Labour MPs seek legislation on SME finance options

Senior Labour MPs are pushing for the government to bring in “fair banking” legislation designed to improve access to finance for SMEs by establishing a rating system judging banks on their performance in this sector, and requiring mainstream banks to cooperate with credit unions and community development finance institutions (CDFIs) to address areas of financial exclusion.

“Thousands of SMEs are sadly locked out of access to affordable credit at the moment, meaning, in short, that they cannot get fair banking. This holds back too many people in too many communities from turning strong ideas for new inventions or new services into more jobs, new high street ventures or just great commercial opportunities,” Thomas said.

Thomas, a former Department for Business and Trade minister, added: “For the entrepreneur who does not have a track record or assets, access to business finance and financial advice is a huge challenge. Indeed, the cost of business finance in the UK is higher than in other comparable countries. When in government, senior figures at one bank told me that the typical business client who received personal sit-down financial advice had a trading income of £10 million or more.”

The bill proposes a fair banking Act which would require the Financial Conduct Authority to analyse the performance of mainstream banks, according to their size, on the provision of equitable access to credit for SMEs and individuals.

 It would create a published ratings system that showed which banks were doing well and which less so. Banks could improve their ratings by expanding their provision of affordable lending to underserved communities and businesses, and by creating partnerships with community banks or CDFIs

US example

Thomas pointed out that there are fair banking requirements in other countries, most notably in the US, where British banks are among the largest investors in US CDFIs.

“The question for those British banks is why they will not back such requirements here. Why will they not do more with community banks and credit unions in the UK?

“To be fair, there is some investment in CDFIs from Lloyds and J. P. Morgan, but it is striking how many other major banks invest in CDFIs in the US but do not invest similarly here,” Thomas said.

“As a result of US requirements, British banks are already used to working with the disclosure requirements that I envisage introducing through the Bill. The majority of the data needed for the disclosure requirements under the Bill will already be collected by the FCA in, for example, its consumer credit product sales data, so it would not be over-regulation,” he added.

Thomas argued that research suggested the requirements in the Bill could push the level of annual lending by CDFIs and credit unions in the UK from an estimated £250 million a year up to £3.3 billion a year.

“There is currently no mandate for banks to expand access to affordable credit, and no incentive for them to work with credit unions and CDFIs to do so. What the widespread exclusion from credit demonstrates is a major market failure. Current measures are not working and voluntary measures are not enough. The measures in my Bill would end that failure,” Thomas concluded.

Shift in attitude

Responsible Finance, one of the backers of Thomas’ bill, has emphasised the difference in attitude towards CDFIs in the US and the UK, noting “our narrative in the UK has often focused on ‘access to finance’ as a problem statement, helping those ‘who can’t get bank finance’.”

In contrast, “the US model reframes the conversation around the end goal: opportunity, prosperity, wealth, and stronger communities.”

Responsible Finance, the national membership body for CDFIs, argues: “This is an important difference. Wealth isn’t a dirty word in the US context, it’s viewed as a path to resilience, dignity and empowerment.

“Could we adopt a similar mindset here? Responsible Finance can help lead this shift, moving our message from ‘access to finance’ towards ‘creating opportunity and prosperity.’  We have so many customer stories showing people holding onto more of their incomes, and entrepreneurs increasing their turnover and providing good jobs; let’s shout about that transformation more.”

Future plans

A Ten Minute Rule Bill is a First Reading of a Private Members Bill, but with the sponsor permitted to make a ten-minute speech outlining the reasons for the proposed legislation. There is little chance of Thomas’ Bill proceeding further unless there is unanimous consent for the Bill or the government elects to support the Bill directly.

However, Thomas’ proposal has the backing of a number of Labour finance heavyweights including Dame Meg Hillier (Chair of the Treasury Select Committee), Sarah Champion, Liam Byrne (Chair Business and Trade Committee), Sarah Owen, David Burton-Sampson, Lloyd Hatton, Bill Esterson, Mr Tanmanjeet Singh Dhesi, Nick Smith, Anneliese Dodds (former Shadow Chancellor) and John McDonnell (former Shadow Chancellor).