Committee (1st Day)
Relevant document: 11th Report from the Delegated Powers Committee
My Lords, if there is a Division in the Chamber, the Committee will adjourn for 10 minutes.
1: Before Clause 1, insert the following new Clause—
“Needs and requirements of small and medium sized enterprises
(1) The Secretary of State shall provide a report on the future needs and requirements of the small and medium enterprise sector for the next ten years with regard to—
(a) access to advice;(b) access to finance;(c) access and support to engage in the export sector;(d) training;(e) recruitment of apprentices.(2) This report shall be published within six months of the passing of this Act and shall be laid before both Houses of Parliament.”
My Lords, first, happy new year to everybody. At Second Reading, the general tone that came from these Benches was that we welcome the Bill. We welcome it because we, the Opposition, realise only too well that national growth in productivity, investment, exporting and employment—all of which we desperately need—can come only from a strong political culture that supports small and medium-sized companies. The Government, and in particular the Conservative Party, want to lead us to believe something else, but we refute it. Labour stands for a dynamic business sector that will prosper with strong support and without the debilitating threat hanging over us of the possibly of the UK leaving the EU two years from now.
I must admit that even I have struggled to keep up with each of the announcements that the Government have made for various forms of funding for small business. Given that it is my job to keep up with all of this, I wonder what the average small business man at the sharp end makes of it all. Let us take a look at Funding for Lending. I said at Second Reading that I thought it was a flop, and the Minister—the noble Baroness, Lady Neville-Rolfe—chastised me and said that I had got it wrong. But I still have to say that I do not think I have got it wrong; I think I have got it right. Much of the funding that has been advanced to the banking sector has been assigned by the banks to the business areas that they know well: in particular, mortgage lending, which is easy, profitable and relatively risk-free for them, as opposed to lending to small businesses, which is hard work and risky, and probably cannot make anything like the same return.
Predictably, they went for the easy option and the route that minimises risk and maximises profit. As a business, why should they not? But that is not what the Government said was going to happen. Investment in small business has made little progress, which is why I called it a flop. The noble Baroness may think otherwise but I can assure her that, based on my own background in equipment leasing, I know the SME funding scene. She may be told by the banks and by her officials that small businesses are being helped, but I speak to those at the coalface and know that many businesses strive in vain to get vital funding. We have to do more to help them.
With that in mind, I turn to this first group of amendments. They are designed to ensure greater security and understanding of the action that the Government are taking with the aim of supporting small businesses. They will enable us to better account for the effectiveness of the steps taken in this direction. The first of the two amendments requires the Secretary of State to undertake an immediate strategic review of the key issues affecting small businesses and, in doing so, design better policy interventions to support them. The second requires that, allied to this strategic review of what small businesses need from government, the Government should publish an annual report which details the steps that they are taking. Taken together, the intention is, first, that there will be a greater level of strategic thinking about the correct policies to support small business in the future and, secondly, that Parliament will be better able to scrutinise these policies.
The truth is that this is required because all is not well with regards to the policy framework for small businesses. During the term of this Government, they have been adversely affected by a £1,500 rise in business rates in what by any account have been difficult trading conditions. It is our view that they should now see a freeze or a cut in business rates. This is one immediate step that could be taken towards supporting small firms. When it comes to receiving advice about how to strengthen and grow small businesses, the landscape remains confused. I have to say that when I go around and ask those who are running small businesses what is the main issue that really bothers them, it is business rates—so this needs to be looked at very seriously.
In the United States, the Small Business Administration represents a successful model for providing support and advice, and indeed for directing policy, and one that we should look to imitate in this country. It is often easier for large companies, especially those which can pay for lobbying advice, to understand how to approach business and how to look for the support that government may be able to provide. In the UK, responsibility for small businesses lies with the Minister of State, who has additional sectors to his brief. In the US, the head of the SBA is a member of the President’s Cabinet: surely we should have the same prominence here.
Perhaps the most important area which the report sought by these amendments should look at is access to finance. There has been a great deal of activity with the intention of improving credit conditions for small businesses—but, as I have said, with only limited success. The Federation of Small Businesses’ Voice of Small Business index shows that small firms are struggling to get the finance they need and still require greater competition and choice in the banking options available to them. Without improvement in these areas, we are unlikely to see significant improvements in credit conditions. The latest Bank of England Credit Conditions Survey shows that credit availability fell slightly during the last quarter, while Funding for Lending figures show that net lending to small businesses remains negative, despite improvements for larger businesses. This issue will arise throughout our discussions in Committee and these figures provide the backdrop to it.
The amendment would also require the Secretary of State to look closely at how best to support small and medium-sized businesses that want to export. This is vital and goes to the heart of the kind of economic recovery we want to experience. The news over the recess that the UK’s current account deficit is at one of its highest ever historic levels should serve to focus our minds on the importance of exports. The export-led recovery that the Chancellor promised has simply not taken place, and to meet the impossible target of £1 trillion a year by 2020 would require nominal growth of around 10% per year—way above current levels and, I must say, way beyond anything I can imagine.
The OBR’s latest forecast has revised down the contribution that trade is expected to make to GDP growth for every year of the next Parliament. Policy action taken to improve this does not show much sign of having a positive effect. The £5 billion export financing facility has helped few businesses. This is a huge missed opportunity. Also, I simply do not understand why we are forever cutting back our embassies and trade capabilities. You cannot set up an environment for export if you are not represented in the countries concerned. In my travels, I frequently come across foreign business people who say that the UK does not take their own country seriously and how good it would be to have more ministerial and trade visits.
Finally, we need to see increased help for those who want to recruit apprentices. The number of apprenticeships actually went down last year, so this is another area that the Government could usefully look at both in terms of future needs and the efficacy of current government policy. I hope that the Minister will be able to accept these amendments, which represent a good way of combining strategy planning and support for small businesses and the effective scrutiny of policy interventions. I beg to move.
My Lords, I take issue with these amendments. What we do not need is another report into the problems that small businesses face. There is no shortage of information on these problems, not least from the Federation of Small Businesses, to which the noble Lord referred. We know what the issues are. There is not enough finance available for small businesses. One of the things that this Bill attempts to do is make access to finance easier. It also includes lots of measures that will help small and medium-sized businesses. However, what those businesses need is action now, not another delay while another report is produced. As we get regular feedback on what the legislation does, that will become more than apparent. Organisations such as the federation will not hesitate to make clear what they think about what the Government are doing. This would be just another bureaucratic exercise when what we need is action.
My Lords, Amendment 1 asks that we report on the long-term needs of small and medium-sized businesses. In moving it, the noble Lord, Lord Mitchell, touched on the wider issues surrounding small business. I do not want to give the Committee another Second Reading speech. A lot of the issues that the noble Lord raised will come up on the various amendments that we discuss today, but I feel that we have done more to help small business than any Government before. This Bill is the latest evidence of that process.
In particular, I refute the claim that the Government are not doing enough to increase lending to small businesses. While the annualised figures remain negative, the tide is turning and there is a significant upward trend. According to the SME Finance Monitor report of November 2014, 71% of all loan and overdraft applications within the previous 18 months were successful. We support small business in many ways. Of course, a recovering economy—which this demonstrates—after probably the worst recession in history is a very important way to help entrepreneurs.
Turning to the amendment, first and foremost, through our industrial strategy the Government are working in partnership with industry to understand the future needs of all businesses and to set the long-term strategic direction. In each of our sector strategies we have joined forces with industry to set ambitions for the sector and our commitment is to invest in helping firms—including small firms—to access finance, skills, innovation and export opportunities so that we can compete internationally. I share the noble Lord’s aspirations for international success.
As well as engagement, we undertake in-depth research and analysis every year to fully understand small and medium-sized business needs. I draw attention in particular to the Small Business Survey, BIS’s flagship annual research project. Results from this are used to develop our business support policy and are also published so that private sector organisations working with small businesses can benefit from the insights. The survey is considered the country’s foremost source of knowledge about small business needs and is widely referenced.
Amendment 1 refers to specific areas of policy relating to small business. This is a good list and I take this opportunity to reassure the noble Lord that the Government are already researching and reporting on the needs of small businesses in these areas. I will give some examples. Last year, the British Business Bank published its strategic plan, setting out a long-term vision for the organisation that will deliver for smaller firms. Only last month, the bank published its first report on trends in business finance markets. The market gaps identified through this in-depth market analysis are feeding into the bank’s product development process. Important and interesting conclusions include the following: more businesses will seek finance for growth; a more diverse and vibrant supply of finance is needed—this Bill helps with that; and awareness and understanding of the range of finance options is not yet comprehensive enough. I am placing a copy of the report in the House Library. We expect future reports to be published on an annual basis.
Secondly, last year, UKTI published Britain Open for Business, an update to its five-year strategy for providing practical help to exporters. UKTI last year worked with 42,684 SMEs to provide a range of services designed to help companies enter new markets. This hands-on relationship allows UKTI to understand and catalogue the needs and challenges faced by these companies and to develop specific programmes to overcome perceived barriers to exporting. Last year, this included a first-time exporter’s package, a medium-sized business programme and an e-exporting initiative.
On skills, in 2012, we published the Holt review, which was the result of in-depth research into how apprenticeships can be altered to meet the future skills needs of small businesses. The UK Commission for Employment and Skills carries out a biennial skills survey of UK employers to understand their needs and motivations when investing in training. Our current employer ownership pilot is testing how we can reform other parts of the skills system to be more responsive to employers’ needs.
Turning to Amendment 33, which seeks to require publication of an annual report on the impact of our policies on SMEs, I am pleased to say that every government department is already required to lay before the House an annual report, alongside their accounts, which covers the achievements in the past year. HMT guidance on the content requirements of annual reports sets out requirements for departments to report on, such as the material policies that they have allocated resources to during the year. Therefore, departments involved in business policy should include that information in the annual report. Further, the guidance includes the need to report—specifically in relation to small business—on action taken to mitigate regulatory burdens on small business and progress made towards procuring 25% of contracts from small and medium-sized business. Given what we do already, our view is that there is no need for the legislative requirement that is proposed.
