshall: Certainly we would like to see a more joined-up approach to public procurement. You will not have had a business lobbyist before you in the past 20 years who would have said anything different. I think that there have been some positive steps recently on that. If you look at Contracts Finder and CompeteFor and if you look at the number of SMEs getting involvement through those supply chains, it has gone up. If you look at central Government’s procurement from SMEs, it has doubled from a very low base. There are some positive things afoot and we should welcome that. In so far as finance and the Green investment bank are concerned, the Green investment bank is set up by the public sector to correct what it sees to be a market failure. We would  hope that the Green investment bank would look at projects that entail significant risk in the early stages, whether an SME or a larger organisation is involved, so that those projects can get off the ground and those investments can be made. It will have to, by its very nature, have a somewhat higher risk profile than a traditional lender responsible to shareholders and regulators.

Q 46

Photo of Anne Marie Morris Anne Marie Morris Conservative, Newton Abbot

Back to SMEs and their access to the Green investment bank. Would it be helpful if there was a requirement on the bank to report annually on the number or amount of funds that have been made available at the different levels of small business, using the EU’s definition of micro, small and medium? SMEs in the round make up more than 90% of businesses in this country by number, so that would enable us to measure whether the Government have been successful in supporting all the different levels of small business.

Dr Marshall: I think it might be a difficult one. As an organisation that represents micro, small, medium-sized and large businesses, clearly there would be different views through the chamber of commerce movement on that point. What is important is the value of contracts that are delivered by SMEs, even when in supply chains, rather than reporting on what has gone directly from the Green investment bank into the bank account of a particular sized company. I would be more interested in seeing that kind of scrutiny and that kind of reporting, so that if a large company were to secure an investment from the GIB and then see that percolate down through the supply chain, that is as good an outcome for us as direct lending to that SME.

Mike Cherry: I think I will add that I would prefer to have proper scrutiny on what the GIB is actually investing in, as opposed to being too prescriptive about whether it is micros or small as against SMEs. The important thing here is ensuring that adequate finance is available to all those businesses that need to get it and which are not getting it at the moment.

Q 47

Photo of Chris Ruane Chris Ruane Opposition Whip (Commons)

If public procurement has improved in the devolved Administration areas—I am thinking specifically of Wales, if Geraint’s statistics are correct—do you think that the national Government have recognised what is going on in other areas of the UK? The Prime Minister likes to point out the negatives, especially in Labour-controlled Administrations, but if there are positives there, is there something that we could learn from those devolved Administrations that should be in this Bill?

Mike Cherry: The federation obviously has its devolved areas, which work very well with their respective parliaments and assemblies. We get a lot of very strong information on how well they are doing on different issues, which we then try to replicate here in Westminster. As to central procurement and wider public procurement, central Government have got the message, but the wider public sector needs to take it on board and the federation has just carried out a survey of local governments to see what they are doing on procurement at the moment and that will be reported on fairly shortly, in time for the autumn party political conferences. We are trying to get a better handle on this, as well as working with all the public sector to ensure that small businesses get the procurement that we feel they should be able to attract and also that the Government reach their aspirational target of 25%.

Dr Marshall: Briefly, you learn the lessons from where lessons can be learned. There are local authorities in this country which are exemplars in involving SMEs in public procurement and there are local authorities that are frankly shocking at it. In the devolved Administrations I am sure that we have positive cases and cases that are not so positive. The question is on hoovering up all of that good practice and trying to inject some of it into central Government where the trend most recently has been positive.

Q 48

Photo of Neil Carmichael Neil Carmichael Conservative, Stroud

Dr Marshall, you mentioned the importance of recognising enhanced risk for Green investment bank investment. Presumably you would agree with me that it is important to have the right kind of expertise in that bank to calibrate that risk. From what you have read and seen so far, do you think that that will be the case?

