Small and medium-sized businesses (SMEs) are vital to the UK economy. Our 5.5 million small businesses account for 60% of all private sector employment, creating jobs and generating wealth in the regions and communities in which they operate.
For such businesses to grow to their full potential, it is vital that they can access the right type of finance at the right time. SMEs are the cornerstone of our economy, and SME investment and a financial system prepared to lend to them ought to be of concern to us all and a key measure of the success of the UK economy as a whole.
That is why today I am making the case in Parliament for using the positive power of co-operation to drive SME lending in this country. And I believe that one of the ways we do that is by correcting the legislative anomaly which currently prevents SMEs from working together to pool risk via mutual guarantee societies (MGS), as they do elsewhere.
House of Commons Research shows that, whilst SME lending is, for the first time since the global economic crisis, starting to become net positive, a look at the broader Bank of England ‘Credit Condition Survey’ for 2016 makes less positive reading. It shows that the availability of credit remains static at best and indeed the proportion of loan applications from small businesses which were approved declined in both Quarter 2 and Quarter 3 of 2016 – it also shows that this decline is predicted to continue.
This trend must be reversed. I believe that the creation of Mutual Guarantee Societies can be part of the solution.
My Bill will allow for the creation of Mutual Guarantee Societies, which are private guarantee institutions created by SMEs who benefit from them. Whilst there are different forms of Mutual Guarantee Society across Europe, they typically share a cooperative or mutual statute. This means that the capital of Mutual Guarantee Societies is provided directly by the SMEs that apply for a loan guarantee in form of cooperative or mutual shares. Each member has equal voting rights and elects the Society’s general assembly and Board.
By working together, SMEs can then negotiate a better deal from banks, whilst for the banks the underpinning of the mutual guarantee provides partial security on otherwise unsecured enterprise lending. The risk is lower, so the price of money is lower. The deal flow is greater, and underpinned by peer review from SME members, so access to capital is easier.
A guarantee provided by a mutual guarantee society on behalf of the SME to the bank replaces this collateral, enabling the bank to grant the loan. The guarantee is a financial commitment by the society to repay a certain percentage of the loan if the SME member cannot honour its payments.
In many ways this Bill is a no brainer.
Mutual Guarantee Societies provide access to finance, achieve better credit conditions, provide assessment of the company’s intangible and qualitative elements, serve as a bridge between SME’s and financial entities and can provide advice and supervision in financial management. The creation of these societies in the UK would also be good for the banks. They reduce the bank’s overall risk, provide qualitative information for the bank, provide more detailed risk assessment at no cost and allow them to work with supervised and reliable financial intermediaries.
The OECD concluded in 2013 that mutual guarantee schemes represent “a key policy tool to address the SME financing gap, while limiting the burden on public finances”
Indeed, the UK is almost unique in not making use of Mutual Guarantee Societies.
In Europe, estimates are that around 2 million guarantees have been made for a value of €70 billion to over 2 million customers. This represents around 8% of all SMEs in the European Union that have benefited from the activity of mutual guarantee societies. Today, Portugal’s mutual loan guarantees are equivalent to 0.5% of GDP. The UK has no mutual guarantee market for SMEs to improve their access to finance because of inappropriate regulatory barriers.
In the UK, any prospective mutual guarantee scheme would face far higher higher capital requirements and regulatory burdens than in any other EU country. Current regulation considers the provision of mutual guarantees to be a form of insurance, under the ‘surety’ category – making them subject to many of the same regulations, conditions and capital requirements as commercial insurers.
Other countries have been able to regulate mutual guarantee societies in a distinct and appropriate was by transposing existing EU directives, which specify an appropriate framework. Because the UK has no such arrangement, we essentially have regulatory gold-plating that blocks new models of mutual finance, holding SMEs back.
Following work with the Co-operative sector in 2012 the Financial Services Authority, which oversees the sector, clarified that the best fit for any mutual guarantee society under current legislation is ‘suretyship’. But this imposes significantly greater capital requirements than is the case in countries which have a bespoke scheme for mutual guarantee societies – and is not a particularly good fit anyway – my Bill changes this.
This Bill provides a definition of a Mutual Guarantee Society and adds mutual guarantees to the list of regulated activities as set out in the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001.
Despite the problems and barriers within the current regulatory system there is one UK based member of the European Association of Mutual Guarantee Societies – the British Business Bank. This institution, created to drive SME lending, may not be the type of mutual which I believe will be created using the legislative change contained within this Bill. However I believe it neatly demonstrates the point that Mutual Guarantee Societies must be part of the answer to the question of how we increase SME lending.
I hope we are pushing at an open door. Responding recently to a question from Wolverhampton South West MP Rob Marris, Treasury Ministers stated that officials plan to meet with the FCA to discuss the possible development of Mutual Guarantee Societies.
I believe that this Bill will create a welcome mutual addition to our financial services sector and allow the UK to benefit from the SME lending in the same way that other countries have done for many years.