I would add that the Government are also committed to transparent and open working and setting out priorities for supporting small and medium-sized businesses. Twice each year, at the Budget and the Autumn Statement, we update the House on our policies designed for small businesses, such as research and development tax credits and small business rate relief. Indeed, the noble Lord mentioned rates. I agree with him that this is a very important area. Of course, the right honourable George Osborne, the Chancellor, made an announcement in relation to rates only in December.
In December 2013, we published Small Business: GREAT Ambition, which is our commitment to supporting small businesses. My colleague in the other place, the right honourable Member for West Suffolk, who is very enthusiastic about his portfolio and takes it very seriously, has said that BIS is committed to continuing this proactive and transparent approach to communicating our offer to small businesses. As an example of this, last year we launched a new website—GREATbusiness.GOV.UK—to be a single point of information about what this Government are doing to support small businesses.
Does this website cover the plethora of information sources which the noble Baroness has spent the last six or seven minutes identifying? In some respects, the report is just another tome gathering dust, but if we can have a website that is regularly updated and is accessible to the general public, as it were, perhaps that would go some way towards creating a report by other means.
I thank the noble Lord for his helpful intervention. Indeed, like him, I feel that we need greater awareness of the potential of GOV.UK and the internet for communicating with business, especially small business, in a much simpler and easier way. That is exactly Matthew Hancock’s intention. The plan is that this website, if it does not do so already, will cover all the sorts of things that you are talking about. Do have a look at it and if you feel there are other things that we should do, I am sure that we can. I am sorry about the parliamentary impropriety of referring to the noble Lord as “you”.
That brings me to a couple of final points. Just last month, which is a year since the publication of Small Business: GREAT Ambition, we announced that we had met a large commitment in that document by launching the Business Growth Service, joining up all of our support available for those businesses that have the right level of ambition, capability and capacity to improve and grow. So we are making progress with this overall and trying to bring together the offer for small business, which I feel is a theme that we will probably agree on in the course of this Committee.
The House can look forward next month to a report by my noble friend Lord Young of Graffham, the Prime Minister’s adviser on enterprise, who will produce his definitive paper on what impact the last five years of government work has had on small businesses in this country. I will ensure that interested Lords receive a copy.
Therefore, while I fully agree with the intention behind the amendments, I agree with my noble friend Lady Wheatcroft that we have enough reports. I do not believe that it is necessary to achieve the outcome that the noble Lord seeks in the way that he has proposed. I hope that he has found some reassurance from my lengthy explanation and is willing to withdraw the amendment.
My Lords, I first declare an interest as chairman of the Enterprise Investment Scheme Association. This issue falls under the Treasury rather than the BIS, so it often gets ignored in terms of its crucial importance in raising equity capital for small businesses. Once you have the equity capital, you can gear up with borrowing. EIS, under Governments of both main parties, has raised more than £12 billion since it started; over the past three years, the amount raised has doubled in each of those years and is now well in excess of £2 billion for the current year. When the present Government came into power, one of the constructive things that they did was to go back to negotiate with the EU to widen the parameters of the EIS, which had been unhelpfully narrowed during the previous Labour Government. Equity finance for small business is almost more precious than debt finance, and there is a wider range of providers of debt finance now increasingly available. I want to register the point on a BIS Bill in a BIS debate today that the Treasury and the EIS is crucially important for small business.
Before we move on, I thank the Minister for her response so far. Within the Bill there is this talk about the annual report and the need for the Government to address the issues in that sort of way. On behalf of the small business sector, I feel that we need to continue to look at issues in the Bill—but also particular issues, to one of which I shall refer the Minister. With the annual report, there is a very serious issue with the small business sector and finance, with regard to late payment to them from big businesses. There is a significant issue there, with 50% of big businesses not paying small businesses on time. I hope that monitoring and reporting back on such issues will be something that is ongoing throughout this Bill.
For example, there is a prompt payment code, which is voluntary—or it has been a voluntary code in the past. I very much hope that as part of the annual report Ministers will agree to look at the code and consider whether it is strong enough and whether it has been implemented enough by the businesses involved and by the Government themselves. Late payment is a serious issue when it comes to finance for small businesses; they should have that money available to invest and employ people in the local area.
I must thank everybody, particularly the Minister, for her reply. Of course, this is a probing amendment—and I think that we have managed to probe and get quite a lot out of it that is beneficial. I thank the noble Lord, Lord Flight, too. I absolutely agree that there is a huge issue with equity for small businesses. Since I started studying economics a long time ago, there has always been that equity gap that needs to be plugged. In some ways, I am not sure that a huge amount of progress has been made on it.
I suppose that it depends on how you look at these things. If you go to visit some of the banks, as I do—and I hear what the Minister says in that regard—you could think that after five years it is a golden period for small businesses and that it is all absolutely rosy. You hear stories, such as were mentioned by the noble Baroness, of 71% of all applications being approved. However, it depends what you mean by an application. Many applications fall at earlier levels before they get to the formal point.
All I can say—I shall be speaking a little later about my own experiences with a small business—is that it is incredibly tough for small businesses that have been going for two or three years to raise the money necessary for them to expand, and I am talking about successful companies. Therefore, I suppose that I take a far more pessimistic view than the noble Baroness. More needs to be done to encourage these businesses. Nevertheless, I am somewhat reassured by what she said, and of course I beg leave to withdraw the amendment.
Amendment 1 withdrawn.
Clause 1: Power to invalidate certain restrictive terms of business contracts
2: Clause 1, page 1, line 10, leave out paragraph (c)
My Lords, I must declare, as I did at Second Reading, that I am the chairman and a shareholder of a graduate recruitment company called Instant Impact Ltd. I also have to declare that this company was founded by my son and a friend, who got to know each other when they were at Cambridge University. I know that this may have echoes of Second Reading about it, but I want to give an example of the sorts of issues that we have encountered. I think that they point towards financing in general and invoice discounting in particular. I shall not detain noble Lords for too long.
Instant Impact has been very successful. After four years of operation, its projected billing for this year is £1 million and its employees now total 22. We should have many more companies like this in the UK—and if we did, maybe some of our problems would be over.
However, success has brought its own issues, and the trickiest of all has been cash flow to support the rapid growth of such a company. In short, we could see that if we continued to grow so rapidly, it would put a severe strain on our bank balance. Therefore, as chairman, I was deputed to find new sources of finance. I was happy to do so but I was even happier for another reason: we talk a lot about small business but, to be honest, it is a long time since I have been in the front line, so it was pretty good to go out there and see what it was like to raise additional funding for a company that is doing quite well.
Eventually, we were successful in that one of the new challenger banks—the noble Lord, Lord Flight, is the chairman of Metro Bank, so I must give him my thanks—offered a superb invoice discounting facility, but not before we endured the lethargy and inflexibility of the traditional high street banks. Of course, as a company we also had to step up our game in credit control and debt collection, and we managed to get an infusion of equity finance.
The high street banks were simply awful. Do not believe for one moment that they have changed. One has the motto, “One for two”: one acceptance for every two rejections. I cannot believe that that is true. All they want is what they have always wanted—bricks and mortar security and personal guarantees. That is not much help to a service business set up by two young men with no assets apart from the business itself.
I went to see the very clearing bank with which I have dealt since I first started working in 1959. It knows my history and my successes inside out. A very senior manager, when I explained our requirements to her, said to me—I am not exaggerating—“Well, it looks like daddy will have to give a personal guarantee, doesn’t it?”. My answer was unprintable and my words should have no place in the august annals of Hansard. I told her that daddy has never given a personal guarantee and certainly did not intend to do so now, or words to that effect.
I have to say, “How dare they?”. After all the banks have been through and after we as a nation have effectively bailed all of them out, it seems that nothing has changed. They tell us that they are in business to support small companies but, when push comes to shove, they revert to their old ways. Too many small businesses when rejected by their own high street bank simply give up. They are intimidated. That is why the new sources of alternative finance—the challenger banks and the peer-to-peer lenders—must continue to be encouraged.
That brings us neatly on to the amendment, which deals with invoice financing. As I said, this type of finance is crucial to many growing businesses. According to the Asset Based Finance Association, their members’ book of invoice financing equals just over £19 billion, as of this past September. Their number of clients exceeds 43,000, and the turnover of those clients amounts to £215 billion. Clearly, this financial sector is crucial to oiling the wheels of UK plc, as I know only too well. However, there are areas that restrict the growth of this sector, particularly those restrictions forced on small businesses that ban them from assigning their receivables.
The amendment removes from the clause entitled “Powers to invalidate restrictive terms of contract payments” the words,
“has effect in relation to persons of a prescribed description only for such purposes as may be prescribed”.
It is a probing amendment to see how widely the Government envision the changes in this clause actually operating.
In Committee in the other place, the Minister said:
“In addition, for some financial services contracts it is important to maintain the ability to prevent assignment of rights under that contract—for example, a business may want to ensure that it deals directly with its own bank in respect of payments due under a loan agreement or other financial service contract”.—[Official Report, Commons, Small Business, Enterprise and Employment Bill Committee, 21/10/14; col. 142.]
That clause will be used to define these contracts. This amendment therefore probes to which businesses the regulations laid out by the Secretary of State will apply, and to which they will not. This is an important question, because we believe that factoring or invoice financing can be a useful way in which small businesses can raise finance.
In the earlier group concerning an annual report on government policies on small business, I laid out the facts around access to finance and the difficulty that many small businesses have had. Throughout this Parliament, schemes designed to support them have had mixed success. Factoring or invoice financing pays a set percentage of a contract in exchange for collecting the money from customers and can obviously help a great deal with the cash flow problems that small businesses face. Given that it can be beneficial, we ask the Minister to provide a little more detail on the extent to which she envisions this clause opening up to business.