Dr Marshall: I certainly have every hope that it will be the case. I am not sure at this stage of the game whether the Green investment bank has its entire staff complement and all of its risk elements in place, as it is a new and evolving institution—we have a tendency in this country to create these institutions and then expect them to emerge out of the ether fully formed sometimes. We need to see those risk attitudes being significantly different to the ones that we see very often in mainstream banks at the moment on some investment propositions. You can understand why those risk attitudes have changed to a certain degree, given what we have been through over the past five years. However, as both Mike and I would probably agree, given the area—the market failure that the Green investment bank has been set up to correct—the appetite for risk will have to be significantly greater.

Photo of Graham Brady Graham Brady Chair, Conservative Party 1922 Committee

We need to move on to the competition aspects.

Q 49

Photo of Chi Onwurah Chi Onwurah Shadow Minister (Business, Innovation and Skills)

The competition parts of the Bill introduce numerous checks and balances with regard to the reviewing and appeals process, and that must have a disproportionately heavy effect on under-resourced smaller businesses. At the same time, the Government chose not to give small business representatives such as yourself a super-complainant status, which would have enabled them better to represent their members’ interests, with less demand on their own resources and time. Do you believe that the Bill does all it can to help small businesses, which often have to take on powerful vested interests with anti-competitive practices to be able to compete fairly and leave consumers better off?

Mike Cherry: We would very much welcome the merging of the Office of Fair Trading and the Competition Commission. Clearly, if you look back at where the OFT has come from in the past and looking at class actions, our key message would be that, in very many cases, small businesses are, in fact, no different from consumers and need the same or similar protection. As for the FSB itself, we are not set up to enable us, at this moment in time, to take on any advantages that may or may not be around super-complainants.

Q 50

Photo of Chi Onwurah Chi Onwurah Shadow Minister (Business, Innovation and Skills)

Whereas consumer representative bodies do have super-complainant status. If you feel that small businesses are similar, that would suggest that a similar level of protection is required.

Mike Cherry: I thought that was what I just said.

Dr Marshall: We would have a conflict of interest, obviously, in accepting any status as super-complainant—we are very likely to have some of the largest companies in the land as well some of the smallest in our membership, so I can neatly sidestep that one.

On the larger point of the competition impact in the Bill, there are three principles that we need to bear in mind. One is the clarity of the changes being undertaken for businesses of all sizes up and down the country; future stability and consistency in the system, with no more changes of brass nameplates on doors, please, as one set of changes is enough; and a really thorough communication of what those changes entail for businesses of all sizes. Too often, we have institutional reorganisations of this sort in response to crises in the system or to economic events, and businesses are not adequately informed and kept involved as they develop thereafter. So that would be my earnest and honest plea as that particular element of the Bill goes through.

Q 51

Photo of Chi Onwurah Chi Onwurah Shadow Minister (Business, Innovation and Skills)

Just a quick follow-up, because we have spoken a lot about the difficulties of finance for businesses of all sizes—smaller businesses in particular. Are you surprised or disappointed that the competition parts of the Bill make no mention of the finance and banking market in which 85% of SME bank accounts are with the same four banks?

Mike Cherry: The Federation has long been calling for far more competition to be available and asking the Government to support our initiatives around alternative finance.

Dr Marshall: We would also like to see more competition in the system. I do not know whether it is a matter for the Bill or for the existing powers to sort out. Equally, we now see the emergence in the system of would-be challengers, for example through the sale and divestment of branches. We would like to see that deliver some more competition perhaps. Even then, alongside that, we would like to see a business bank for those new and growing businesses that are unlikely to get access to any mainstream lenders simply because they do not have the track record to do so.

Q 52

Photo of Anne Marie Morris Anne Marie Morris Conservative, Newton Abbot

Merger for small businesses is traumatic at the best of times. Do you think that there should be a limit below which some of the current rules and regulations about referrals should not apply? I know that it has been discussed and considered at the moment to be in the “too hard” basket, even if it is not fair, but what would be your view? Do you have an alternative suggestion about how we could make mergers of the very smallest businesses easier?

Mike Cherry: I am not aware of the detail of that and would have to come back to the Committee on that point.

