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One of the curious things about Britain is how much better the country is at creating new companies than nurturing them once they’ve been started.
When it comes to new business formation, the UK sits close to the top of the European league table. At 14 per cent of the total company population, its annual business birth rate exceeds those of other large EU economies, such as Germany and France.
But fast forward a little bit, and pretty quickly the country slides down the rankings. After three years, the number of those companies employing more than 10 people lags behind badly compared to the European peer group. That places the UK 13th out of 18 countries, according to the Federation of Small Business.
So while British entrepreneurs race out of the blocks, they then soon slow to a potter. This isn’t a costless foible. The inability to grow small businesses is one factor behind sub-standard productivity and low wage growth.
Some believe the slow pace may reflect the fact that modern Britons have become wedded to the idea of running “lifestyle” companies — the sort that make artisanal cheese, or own hipster cafés, and don’t tend to grow much. But there’s another, more likely explanation, which is that owners don’t want to seek outside capital. The main source is after all a bank — and the UK’s largest lenders have since the financial crisis been wading through a series of trust-sapping scandals with business customers.
Many are embroiled in accusations that they mis-sold derivatives in industrial quantities to smaller companies, now the subject of an industry-wide compensation scheme. Then there is the case of RBS, and its controversial GRG restructuring unit, which is accused of pushing smaller companies unnecessarily into bankruptcy.
This has become so rancid that Ross McEwan, the state-owned bank’s chief executive, recently berated his own customers for “bad mouthing” the bank and making “false accusations” about the behaviour of GRG. And that again is despite the existence of a £400m restitution scheme.
Although it is perilous to disaggregate loan demand from general business confidence, entrepreneurs do seem to be more reluctant borrowers. According to the British Business Bank, the proportion of small companies making applications for an overdraft fell from 11 per cent in 2012 to 7 per cent in 2015, and 6 per cent in the first half of 2016. About 46 per cent of such companies are persistent non-borrowers. Cash balances are going up.
Tony Baron of the FSB believes the bank scandals have highlighted the risk of getting in hock to your bankers. “They show the massive imbalance of power and justice that exists,” he says. “If a small business gets into a dispute with its lender, there’s no way to get affordable redress.”
Banks often say that they would like to lend more to business customers. But if they’re really serious, one way would be to re-calibrate the power balance, so customers felt more confident about putting their business on the line to secure capital to grow it.
It’s not a novel concept. For instance, when banks introduced direct debit mandates in the late 1960s, they needed customers to trust them to dip into personal bank accounts. There were huge productivity gains from replacing myriad transactions with a smaller number of predictable orders. So, to secure those gains, the banks guaranteed that in any dispute over a mandate, the customer would always be paid back.
According to Richard Samuel, a barrister, the banks could similarly build confidence in business lending by moving away from the current system, where customers only gain redress either from ad hoc restitution systems where the banks themselves are judge and jury, or the perilous and costly route of going to court. These should be replaced with a low-cost independent tribunal system, akin to an employment tribunal, where a customer’s complaint can be legally adjudicated.
The Financial Conduct Authority accepts that customers need more protection — albeit short of scooping business lending under the full regulatory umbrella. So far the regulator has drawn back from going the tribunal route, saying there isn’t the parliamentary time for it.
Instead, the FCA chief executive Andrew Bailey proposes loading the task on to the Financial Ombudsman’s Service. That’s a mistake. The FOS is a useful dispute mediation service but one that critically lacks any teeth.
The low level of trust in banks is a problem — and not just for their customers. It hurts the wider economy and in the long run crimps the banks’ own businesses. Solving it should be more of a priority for politicians and banks. Otherwise the risk is that Britain’s low-growth adolescent businesses will simply drift further behind.