The Federation of Small Businesses has also produced work on other kinds of factoring found elsewhere in the world. It pointed to the Swiss WIR. It was founded in 1934 and represents a kind of mutual, whereby its 60,000 members create mutual liquidity using the money owed to them, complete with a complementary currency, which is accessed to a greater extent during recessions and thereby provides countercyclical support. It would be good to hear the Minister’s views on such a structure and whether she believes that it is possible to create one under the provisions of the Bill. It is certainly an interesting idea.
Finally, all this is intimately linked with a problem that we are soon to discuss—late payment of money owed to small businesses and the effect it has on liquidity. I hope that the Minister will see our improvements to that part of the Bill as part of a package that would improve credit conditions and cash flow circumstances for small businesses, and ease the difficulties that many of them have recently experienced. I beg to move.
My Lords, I was glad to hear of the experiences of the noble Lord, Lord Mitchell, and his success in running a business. Let us hope that there will be success for others in that direction as a result of the changes that we are making in the Bill. Having been brought up on a farm, which I suppose is the ultimate small business—and one that, I am afraid, failed, which is also a relevant experience—and shared a small garden company, I know exactly what the noble Lord is saying about the availability of finance, funding and cash flow. These are always incredibly important issues for small companies.
Turning to Amendment 2, I have some sympathy with the noble Lord’s proposal and general stance, and I should like to reassure noble Lords that the Government are currently consulting on this very issue.
The purpose of our clause is to make it easier for businesses to access invoice finance, which I agree is one of the most important sources of alternative finance around. The effect of the clause is to create a power for the Secretary of State to make regulations which can invalidate contractual barriers that inhibit small businesses’ use of invoice finance in the way that larger companies are able to operate. The Federation of Small Businesses, the IoD and the Asset Based Finance Association have all expressed support for this measure.
In the consultation, the Government outlined their preferred option for using the power, which is to nullify a ban on invoice assignments outright with some exceptions. The Government also requested views on how this measure would interact with supply chain finance, commercial confidentiality, financial services and land interests.
Clause 1 as currently drafted gives sufficient flexibility to allow the draft regulations to be adapted if the consultation provides strong evidence that in some situations an assignment can lead to unintended consequences. Conversely, if we accepted this amendment today, we would remove one possible way of dealing with anti-assignment clauses before having had the opportunity to consider the evidence from the consultation on the best way forward. Our consultation will close on 16 February and a summary of responses will be provided shortly after.
I hope that the noble Lord feels that his probe has been effective, that he finds the explanation reassuring and that he understands that we are on the case in consulting not only in writing but by having stakeholder discussions. On that basis, I hope that he will withdraw his amendment.
I thank the noble Baroness for her reply. Of course, this report will come before the Report stage of the Bill, so we can come back to it as necessary. Again, I thank her. I think that most of her response was reassuring and I beg leave to withdraw the amendment.
Amendment 2 withdrawn.
Clause 1 agreed.
Clause 2 agreed.
Clause 3: Companies: duty to publish report on payment practices
3: Clause 3, page 3, line 40, leave out “may” and insert “shall”
My Lords, I shall speak also to Amendments 4, 6, 7, 10 and 11.
We are concerned with the effective operation of the policy in this legislative framework. We have deep concerns that the legislation as drafted will have unintended consequences that will put small businesses in a weaker rather than a stronger position. The Government’s approach addresses only the information asymmetry and addresses insufficiently the market power asymmetry. This means that the Government’s current proposals are likely to benefit larger entities and to provide little for SMEs other than better knowledge of how weak their position really is.
The huge advantage of our proposals is that they use transparency to change culture by enshrining good practice, reinforcing duties and making enforcement attractive to large companies. This will not just address the growing problem and impact of late payments but promote a more competitive and effective market where the velocity of the circulation of cash will have a positive impact on growth productivity and business activity. We have been struck by some of the grumblings around the business discussion paper, Building a Responsible Payment Culture, and the feeling that somehow too much weight was given to the concerns and interests of those with the most interest to protect. Our proposals meet more clearly the overall policy objectives of the Government and are consistent with the central concerns of SMEs.
In considering our proposals and given the range of evidence and data the Government have, in the possible event that they remain unpersuaded by the overwhelming logic and attractiveness of our amendment, could BIS make available the evidence demonstrating that our suggestions would be less effective in achieving the outcomes we share? I think that any independent economic model would strongly endorse the positive benefits of our approach.
I would be grateful, too, if the Government’s current consultation for the Bill, when published, were to detail more clearly where the responses were from—the particular areas and sectors, and whose interests they reflect. I also request that the Minister gives some consideration to making our suggestions available to some key stakeholders to integrate as a small addendum to the consultation.
The model we propose is compelling. Has the Minister any current modelling that should dissuade the Government from accepting our amendments? What assurances can she give that the £40 billion—or £45 billion, or £50 billion—in late payments currently outstanding can come down over time with anything like the scale needed to show that these proposals from the Government will succeed? What is the anticipated decline? How strongly can this be addressed? I would be happy for her to test the efficiency of our model against that of the Government. I am very conscious of the exhortation of the noble Baroness, Lady Wheatcroft, that we need action. Certainly, we need to ensure that any measures that benefit small businesses do so as swiftly as possible.
Our amendments work as a package, reflecting the fact that, as all research and experience shows, late payment might be the most egregious practice but it is not the only one. In may be the easiest to identify and quantify, and it may even have the largest economic impact, but it may not be the worst or most shocking payment practice. Late payment is one element of the payment story. There are problems with withholding payments or fines, and with retrospective charges and retrospective payments.
I thank the small businesses, and their advisers and representatives, who provided us with a great deal of background information. The detailed and voluminous stories we have heard and keep hearing—yet which people do not want to go on the record over—provide some evidence of the weakness of approaching this solely by way of transparency, information and exhortation. I will outline in more detail some of the problems in this area when talking about Amendment 10.
Our amendments on this try to provide a more practical framework to meet the objectives of the Bill. Clause 3 provides that:
“The Secretary of State may by regulations impose a requirement, on such descriptions of companies as may be prescribed, to publish … prescribed information about the company’s payment practices and policies relating to relevant contracts of a prescribed description”.
Amendment 3 changes this “may” to “shall” to make it a firm requirement. By the Government’s own standard, changing culture would require a common series of obligations and practices. Has the Minister any data or economic models that would demonstrate that there is a more effective way of making these changes other than by means of a universal provision?
Amendment 4 is a practical way to make culture change. We propose that rather than the Bill being a way to make it acceptable to complain about late payment, we encourage a business operating culture of paying on time and sticking to contracts. By making this a more clear obligation on the part of the companies that are required to pay, we also meet the problems of dealing with the consequences of poisoning commercial relationships and for the exercise of market power concentration and intimidation to allow poor practices to continue. The amendment requires companies to produce quarterly statements that list all payments to suppliers that have been paid more than 30 days after the suppliers agreed payment terms, without a formal query having to be made. We are aware that concerns have been raised with BIS that unless time limits are properly identified there would be an ever-increasing pressure on small businesses to accede to extended timescales for the settlement of payments. I would be grateful if the Minister would outline how the Government feel this would operate in practice, and how small businesses will be able to resist such pressures.
Amendment 6 asks for assurances from the relevant auditor that the company is maintaining accurate and honest financial records and statements. What is therefore expected of auditors is exactly the same as now. We would require them to exercise broader and clearer judgment in these matters. Confirming that the accounts represent a true picture of the economic position of the company and that it is a going concern should be qualified if the only way it can meet its cash flow or profit targets is by late or poor payment practices.
Amendment 7 would establish that the financial reporting officer shall be liable for false reporting. If there were false reporting, the business would be liable for a fine equivalent to no more that the amount it owed—the overall value of the invoice—and up to a maximum of £10,000 for false reporting. This therefore provides for not just clearer information but also for obligations to pay to be an audit requirement, and for enforcement to be undertaken through existing government agencies. It also makes shareholders and company boards protecting their and the company’s long-term interests hold their executives properly to account on these matters.
Amendment 9 makes it an offence for companies not to fulfil compensation payment plans which have been made by more than 30 days. It has the effect of empowering small businesses, putting the onus on big businesses to report themselves. Failure to complete a quarterly return would be subject to a fine upon conviction.
These amendments provide not just for clear information, but for obligations to pay to be audit requirements, for business practice to focus on proper payment, and for the enforcement to be undertaken through existing government agencies. It also makes shareholders and company boards protecting their and the company’s long-term interests hold their executives properly to account. It is certainly true that in today’s age and through the use of technology in the development of business systems software, this is proportionate and practical.
Amendment 10 ensures that this series of measures does not displace the problem of late payments by transferring it to other practices, and indeed also has the benefit of addressing other detrimental payment practices against small businesses by larger companies such as exceeding payment agreements and retrospective and unilateral actions. Withholding payments or arranging debits on future invoices can be caused by disputes or even because of quality issues. These are rightly matters that should be raised, but that should be done prior to a unilateral fine, debit, discount or withholding of payment, and should be swiftly resolved between the parties. By way of illustration, one online retailer whose payment terms are somewhere between 40 days and 50 days imposes fines unilaterally, insists on communicating only through its electronic systems and ordinarily takes in excess of 90 days to resolve issues. Small businesses complain that big companies use their market power to make them provide their cash flow funding.
Businesses retrospectively impose cuts to the previously agreed supply prices in, for example, their end-of-year arrangements to meet their margins without any regard for the freedom to contract. Of particular concern is the fact that plcs were considered to be among the worst culprits, and many made reference to the conduct identified against Debenhams imposing a 2.5% discount on its supply prices as a last-minute attempt to boost falling profit margins caused, according to analysts, by the company’s failure to report the scale of the costs of its opulent new head office and the disruption to trading caused by the management of the refurbishment of the flagship store. Sending retrospective debit notes on the basis of investments made to provide benefits to suppliers may be a plausible argument, but the manner in which these can be applied and the fact that they rarely have any performance reporting, direct correlation or even requirements of proof of the nature of the exceptional cost, would also need to be addressed.