Dr Marshall: The only thing that I would add is that it depends on the market in question. If you have a market that is 100% controlled by two 10-employee businesses, there might well be a case for a referral if those two businesses were to merge. It is down to the instance in question.

Photo of Graham Brady Graham Brady Chair, Conservative Party 1922 Committee

Let us move on to the employment aspects of the Bill.

Q 53

Photo of Julian Smith Julian Smith Conservative, Skipton and Ripon

Many of your businesses have had a tough time recently. First, some of the people running the businesses that you represent will have been struggling to reach average earnings, or even the level of the benefit cap, in their personal income levels. First, will you describe how the employment law burden is affecting those people? How will some of the Government’s modest changes, which are designed to encourage your members to take on more staff, help? Any statistics you have on that will be helpful.

Secondly, on financial penalties, do you think that there should be exemptions for smaller businesses in the Bill’s proposals? Thirdly, should there be variated levels of compensation for unfair dismissal? How would such changes give your members even more confidence to take on more employees?

Dr Marshall: I will start with the financial penalties question: I would like to see it struck from the Bill. It threatens to undo a lot of the good in the Bill around tribunal reforms, settlement agreements and many of the other aspects that were discussed in the previous session. Suggesting to an employer that you might go through the system to defend your reputation and honour against a vexatious claim, only—if you are found against—to face a financial penalty, will encourage you only to settle early, which is precisely the opposite of what we see everywhere else in the Bill. Everywhere else, we have seen an opportunity to reconcile claims and deal with them early. We would like financial penalties to be struck entirely from the Bill.

On the wider point about employment law, it creates both a real and a psychological burden for our business members. I like to say that they often think half with their head and half with their gut. The half that thinks with the head is upset about the levels of compliance and process required in employment legislation; the half that is governed by the gut says, “I don’t have the confidence to take on more staff because of the number of rules that I face, and the complexity and expense associated with them.” Although, as we said, we certainly welcome the introduction of tribunal reforms and the prospect of settlement agreements and other measures, there is and always will be more that can be done. However, this is a good start, and it will help deliver some of that gut confidence that employers want.

Mike Cherry: We think that the financial penalties are totally disproportionate. We are seeing this in other areas of legislation, where the big stick is the fine on the business, even to the extent of fining people for failing on the procedure, for instance—through no fault of their own, but purely through not knowing what needs to be done. We need to stop that as soon as we can.

I am not sure about variated levels of compensation. In our surveys, our members’ current aspirations are to grow their businesses, generally. Anything that can be done to reduce the legislative burdens, around employment legislation in particular, has to be welcomed. We frequently say that it is often the time that owners have to take out to defend themselves, rather than the pure cost, that is hugely damaging to business. Any simplification of the employment tribunal system has to be a priority going forward, in our opinion.

Q 54

Photo of Geraint Davies Geraint Davies Parliamentary Assembly of the Council of Europe (Substitute Member)

The biggest focus for small businesses is generating more demand through procurement, infrastructure, investment, easier access to finance and  so on. However, in a situation of deflated demand and zero growth, many small businesses will be looking to downsize, so will the changes in employment legislation make it easier for them to reduce their head count?

Mike Cherry: I do not think that small businesses look to reduce their head count; I think they look to grow their businesses in most cases. That is what our survey has shown their aspirations to be. I think when you have a problem perhaps with an employee, which may or may not have been recognised, for whatever reason, a simplified process has to be advantageous for both the employee and the employer.

Q 55

Photo of Geraint Davies Geraint Davies Parliamentary Assembly of the Council of Europe (Substitute Member)

You don’t think it will create a culture of fear, with the power pushed towards the employer being able to reduce the number of employees?

Mike Cherry: I tend to get a little concerned when people throw something at me like that, because in my experience that is certainly not the case with the majority of our members. They want to grow their businesses, and they need employees who are coming out of school and able to be trained to do the jobs they want. It is as simple as that, and that is surely to the benefit of business and the individuals concerned.

