The impact of the financial crisis on the cost and availability of credit is seriously affecting the economy. The Government have already taken action to ease the flow of credit to small and medium-sized businesses including by working with the Bank of England to launch the Funding for Lending Scheme, by putting in place access to finance schemes such as the £1.2 billion Business Finance Partnership and the Seed Enterprise Investment Scheme, and providing additional funding for the Enterprise Finance Guarantee.
However, many good small and medium-sized businesses (SMEs) still struggle to raise finance from their banks. Furthermore, well before the financial crisis Britain suffered from structural failings in finance, in long term credit in particular. Now as the economy recovers, there is a risk that UK businesses lack the support they need to grow.
As set out in the Autumn Statement 2012, the Government therefore plan to deploy an extra £1 billion to create a business bank. We will maximise the bank's impact and reach by exploring joint investment with the private sector and the use of government guarantees. The bank will make wholesale interventions in the business finance market to facilitate the development of a greater diversity of non-bank business finance sources and to tackle other long-standing market gaps. We will also take steps to bring together government finance schemes for small and medium-sized businesses so that they are managed as a single portfolio and ensure businesses are aware of and can access government-backed business advice.
I wish to outline to the House how we will achieve this and what are the key milestones along the way.
We envisage the business bank operating on a commercial basis within a strategic framework set by Ministers. It will be charged with finding ways to fill gaps in the business finance market, based on economic analysis. A number of options are being considered including capital investments and guarantees for long term finance products, as well as a wider range of wholesale funding activities which could become relevant over time. Detailed design of the activities will need to reflect the requirement to ensure our proposals are fully consistent with state aid rules. We plan to start a dialogue with the Commission about our proposals in January.
At the same time, and in order to start acting swiftly, we propose to use £300 million of the new funding to co-invest alongside the private sector in sources of finance that help diversify the business finance market. These investments will be made under Section 8 of the Industrial Development Act 1982. Further detail of how this funding will be made available will be provided at Budget 2013 after engagement with market participants in the new year.
I am also creating an advisory group, which will comprise independent business and finance experts and advise the Government on the setting up and strategic direction of the new institution. Sir Peter Burt has very kindly agreed to chair this advisory group and additional members will be appointed very shortly. I can also announce today that Keith Morgan has joined the Government to lead the design work for the future business bank. The group will provide advice on:
The activities and specific segments of the market on which different activities of the business bank should focus;The design of existing interventions and how they could best be improved;The detailed design of the new interventions, how to make them most effective, and how to attract private sector capital if desirable;How to ensure better joining up of wider government- funded business advice and support as well as enhanced awareness of and access by businesses to this support;The role of Government in such an organisation, and at what level;The overall implementation plan;The marketing plan for these activities; andThe key roles in terms of design and execution risk for the implementation phase.
We will use their expertise to develop proposals for the bank's interventions and discuss and where relevant agree these interventions with HMT, the Bank of England, UK regulators and the European Commission.
I will present more detailed proposals on these matters to the House next year.