The contract terms and price negotiations are of course up to the parties concerned. Commercial terms such as marketing discounts, early payment discounts, stock writedowns, rebates and charging for central distribution costs may be of benefit or may distort pricing negotiations, but those are matters for them. These terms can be entered into by parties, but should not be able to be imposed retrospectively and coercively by means of threats or market power. Larger UK companies use these practices to squeeze UK companies in ways they cannot do to overseas suppliers. Overseas suppliers request letters of credit which generally companies will take out with banks and which guarantee payment. The price is the price, the payment terms are the payment terms and the timing is the timing.
This amendment would empower the Secretary of State with new regulation-making powers to address these issues. It would be helpful if the Minister could set out in her reply the concerns the Government have about these practices, how they should be dealt with, and what protections there are against these being used more favourably as a means of masking the advantages gained by the poor practice of paying suppliers late.
Finally, Amendment 11 is an attempt to ensure that companies are aware that operating late and poor payment practices has the commitment and attention of Government, and that even the very biggest businesses will know that they would all be publicly named and shamed if they do not comply. It would also provide an opportunity for Ministers to name and praise those businesses that do pay on time by complying with excellent payment practices. We have been very encouraged during our work on the Bill that many small businesses are keen to praise those who act well and to encourage others to adopt their practices. Of particular note are John Lewis and Dunelm, who have been praised strongly for how they conduct their business—and there is nothing but acclaim for how Next, so ably and admirably led by the noble Lord, Lord Wolfson of Aspley Guise, conducts its business with suppliers. I would be grateful if the Minister would tell us what the Government’s plans are to encourage and commend businesses and businesspeople whose payment practices deserve it.
This group of amendments comprises effective, proportionate and very workable suggestions which are good for SMEs and those who wish to see growth triggered through the creation of competitive and properly functioning markets. The Government are to be applauded for trying to tackle this issue but it is clear that the Bill is likely to fall short. I hope that they will give full and due consideration to our amendments. I beg to move.
My Lords, Amendment 5, and its sister Amendment 25, have been tabled on the back of some excellent research undertaken by Grant Thornton in its impact assessment of the Bill. The research focuses on the fact that some small and medium-sized businesses qualify as SMEs for the purposes of the Government’s definition of those qualifying for R&D tax credits, but for the purposes of this Bill they are treated as large companies. The amounts and definitions here are interesting in that the R&D tax credit definition of a small company is one with a turnover of up to €100 million, assets of up to €26 million and with up to 500 employees. I draw the Committee’s attention to the fact that I believe that there is a printing error in the amendments and a pound sign was inserted instead of a euro sign. For the purposes of the Bill, the definition of SMEs is enterprises with a turnover of less than £25.9 million, assets of less than £12.9 million and a maximum of 250 employees.
The number of businesses to which this point relates is 2,851, according to Grant Thornton, with a combined turnover of £151 billion, an average turnover of £53 million and some 30,000 employees. The key point about businesses in this sector, which I will define as small SMBs, is that they have played the biggest and most disproportionate role in contributing to economic growth in this country. They have outperformed small companies and large businesses on employment growth, profitability growth, R&D and capital investment. This group is arguably more important than the very small SMEs that the Bill addresses.
The challenge that we face here comes under two different categories. First, as the Bill stands, small and medium-sized businesses will not benefit from the new provisions for providing access to finance and credit information, although they need this just as much as very small companies. Secondly, they will face increased regulatory requirements and costs arising from the requirement to publish reports on payment practices and the rather more demanding and expensive requirements in relation to the public register of significant ownership in businesses.
When the Bill was drafted, I am sure that the Government cannot have meant it to have the unintended consequence of being positively damaging to the most important entrepreneurial sector in this country. I am equally sure that the noble Baroness, Lady Neville-Rolfe, who I believe when she was a senior executive at Tesco railed against the ever-increasing amount of regulation imposed on business, will not want to see yet more regulation being imposed on small and medium-sized businesses.
In essence, Amendments 5 and 25 insert the R&D tax relief definition of an SME. To press home the point, under R&D tax relief it is inappropriate for small and medium-sized businesses to report on payment practices. Late payment for them is as much an issue as it is for small businesses. Indeed, medium-sized business find that it takes on average 48 days to be paid, against the average across the G8 of 42 days and only 32 days in Germany. In addition, such reporting on payments would be a costly and tedious regulatory requirement on what are still small companies. Amendment 5 deliberately sets a threshold of 499 employees and a turnover of £100 million, in line with the R&D tax credit, and Amendment 25 similarly defines a limit for the purposes of benefiting from credit information and credit facilities.
I put in a plea for the Government to consider these points. The Bill has a lot of virtue; it is there to try and help small businesses. Its definition of small businesses is, unwisely, too small for the purposes of what really matters. Small SMBs are not just equally important but potentially more important than small SMEs to the fortunes of our economy.
My Lords, I wish briefly to comment on the amendments, particularly following the comments of my noble friend Lord Cotter, who spoke on this issue of late payments.
Obviously, late payments are invidious. They affect small businesses severely, particularly in terms of cash flow. However, in looking at these amendments, there is a balance that we have to get right. There is a danger, certainly in some of the amendments, that we will overregulate. I refer particularly to Amendment 6, which has a requirement for quarterly reports and indicates that all payments to suppliers made more than 30 days after the date indicated have to be listed in some way, unless a formal query has been made on the invoice. The danger is that if one overregulates, all that will happen is that businesses will be inundated with formal queries as a way of avoiding the reporting.
Also important—if one is going to require all this information to be collated—is the reality that in many sectors balancing the payment of bills, whether we like it or not, sometimes protects the cash flow of certain companies that otherwise could be in difficulty. If this information is made more public in detail, there could be consequences for the management of the credit of those companies. So there are problems of overregulation that could be bureaucratic and inflexible, and could damage the businesses that we are trying to help.
My Lords, I recognise that late payment has been one of the most stubborn problems affecting small businesses over many decades. It is quite a few decades since I was Small Firms Minister in Margaret Thatcher’s Government, but the problem goes back a long time before that. I congratulate the Government on having found a new method of trying to deal with it, which has been incorporated in these clauses. In principle, that is much to be admired and supported.
I am much in favour of Amendment 5, tabled by my noble friend Lord Flight. Like him, I was much impressed by the Grant Thornton list of companies, which gives very important support to something that we all know—that small and medium-sized firms such as those in this list vary hugely. When you compare the turnover, the balance sheet and the number of employees of the different companies, the huge variety is astonishing. Like my noble friend, I cannot believe that the Government really want to impose this new element of bureaucracy on these companies, some of which have very small numbers of employees. One of them had two employees, and many of them—littered about—have fewer than 10, although they often have very large turnovers and large amounts on their balance sheets. We can imagine what sort of companies they are without following them up. Therefore, I support Amendment 5.
As for the other amendments, I have a more mixed view. Inserting the word “performance” as in Amendment 4 is, in principle, a good idea. The Bill says that large companies have to report on the company’s “practices and policies”, but it is actually the performance that matters, whether or not those practices or policies are being followed through. Of course, the difficulty comes when you try to get to the definition of “performance”—and that difficulty is illustrated by Amendment 6, and so on. One of the points on that, which has just been referred to, is the question of invoices that get queried.
We all know that when a business gets into trouble one thing that it does is to pay people later. To start with, if it can get away with it, it pays the taxman later—and then it goes on to try to pay its various suppliers later and improve its cash flow in that way. It is a sensible thing to do, if you can possibly do it, and that applies to large companies as much as to small ones. When a large company’s market power is very great in comparison with that of its smaller suppliers, that is where the whole trouble of late payment, which we talk about endlessly, arises in its most acute form.
Subsection (1)(a) of the proposed new clause in Amendment 10 suggests that the Secretary of State should impose,
“a limit on the number of days after receipt of a supplier’s invoice a company can seek to challenge that invoice”.
I see the point that noble Lords are trying to make with this, but they do not say how many days after—and, in any reasonable arrangement, it would vary hugely according to the nature of the business. With some transactions, you can tell at once if the invoice is fair, and that a correct price has been agreed, while with other goods delivered or services rendered you may not know for quite a long time after the invoice comes in whether the goods are satisfactory and come up to standard. To prevent people from complaining about an invoice after a certain number of days, even if it is a long number of days, is a difficult thing to do in some cases. But subsection (1)(a) of the proposed new clause in Amendment 10 is necessary to support the proposal in paragraph (a) in Amendment 6, which says that you have to register a formal query,
“within a period as may be prescribed”.
The two tie up together, and that is a great difficulty.
This really illustrates the wider point, which one runs across all the time in dealing with small business policy: half the time, when one seeks to improve the situation of small businesses, one does so by increasing the amount of regulation. In this case it increases the amount of regulation on large companies, whether or not the definition in Amendment 5 is agreed to. One is seeking to improve the regulatory situation for them but, unless a small firm that is in trouble knows about the regulation and can look at it, it will not be able to take advantage of it. That is one problem of small business policy that occurs on many occasions. On the whole, I am leery about agreeing to complicate the regulations, not only from the point of view of the large companies and particularly the medium-sized companies—the subject of Amendment 5—but also from the point of view of the smallest companies.
My Lords, I should declare an interest as president of the Specialist Engineering Contractors’ Group, which is an umbrella trade association in the construction industry. Something like 95% of the businesses in construction employ fewer than 10 people. They are often the weathervane of the British economy, you might say, in so far as they are the first to lay off people and often among the last to get started again.
In a supply chain, small businesses are extremely vulnerable to the problems of payment. In some respects, they are probably not that concerned about the bureaucratic burdens that the people who are not paying them money are going to have to face as a consequence of the amendments that the noble Lord, Lord Mendelsohn, has so eloquently spoken in favour of. I start with that premise, but I make the additional point that regulation is a pain in the neck for the people who undertake bad practice. The rest of the people have nothing to fear from it; the other businesses do not have problems with it. We know that there are always examples of unintended consequence, but if that were the reason why we did not do something, we would never do anything in this House or the other place. I think that it is necessary to have some form of discipline to bring people into line.