Q 56

Photo of Graham Brady Graham Brady Chair, Conservative Party 1922 Committee

We have five minutes left, and five hon. Members wanting to ask questions. Do you have something to add quickly?

Dr Marshall: I may be more frank than some of my colleagues. If reducing the head count were the objective, businesses already have tools at hand to do that. I was with a business last week that is facing difficult trading conditions, and is considering voluntary and possibly involuntary redundancies. Those are mechanisms for reducing the head count when cost pressures are high. Changes to employment law are about boosting confidence overall and I do not see this as being in any way something that businesses would use to reduce their head count.

Q 57

Photo of Lorely Burt Lorely Burt Chair of the Liberal Democrat Parliamentary Party

We understand that tribunals, or the threat of a tribunal, can have a greater disproportionate effect on a small business than on a larger business because of resources. However, the idea that if you break the law there should be a financial penalty of up to £5,000 does not seem huge to me. Employers have a responsibility to act within the law. On the other side, do you think that the measures go far enough specifically for SMEs, or are there additional things that we should put into the Bill, particularly for SMEs?

Dr Marshall: On financial penalties, I do not agree. I actually think that the potential for reputational damage to a business is so great that it will settle up front if it is threatened with a penalty of any kind. Businesses value their reputation, their goodwill, their customer networks and so on far more than £5,000. All that it is creating, as Mike said, is a big stick to threaten businesses with. It is not conducive to creating a culture of hiring or optimism for business.

Mike Cherry: I have a problem with £5,000. It is a significant amount of money that most businesses could not find easily, and would cause them severe problems.

Q 58

Photo of Ian Murray Ian Murray Shadow Minister (Business, Innovation and Skills)

I am mainly addressing Mike because of the time constraints. You said in your response to the Bill that you have some concerns about the compulsory ACAS early conciliation, and that you would want to be reassured on those key concerns. Can you unpack what those key concerns are, and what changes you are looking for?

Mike Cherry: Our key concerns are, first and foremost, that ACAS does not have the resources to enable this to happen at the moment, and that it would need significant resources putting in. Our other concern is that, in many of our members’ opinion, ACAS is not neutral or employer-friendly, and does not help the employer as much as it could, so there would need to be some sort of cultural shift within ACAS to ensure that it is seen to be truly independent and able to help both sides properly.

Dr Marshall: We are more positive on ACAS. We think it will probably need more resourcing to deal with pre-claim conciliation. When we put forward the idea of pre-claim conciliation and compulsory referral to ACAS in 2009-10, we said that it would require resourcing appropriate to need. If more cases are not being heard at tribunal because they are being moved into the ACAS system, obviously the resource consequentials would have to be dealt with.

Q 59

Photo of Andrew Bingham Andrew Bingham Conservative, High Peak

Would you agree that, for micro-businesses that have to run very lean, firing and getting rid of staff willy-nilly is a foolish premise because they invest so much time in employees when they take them on and train them up? Saying that the Bill is there to enable people to get rid of staff is wrong; quite the opposite is true. Getting rid of people is the last resort, because they have invested so much in them.

A supplementary to that is: have you any idea of the figures—

Q 60

Photo of Andrew Bingham Andrew Bingham Conservative, High Peak

Sorry. I will be quick. Have you any idea of figures, and how the reduction in employment legislation might increase the number of jobs created?

Mike Cherry: I think that, yes, of course, it is a last resort. In micro-businesses in particular, as with most small businesses, we know our employees, we value them, we give them flexible time off if they need it when we possibly can, and we respect their rights to the utmost, when we possibly can. Inevitably, sometimes things go wrong and for whatever reason, you have to downsize. As Adam has said—

Photo of Graham Brady Graham Brady Chair, Conservative Party 1922 Committee

Order. I am afraid that that brings us to the end of the time allotted to the Committee to ask questions of these witnesses. I thank them on behalf of  the Committee. We will now hear evidence from the Trades Union Congress, Unite and the GMB. Thank you very much.