One of the great disasters of this Government has been the Green Deal. Noble Lords may recall that this was going to be the mechanism whereby houses would be insulated and new central heating would be made available, and it would all be paid for out of the energy savings, which would then be deducted from households’ energy bills—it would pay for itself. One reason why that did not get off the ground was that among the promoters were to be a number of supermarkets, whose record in late payment was such that the people in the Specialist Engineering Contractors’ Group said, “We wouldn’t touch that with a barge pole. If their payment terms are of the order of 100 days, we don’t want to have anything to do with them”. This early example of a government-led scheme foundering was down to a lack of trust on the part of those small business men—people such as the electrical contractors, the small plumbers, the lads who do the central heating—who were not prepared to enter into agreements with those companies that had a dreadful record of slow payment. The Government have to look at the reasons for some of their own disappointments—I will not put it any more strongly than that.
On supply chains, I credit the Government for following on from what Peter Mandelson started when he was in BIS in trying to ensure that government contracts were paid within 30 days. Part of the problem was, of course, that the main contractor got paid but the money never trickled down the supply chain. That was one of the difficulties and it still exists—which is why the Federation of Small Businesses and other groups are extremely distrustful of the blandishments of Governments of any complexion, because in so many instances they have not been properly thought through.
If we are to have a more transparent and more effective means of securing payment in a prompt way, I cannot see that that is a problem. It may be embarrassing when big companies are named and shamed, but I do not necessarily think that that is a bad thing. We have seen this with those companies which we now know do not pay their taxes in the United Kingdom. Many of us are no longer consumers of Starbucks products. What they do is legitimate—it is just that the law is not very satisfactory here—but we have a choice as consumers, and we choose not to go there.
A lot of people would find it quite embarrassing if the companies that they regard as being good suppliers and trustworthy companies are found to be squeezing these small, vulnerable businesses. When we talk about cash flow in respect of these businesses, we are talking about perhaps somewhere between £5,000 and £25,000—about two or three weeks’ work. It is that kind of thing. We talk about support for small businesses, but they are not philanthropic institutions. They exist in order to do a job of work for which they will be promptly paid, so that they can then pass on that money to their employees.
This is an important set of amendments. It does not matter if, at the end of the day, the Minister says that the wording is wrong. That is the standard reply to any debate at Committee stage: “We like the principle but we don’t like the wording”. The Minister has a plethora of civil servants there who can give the wording and draftspeople who can do the business. Therefore, I do not think, at this stage, that that is a satisfactory response, if I can anticipate what the Minister will say.
I will finish on one last point. I have been at this game a wee while now, and the default for opposition draftsmen of amendments is that wherever you find a “may”, you make it into a “shall”. After May of this year, the tables will be reversed and a number of noble Lords will be learning the ropes of opposition. I have to say that it is not a particularly pleasant job—I had 18 years of it and it was pretty hellish. The point I am really getting at here is that it is a sign of intent. If the Government are serious about one of the fundamentals of the assistance to small business, it is making sure that these small businesses get paid by the larger businesses for which they have undertaken to do work at a fixed price within a reasonable time. They are entitled to no less than that. That is what this suite of amendments from this side of the House, in my view, is designed to do.
There are imperfections in these amendments, but their intention is quite clear. I would like to think that we are not that far away from the Government on this issue. This has to be a consensual matter if we are going to have a continuous industrial strategy that we can all sign up to.
Before the Minister replies, I will just follow on from what the noble Lord, Lord O’Neill, said. From his experience, the down-the-line payment is a very important point indeed. It is increasingly incumbent upon government, when it gives contracts to the big contractors, to ensure in some way or other—although we do not want to bring too much regulation in—that these large contractors are monitored in terms of their payment record when it comes to subcontractors. The smaller businesses supplying or helping the main contractor frequently, as the noble Lord, Lord O’Neill, said from his experience, suffer badly because they do not get the payment. The large contractor in that case should not be given contracts in the future if it does not have some form of checking or commitment to ensure that it pays small businesses in the proper manner that is required.
My Lords, I think that the whole issue of late payments is to do with the business culture that exists. As the years have gone by, it has become easier and easier for large companies effectively to bully small companies so that they can maximise their cash flow. In these days of low interest, it is not a question of paying less interest but of being able to conserve cash flow at the expense of somebody else. It is a really bad situation. I am glad that the Government have taken the initiative on it, and we have come up with amendments that we think will help them.
I do not know whether this is true but I am prepared to bet that more than any government support for funding that we have discussed or any new initiative to help small businesses, the one thing that would change the situation and help companies would be an improvement in the culture of late payments. I suspect that in this Room today there are many noble Lords and others who have themselves come from small business backgrounds—perhaps family businesses—or have worked in small businesses. We all know what it is like to sweat while waiting for a payment from a big company, knowing that if it does not come you may be forced into a state of bankruptcy. Therefore, I think that anything that can be done to encourage payments and to reverse this culture of companies taking more credit would be great.
At the extreme, I do not understand why there is any credit on payments. After all, if you or I go into a shop to buy a new computer, we do not say, “Well, you know, it’s going to cost £1,000 and I’d like 60 days’ credit before I pay”. We would be laughed out of the shop. So why it is any different with a business? Why cannot payments be absolutely instantaneous? I know that I am portraying a very rosy situation here but I feel that there should be a move towards a greater reduction in the number of days’ credit that companies take. With the ease of making payments today, it should become lower and lower.
I want to make one plug if I may. I have mentioned before that I am the chairman of a small company. We had two particular debtors who were each not paying us £7,000. The young men who ran the company tried everything they could but the money was not forthcoming. In my role as Jack of all trades chairman, I decided to take on the job of chief debt collector as well and got on to these two companies to get in the funding. It was partially successful but they were very elusive. They said that one company had gone out of business—the usual sort of stuff you get. However, I discovered something amazing. To be honest, I never thought that I would be standing here saying how good Her Majesty’s county courts are. If you look up the county courts online, there is a facility there to issue a county court judgment online and quickly. I have to tell your Lordships that in both cases I did it and got the money plus interest within 14 days.
My Lords, I agree with an important element of what the noble Lord, Lord Mitchell, has just said but I disagree quite fundamentally with the conclusion that he draws as a result. I believe that basically we are talking about how you effect a culture change and, in that, the noble Lord is absolutely right—it relates to big companies, medium-sized companies and small companies. I must declare an interest as I run quite a large company. However, you do not effect a culture change in business by prescribing in detail in legislation what you should report for ever more. In that sense, “may” is a much more important word to include in this legislation than “shall”.
My Lords, I thank noble Lords for their amendments and for providing the opportunity for us to debate this important matter of late payment. The Government are taking action to change the culture of late payment, but we know that there is still more to do. It is helpful to have the experience of noble Lords, including that of the noble Lord, Lord O’Neill, of how this has been working. We are serious about changing the culture and it is good to have my noble friend Lady Harding here to bring her experience of culture change. My right honourable friend Matt Hancock has made our intention very clear on a number of occasions and we are busily working on this, as I will explain.
Through the measures in the Bill, large and listed companies will have to publish information about their payment performance and practices. We are also strengthening the prompt payment code, which commits signatories to pay within agreed and clearly defined terms. I agree with the noble Lord, Lord Stoneham, that we have to be careful about not overregulating small business, but action is necessary in this area.
I will take each amendment in turn. On Amendment 3, it is common when introducing new regulations through a power to use the word “may”, but I can reassure noble Lords that the Government are fully committed to introducing a reporting requirement on payment practices. That is why we are already consulting on draft secondary regulations.
Turning to Amendments 4, 6 and 7 regarding the payment performance reports, the noble Lord, Lord Mendelsohn, raises a good point, and I am pleased to be able to reassure him that the clause as already drafted enables these matters to be dealt with by way of secondary legislation as far as they relate to information to be reported. In our current consultation, we are seeking views on many of these issues, for example on the enforcement regime. We will be considering carefully the arguments made, both here in this House and through our consultation, before deciding how best to proceed.
Our consultation document, Duty to Report on Payment Practices and Policies, published on 27 November, merits perusal. We are very open to comments and ideas, and noble Lords will see that good and bad supply practices would become public, company by company, every quarter in a preordained format on each company website. This transparency will change the culture in a way in which earlier measures have not succeeded in doing. We look forward to the responses and, as the noble Lord, Lord Mendelsohn, suggested, we will make sure that we look at who the responses are coming from, because obviously there are different interests here. We will publish a detailed summary of responses, once the consultation is closed, before the end of this Parliament.
To complement the consultation on paper and the discussions here in the House, we will hold a number of consultation round tables, which Matt Hancock will lead. We are having meetings with stakeholders, which will include small business groups and large business groups, and business representative bodies. The meetings will start next week and will run until 2 February, when the consultation closes. They will look at specific subjects of interest to the stakeholders who are gathered together, and will include the content and scope of reporting requirements, enforcement and monitoring of those requirements, supplier lists—an issue that has been mentioned—and how invoice dates should be tackled.
I am grateful to my noble friend Lord Flight for tabling his Amendment 5, and to him and my noble friend Lord Cope for their comments. Our prompt payment consultation also seeks views on which companies should be subject to the reporting requirement. We propose to exclude small and medium-sized companies from this obligation, using the definition in the Companies Act 2006. We chose this definition as businesses will already be familiar with it, making it easy for them to comply with it. Stakeholders advise us that if instead we relied on the definition used for research and development tax relief, as my noble friend proposed, it would reduce the number of companies in scope from around 18,000 to around 15,000.
My noble friend Lord Flight also mentioned Amendment 25, which relates to the definition of small and medium-sized businesses used for the credit data provision. I understand that that proposed definition is the one used by Her Majesty’s Revenue and Customs for the purposes of the research and development tax credit. We were planning to talk about this under Amendment 25. My noble friend Lord Newby hopes to be here for that, but he is detained on the Pension Schemes Bill; he has a rather awkward situation today, boxing and coxing with the other Bill on the Floor of the House today, as I hope the Committee will understand.
To conclude on Amendment 5, mandatory company reporting requirements are drawn largely from existing company legislation. This is why our starting point was the precedent that UK companies will be familiar with. In addition, given the scale of the problem—I think somebody mentioned £46 billion a year—and the relatively low estimated cost of this measure, at £33.8 million over 10 years, the Government think that it is important that as many companies as is proportionate should be required to report on payment terms. We are consulting on the issue and will consider all alternative proposals. In the mean time, it would be premature to accept the amendment.
On Amendment 9, many respondents to our 2013 discussion paper felt that introducing further penalties would be unlikely to tackle the problem of late payment. The Government also consider that the amendment could lead to wholly undesirable consequences if businesses lengthened their payment terms to avoid paying interest. In the other place, the Government committed to holding a round table on automatic payment of interest to test our current assumptions. We will report back on that issue before the end of March. In any case, by forcing companies to publish comparable information on their payment practices as I have described, we will put pressure on them to improve those very payment practices.
On Amendment 10, late payment legislation already sets a maximum 30-day period to quibble after the receipt of relevant goods and services. Stakeholders to whom we have spoken are unsure that additional legislation would achieve real change, but we will consult stakeholders to understand any concerns around quibble times.
As for unilateral changes to payment terms, it is poor payment practice to ask suppliers to accept blanket changes to payment terms, but in practice such requests are of course not imposed unilaterally. Rather, they are changes made with the agreement of both parties, even if the smaller party may feel that they have no option other than to agree. That was the problem described earlier. I am afraid that a ban as proposed in Amendment 10 would probably not prevent the practice, but we agree that more must be done to tackle exploitation of small suppliers. As I said, our current consultation proposes that companies should report on whether standard and maximum payment terms should be amended during each reporting period to help shine a light on such behaviour. I emphasise that that is out for consultation.
The practice of large companies asking existing suppliers to pay to join or remain on a supplier list, mentioned by the noble Lord, Lord Mendelsohn, is deeply concerning. As a result, we are currently consulting on the issue to understand how widespread concerns are about this and whether action should be taken. Obviously, a ban would apply economy-wide, because that is the nature of the provisions that we are debating today. It is imperative that any actions that we take are targeted and do not inadvertently prohibit the use of supplier lists, for example, where they are mutually beneficial to both parties. I can see circumstances where that might be the case.
Finally, turning to Amendment 11, while we already have a prompt payment code, we can and must do more to strengthen it. We have appointed an advisory board made up of code signatories and business representative bodies to steer this important work. We are currently surveying signatories and non-signatories to the code to test our initial proposals for strengthening its enforcement mechanisms, and considering whether it should have a maximum payment term. Introducing a maximum payment term would be a significant shift for the code. It is right that we use this consultation period to understand how all the options would work in practice.
I turn now to the proposals regarding writing to FTSE 350 companies. Perhaps I may mention that my right honourable friend made a commitment in the other place to write to all those companies to ask them to join the code. I just want to say that he will fulfil this commitment before the end of this Parliament, and of course I will be happy to write to noble Lords to inform them when that has been done.
I hope that the noble Lord feels reassured that we are making a lot of changes and that we are proceeding, albeit by secondary legislation, to do many of the things that have been discussed today. I hope also that he will agree that the amendment should be withdrawn.
My Lords, I am encouraged that these amendments have triggered a long and very useful debate on late payment issues. I was struck by my noble friend Lord O’Neill, who spoke so persuasively about the central principle behind our amendments, which is to ensure that measures designed to help small businesses really and truly do so. It is in that context that the objections raised by the noble Lord, Lord Stoneham, around over-regulation have to be seen. There is no point in legislating if the legislation does not achieve its aims. When we look at the size and scale of late payments, the extension of how long it takes for payments to be made and the drift over a number of years, unless we have measures that really will change this situation, we will fail to achieve those aims. It is important that what we do is effective and I do not think that an objection to making something effective is simply to say that it constitutes over-regulation.
Important points have been raised about some companies where there are consequences and cashflow difficulties, but the comments made by my noble friend Lord Mitchell are important. The price is the price and the time you should pay is the time you should pay. If there are problems, there should be an opportunity for companies to talk together and address them, but it should not be a case of taking unilateral measures or that these issues can be dealt with only through lawyers and the courts. We suggest that there should be effective discussions between the parties and that power relations which affect that sort of discussion should not be exercised unilaterally.
The noble Lord, Lord Cope, raised a number of points which address some of the issues, but they did not fundamentally address the problems that we are trying to deal with—namely, the asymmetry of power. In relation to the issue of the burdens, much of what the Government are proposing and we are proposing could actually be achieved through software packages that are already available. I think that the preparation of these reports would be a lot more pleasurable than VAT returns on a quarterly basis.
I want to say in relation to Amendment 5 that I was impressed with the Grant Thornton document. It certainly identified the costs which it suggested could be taken out. I actually thought that it would be the largest beneficiary of those costs, and it is impressive to see an accountancy firm not supporting the position of its own fees. I thought that the document was a very useful introduction to the debate. However, the costs are still significantly lower than the benefits identified by the Government, so I would say even within that context that I cannot see the strength of the case. We therefore are strongly of the opinion that this needs one definition.
I am grateful to the Minister for what she has said. We are encouraged by some things and discouraged by others. We are certainly encouraged that as regards Amendment 3, there is an assurance that “may” will become “shall”, and that it will perhaps morph into “shall” in the drafting. We are also grateful for her reassurances on some particular measures, and in relation to the overall aims that we are both trying to achieve. In relation to the consultation, which we look forward to reading, we would request, however, that we are not looking at an edited summary but more extensive reporting of the fuller sense of the discussions.
I have to say that some of the other measures still do not address fundamental problems. It is not the case that these charges are frequently imposed by consent, as was mentioned in relation to Amendment 10; they are dealt with unilaterally. That has been under-emphasised. On Amendment 9, the responses indicate that penalties would not be of benefit. That is understood within the context where the companies would have to be the ones that tried to achieve those penalties, which would not be of benefit—there is no doubt about that. We are trying to make sure that the obligations are changed so that companies see that it is of benefit to make the payments. In that way, we are addressing the issue of culture change. Transparency and information are a necessary but insufficient condition to make that change, and given the position of small businesses and the amount of money outstanding, we have to be conscious that these measures would succeed significantly in providing economic change.
However, we still have some matters to consider, some responses to receive and some greater opportunity for the Government to look at this matter. Although I am sorry that the Minister cannot accept our proposals, I hope that she can do so in due course. The message that goes out from here should not be that this side is the only one that really believes in getting things done and is on the side of small businesses. I beg leave to withdraw the amendment.
Amendment 3 withdrawn.
Amendment 4 not moved.
5: Clause 3, page 4, line 14, at end insert—
“( ) it qualifies as a small or medium sized business for the purposes of the Research and Development Corporation Tax relief”
My Lords, I am not quite clear what the Minister was actually offering here, but I should stress that it is clearly completely inappropriate to treat companies with a turnover in excess of £25 million and more than 250 employees as large companies, which is what the Bill presently does. These small and medium-sized businesses are as much the victims of late payment as smaller companies. It is clear—and I trust that both sides of the Committee would agree—that the definition needs changing to an appropriate size, whether by using the R&D definition that fits reasonably well and on which Grant Thornton has done the research, or another definition. However, the SME definition is clearly inappropriate. I beg to move.
Amendment 5 withdrawn.
Amendments 6 and 7 not moved.
8: Clause 3, page 4, line 40, at end insert—
“( ) Until section 85(2) of the Legal Aid, Sentencing and Punishment of Offenders Act 2012 comes into force, in subsection (7)(a), “a fine” is to be read as “a fine not exceeding level 5 on the standard scale”.”
My Lords, this group of amendments makes a number of consequential and technical changes to the penalty levels set out in the Bill. The Legal Aid, Sentencing and Punishment of Offenders Act 2012 includes a provision that, once commenced, will remove the upper limit on all fines of £5,000 and above in the magistrates’ courts. The Act also provides a power by order to increase the amounts of maximum fines at levels 1 to 4 available to magistrates for less serious offences.
The Bill was drafted on the assumption that both the £5,000 limit would have been lifted and levels 1 to 4 increased by the time it received Royal Assent. As this is not yet the case, it is necessary for some of the penalties provided by the Bill to be amended to operate satisfactorily whether or not the changes have come into force. The amendments ensure that the penalties in the Bill work whether or not the changes have taken place, without the need for further amendments to the Bill. This future proofing will apply in respect of a penalty for non-compliance with the proposed reporting requirement on payment performance, which we have just discussed.
We have considered carefully the appropriate level of penalties in the Bill. As the majority of the penalties are in Parts 7 and 8, I shall concentrate my remarks on these parts. The penalties in Parts 7 and 8 are designed to be consistent with the level and approach of existing Companies Act penalties. For example, the failure by a company to make its register of people with significant control available for inspection in new Section 790N(2) is subject to a level 3 fine. This is consistent with the existing penalty in Section 114 of the Companies Act for failure to make the register of members available for inspection.
I now turn to Amendments 45, 46, 57 and 58, which affect Schedules 3 and 5 to the Bill. Schedule 5 provides an option for private companies to keep information about their members and company officers on the public register at Companies House instead of having to keep registers containing this information. This option will also apply to the new register of people with significant control in Schedule 3. A company that takes advantage of this option must still keep precisely the same information on the public register as it would keep on its own register. It must keep the information up to date in the same way as it must keep its own register up to date. The aim of the offences and penalties in the new provisions is to mirror the offences and penalties for not adequately maintaining the information required in each company register.
During our review of the penalties, we discovered that there are a couple of instances where the penalties do not mirror each other. Amendments 45, 46, 57 and 58 correct this to ensure that the penalties are consistent. For example, the fine for not keeping a register of members is set at level 3. As currently drafted, the penalty for a company that chooses not to keep a register of members and does not provide Companies House with information about its members is set at level 4. Amendment 58 replaces this with a level 3 fine to ensure that the penalties are consistent. I very much hope that noble Lords will support these essentially technical amendments. I beg to move.
My Lords, I thank the Minister for explaining these government amendments so clearly. She will be relieved to hear that we will not seek to oppose them.
Of course, the Minister is right because, more than 32 months after the LASPO Act received Royal Assent, the Government have not got round to implementing Section 85 of it. That Act was a terrible piece of legislation but the one exception to it was Part 3—in which Section 85 is to be found. While I would very much welcome the chance of explaining to the Committee why it was such a dreadful Act, I will resist that temptation this afternoon.
Part 3 deals with sentencing and punishment of offenders and was widely supported across both Houses. I have two questions for the Minister—I am sure they are both quite easy ones for her. First, why have the Government not acted sooner to implement Section 85? It has been almost three years now and the changes required statutory instruments which have just not been brought before Parliament. An explanation would be welcomed by the Committee. Secondly, what are the Government’s proposals now to bring forward those statutory instruments, and will they be completed by the time that Parliament prorogues for the general election? If the noble Baroness is not in a position to answer those two questions now, she can write to me in due course.
My Lords, it used to be thought that it was only on the opposition side that concern about long waits for things that have been promised is to be found. This is an example of something where Governments do not do themselves any favours at all if it seems that they are capable of bringing forth legislation, because they know what they are going to do, but then spend some 30-odd months before they actually do it. I hope that the noble Baroness will be able to give us the answer but that if not—perfectly reasonably, she may not have that answer—she will make sure that we all know about it when she writes to the Opposition, as this is something that worries us all.
My Lords, I am grateful to noble Lords for their support for the government amendments. The regulations in question relating to LASPO were laid on 17 December. They are necessary to accompany the commencement of the unlimited fines provision, and before they can be approved, they of course need to be debated in both Houses of Parliament. We hope that unlimited fines can be brought into force before Parliament is dissolved in March.
Amendment 8 agreed.
Amendment 9 not moved.
Clause 3, as amended, agreed.
Amendments 10 and 11 not moved.
12: After Clause 3, insert the following new Clause—
“Payment practices: retention of monies
(1) The Secretary of State may by regulations impose requirements on certain companies to publish information about their policies, practices and performance in holding, safeguarding and releasing sums withheld by, or in behalf of, a payer from monies which would otherwise be due under a contract, the effect of which would provide the payer with security for the current and future performance by the payee of any or all of the payee’s obligations under the contract (“retention monies”).
(2) The regulations under subsection (1) may prescribe—
(a) the companies or type of companies to which the regulations apply;(b) the information required to be published;(c) the intervals at which, and format and manner in which, publication must take place; and(d) the type of description of contractual provision to which the regulations apply.(3) The restrictions on regulations in section 3(3) shall apply to regulations made under subsection (1) of this section.
(4) The Secretary of State shall arrange a review of the operation of the type of contractual provisions mentioned in subsection (1) after a period of 18 months following the coming into force of the first regulations made under subsection (1), and shall lay a copy of the report of the review before each House of Parliament.
(5) The review provided for under subsection (4) may make recommendations for requirements and obligations to be imposed upon certain types or descriptions of companies in relation to the practice of retaining monies as described in subsection (1).
(6) After public consultation, the Secretary of State may by regulations impose such requirements and obligations on prescribed companies as were recommended by the review, in whole or in part and with such amendments as the Secretary of State believes to be required in order to—
(a) ensure that the practice of withholding retention monies does not give rise to unfair treatment of payees;(b) provide assurance that retention monies are held securely; and(c) ensure that the position of a payee company from whom retention monies are being withheld is protected when a payer company becomes insolvent.”
My Lords, I rise to move Amendment 12, which is in my name and that of my noble friend Lord Mendelsohn. I declare an interest in that my wife is a solicitor who deals with construction contracts.
It was a surprise to me to discover that at any one time, according to recently released figures, about £3 billion is outstanding within the construction industry by way of cash retentions. This figure represents the aggregate of monies which have ultimately been provided by small businesses, ostensibly as security in the event they do not return to remedy any defects in their work. I suspect that this process is taken from domestic situations; we are all aware of the problems that can be caused when one tries to get a rogue trader or contractor back to remedy faulty work.
However, in a commercial setting, the situation is surely different. It appears that the main motive for deducting retentions is to enhance the working capital of the party deducting them. Using the FOI Act, the Specialist Engineering Contractors’ Group recently carried out research among public bodies of the use made of cash retentions. It found that 71% of those surveyed added cash retentions to their working capital or admitted that they actually reinvested them while they waited for the evolution of the work process being undertaken by the contractor. The effect is that bodies that are commissioning work are also borrowing from the small firms that are carrying out the work. That is counterproductive to good economic activity at a time when such firms are also having major problems in accessing finance.
The key issue is that cash retentions are being deducted from payments already earned. They are handed over on condition that they are returned only unless they are used to remedy defects in the event that the firm does not do so. However, this is a very unsatisfactory situation, as in the mean time there is no protection for the retained money that will ensure that they will be available for release if, in the event, there are no uncompleted remedial works. We think that there is a good case for any retention funds to be kept separate from working capital and we suggest that there should be some form of trust in which these amounts are held.
These issues apply of course all the way down the supply chain. It is obviously true that for public sector works, small firms operating directly with the public sector are unlikely to see that body go bust, although it is not unknown. However, if they are dealing with private companies that are themselves contracted by the public sector, the firms further down the supply chain are at risk of losing their retentions if their top supplier, for instance, becomes insolvent. On the other hand, a tier-one supplier at the top level does not carry this risk because it will be working with bodies that are unlikely to become insolvent.
Of course, the business department has a construction supply chain payment charter, which was launched on 22 April 2014. In it is expressed the wish that these retentions should be abolished, which, I think, is good news. However, unfortunately the proposal is to wait until 2025. Governments have long aspirations and wide horizons but to wait another 10 years for such an obvious piece of legislation seems a little otiose. I hope that when the Minister comes to respond she can explain exactly why the delay is there and what it is for.
If it were possible for the Government to accept our amendment, this would begin to move us down the process. In particular, if it were appropriate to ensure that money held on retention was, in fact, placed in trust, separate from the working capital of the companies that were involved in it, that would certainly have the advantage of reducing the risk to those lending their money to those commissioning it. The amendment would enable the Secretary of State, through regulation, to be better informed about the extent of the problem and then to issue regulations when the appropriate time came. In this case, we are quite happy for this to be a “may” and not a “shall” provision.
If the amendment is accepted, it will have far-reaching benefits for small businesses throughout the construction industry. It will enable them to provide more jobs and increase their training provisions, and investees in resources will help to improve policy and the timeliness of delivery. How could we be against that? I beg to move.
I support the amendment and my noble friend. In 2002, I was the chair of a Select Committee that looked at retentions. At the time, it achieved a degree of notoriety in so far as, once the six weeks had elapsed, we got a letter from the department—I should say from the Minister, even though he was a member of the Government of my own party—but frankly it was not worth the paper it was written on. It was the most feeble response on this issue. Therefore, perhaps uncharacteristically, I am not here today to make party points, because my lot were as bad as the other lot. However, the fact was that the civil servants were somewhat uncomfortable when we took them word by word through their communication. Eventually, with them having a second bite at the cherry, we got a rather better ministerial response.
Given the glacial speed at which this matter has been dealt with by the respective Governments, it was not a surprise but a matter of some satisfaction that in 2014 we had the question of retentions being dealt with included in the fair payment charter. Both sides have already spoken today about culture change but 23 years to secure a culture change on a matter as fundamental as payment seems to be a rather relaxed, laid-back approach to this issue. While there is always more rejoicing in heaven when one sinner repenteth—and there seem to be a number of sinners repenting on this issue at the moment—the fact is that the bus to Damascus is taking a lot longer to arrive than it should.
Therefore, I encourage the Minister to look afresh at the dates. The payment charter was important and a significant advance but I do not think that we should rest on our laurels in this respect. A number of businesses are short-changed as a matter of course because of retentions and it is indefensible that the public sector should be part of that. On the other hand, it is almost inevitable because 40% of all construction work in the United Kingdom is paid for by the state in one way or another, whether by local government, the health service or those authorised to do so by other people. There is even a fair amount of work carried out at the behest of regulatory bodies which, although independent of the state, are nevertheless instruments of the state in one way or another.
We should not underestimate the significant contribution that could be made by a Government prepared to increase the pace of change here. While the advance that has been made in the past two or three years in terms of payment generally is to be applauded, this most pernicious form of payment retention cannot be justified. It has been said that this is a means of regulating bad practice, but it is a most unsatisfactory one. There was a time when the supply chain was a somewhat feisty, disagreeable means of doing business, where there was quite considerable ill feeling between relative tiers of that chain. That is no longer the case but a significant minority of businesses is still prepared to hold on to money that legitimately should be given to people who have fulfilled their work.
We could go into anecdotal evidence of this kind of practice. For example, the people who prepare the foundations for a building project are very often still waiting to get paid because the car park turf has not yet been laid. They have long departed the site and finished their work but are still waiting because the project is not completed. That kind of sharp practice should not occur in an efficient economy or decent society. I would like to think that the Minister had a bit of scope here, could take this amendment away and, if it is not quite to her needs, do something more with it. If I were to individually ask the Members of this Committee whether they agree with this practice, think it contributes to the efficiency of the British economy or even think it is fair, they would probably answer that “No” is the only answer. It is not fair and it does not promote economic efficiency. It enhances distrust between sectors of an industry where this Government and their predecessors, through the appointment of a chief adviser on construction and the like, have been trying to bring the parties together to get them to have a concerted approach—that is, the management, unions and various sectors of the industry. As long as we have this kind of practice, we will not have the trust that lies at the heart of an industry that can do so much but sometimes falls at the first hurdle. The first hurdle of any business is payment, as we have said already today.
My Lords, I support my noble friends in this amendment. My experience is really only in the construction industry but there may be issues that are general to other areas where there are a large number of subcontractors. In construction, the retention system—if we can call it that—is about 100 years old, but in practice it is positively medieval. It is holding back money owed for work that has been done and completed. There seems to be little or no recourse because, if a subcontractor tries to take on the principal contractor in public through the legal system, they suddenly find that the work dries up.
I know for a fact someone who is owed £1 million by a principal contractor. After several months and being told that the accounting system had changed—a very common thing to be told—he was then informed that if he paid £50,000 up front, he would get his money. I know another company with a turnover of £45 million that wrote in last November: it has retention outstanding of £762,000. In some cases, as my noble friend Lord O’Neill said, people have to wait for so long for areas that are completely extraneous to their own work, and wait for years until—sometimes—the main contractor has gone out of business and they do not get their money. This encourages a bullying culture: a clamping down from the top so that undercapitalised principal contractors squeeze the next layer down.
That has implications—which is where I come in, if you like—for the way that building workers are treated. They are the ones who, in the end, have to pay for all of this. We as taxpayers have to pay, of course, for failed companies and lost hope and opportunities, but building workers are paying for a system that really ought to be reformed. This proposal is long overdue. Germany manages without such a system, as does Japan. We do not need this system, rather we need a fair system where money goes into a bank on trust and is paid out automatically on the satisfactory completion of a particular tranche of work. That is not a lot to ask for. The noble Baroness opposite talked about culture change, and I agree that that is extremely important. But the only way in which that is going to be done is by making some of these pernicious practices illegal.
My Lords, I thank the noble Lord for Amendment 12 on the important matter of retention payments and for initiating an interesting and important debate. Although his proposed new clause is very widely drafted, it is clear from our discussions that the focus is actually on the construction sector. The Government are clear that there are a number of issues with the payment culture in the construction industry. I am also grateful to the noble Baroness, Lady Donaghy, for adding her reflections. Retentions are clearly part of that wider culture. We believe that we are most likely to make progress by dealing with the wider picture rather than focusing on specific details; namely, looking to address the cause rather than the symptoms. That is why we are working with the industry on a number of fronts.
These include the Housing Grants, Construction and Regeneration Act 1996, as amended in 2011, which sets out a statutory framework governing contractual terms on payment. This introduces some basic rights such as the prohibition of so-called “pay-when-paid” clauses and the right to adjudication; that is, a contractual dispute resolution process, which I think we have agreed in other debates in this Room is very important. Recognising the importance of Government in this game because we are such a big customer, as the noble Lord, Lord O’Neill, mentioned, we are using procurement to introduce innovative new practices in our own operations such as the use of so-called “project bank accounts” which will change the payment dynamic on construction projects by facilitating payments directly to sub-contractors. These are a form of escrow account which holds the money that is used to pay sub-contractors as work is completed and is not dissimilar to the trust idea mentioned by the noble Lord, Lord Stevenson.
We are also working with the industry through its Construction Leadership Council and the Institute of Credit Management to implement a payment charter that contains 11 commitments, including one specifically to remove the need for retentions. As we have heard, Amendment 3 aims to introduce a power to impose a reporting requirement on the narrow practice of retaining money, mainly because of concerns about the construction industry. We do not believe that this is necessary. The Government are already able to include a new obligation to report on retention practices through the powers we are taking in this Bill. That deals with the reporting part.
I turn now to the underlying substance of retentions. We are also working with industry through the Construction Leadership Council to move to a position where retentions are no longer necessary by 2025, which is of course an end date. I am sure that noble Lords will agree that removing retentions needs to go hand in hand with defect-free work, particularly on one-off contracts.
Supply arrangements in construction are often project based, frequently short term and can involve payments for partially completed and therefore hard to value work. Clients need some sort of guarantee that, should defects emerge within a reasonable period—and it can be as much as 12 to 24 months, although on one’s own private building work at home it is usually about six months—there has to be some remedy. Retentions were the way devised for dealing with this, and to move forward a workable alternative has to be found. I suspect that that may be something to do with the long timescales that we see here. Moreover, we are seeking evidence on the prevalence of this issue in other sectors beyond construction—but also in construction itself—in the stakeholder groups and on the payment terms consultation that I mentioned in the previous discussion. So we will have a better idea of what the current situation is and how the changes that we propose on the reporting of payment terms and timescales will affect matters, not only in construction but elsewhere. That will help to establish the need for further government action. On this basis, I would ask the noble Lord to withdraw his amendment.
The Minister made the point that, as the main customer, the Government have started a number of projects with project bank accounts. Before we get to the next stage, could she provide us with an indication of which departments are entering into this? My understanding is that it is fairly patchy and that some departments—for example, the Ministry of Defence—have been somewhat less than enthusiastic about changing their procurement practices. It would be helpful if we could get a picture of what is actually happening. I know that it is limited and I am not going to criticise the Government for the size of the operation; it is about the number of departments that are willing to participate. That is as important as anything. Some of them seem to be enthusiastic while others are a bit less so. It would be useful to find out, and it might even help if we named and shamed them.
I thank the Minister for her response, although I am a bit disappointed by her willingness to take on board some of the issues. I thought that my noble friend Lord O’Neill made an excellent contribution that endorsed and fleshed out some of the issues. Likewise, my noble friend Lady Donaghy raised them from a different perspective, but with very much a similar line. This is clearly a pernicious activity with medieval origins, possibly even back as far as Damascus, which needs to be looked at very hard. To set a timetable of 2025 will cause flames to emerge from those who are trying to deal with it—but that metaphor is running out fast.
Two things struck me. I do not often hear the words “government” and “innovative practices” coupled together, but I am delighted to hear them. I think that my noble friend Lord O’Neill was right to suggest that we need a bit more evidence of that, and I look forward to the letter being more widely copied than just to him.
The other aspiration mentioned was the wish to see defect-free work. Well, pigs do fly and I have occasionally seen one or two, but I do not think that we are talking about that. Is not the answer, more seriously, that we are trying to get out of this a more robust and resilient construction practice activity within which good clients contract with good suppliers on a basis of mutual trust and organisation? The idea of having a separate escrow account or retentions thing really plays to a lack of confidence and the ability to take action through the courts, which the Government often pray in aid as the answer to all difficulties. Is that really the way forward? If you have good clients and a good contractor and there is a problem, there are arbitration and other systems that well exercise those on their way through. I do not see the case for retaining the retentions system as a way of trying to bolster this up. The Government may want to reflect on that, but I shall read carefully through the Minister’s response and think again about the issue. There is something here that perhaps needs a little more attention but, in the mean time, I beg leave to withdraw the amendment.
Amendment 12 withdrawn.
Clause 4: Small and medium sized businesses: information to credit reference agencies
13: Clause 4, page 5, line 8, at end insert—
“(c) a duty on designated banks and designated credit reference agencies to provide information about the criteria used to calculate the credit score of a small and medium sized business customer to such customers.”
My Lords, 2015 got off to a cracking start for me. On 1 January, my football team, Tottenham Hotspur, put five goals past Chelsea. For those who do not follow football, that is as good as it gets. Then, on 2 January, the new rules on payday lending came into effect. Having campaigned on the issue for three years, that was a wonderful outcome.
When I was involved with payday lending, I became aware of how important it is for large banks to share individuals’ credit references with much smaller credit providers. If the credit information is not provided in a timely manner, it is much harder for loans to be advanced. Small businesses suffer from the same malaise. To advance credit, providers need data, much of which are historic. Without data, lenders are simply shooting in the dark. We are very pleased that the Government are addressing this measure but we believe that we can go much further in toughening up its implementation.
These amendments concern the ability of SMEs to work out how their credit rating is calculated and would place a duty on credit reference agencies to increase the transparency around how the scores are worked out. Clause 4 gives the Treasury the power to require banks to share information with credit agencies to increase the likelihood of SMEs accessing finance, even if they are initially turned down for a loan. This is important as there is a growing market of alternative finance providers that can help small businesses get the credit they need. For example, Funding Circle, a major peer-to-peer lender, has provided more than 36,000 loans with a value approaching £500 million, so this is already an important and fast growing market.
We support the provisions in Clause 4 and believe it is crucial that we look at expanding the provision of finance to small business. These amendments are aimed mainly at helping those who are refused access to finance but for whom it is not immediately clear why that is the case. As I mentioned earlier, many small businesses that are turned down by high street banks just turn tail and do not seek alternative providers. We must encourage the small business community to say, “If your bank turns you down, there are plenty of others who can advance finance to you”.
You and I can contact credit reference agencies to get information about our credit scores and, in so doing, can find out more detail about how we might improve them—for example, by using a certain type of credit judiciously over a period of time. This process is also important for correcting mistakes when they affect a credit score. All businesses need the same ability to find out why they are struggling to obtain credit. In the first instance, the information lets a small business know whether or not the fault lies with its business or results from a change of policy at the bank. If the fault lies with the business, it can look at taking steps to remedy it, such as making changes to the business plan.
This amendment is also important in terms of working out whether being referred by a bank to a credit agency and alternative sources of finance will affect a business’s credit score. If it is not accepted, the effectiveness of the change which, as I have said, has our support, will be difficult to judge. For instance, if the initial rejection raises the cost of lending, a business would have been better off seeking alternative finance. That does not seem to be the Government’s intention. The amendment would ensure that the change has the effect that the Government intend. This change is supported by the Federation of Small Businesses, which says that it,
“would also like to see a duty included in the Bill which requires banks and credit reference agencies to provide information about the criteria used to calculate the credit score of the small and medium sized business customer. This would increase transparency and guidance to help small firms to understand their credit score and to help them take steps to improve it. The customer would request this information in writing and no charge would be made for providing it”.
We have also included in this group of amendments a safeguard to ensure that only data relevant to this process is shared, and that it is shared only with the permission of the business. Without such a safeguard, there will be understandable reluctance among many businesses to have possibly sensitive data circulating without their express consent. I hope the Government can accept this improvement to a clause that has widespread support, to ensure that no opportunities to improve access to finance for small business are missed.
Finally in this group there is also a probing amendment on the likely costs of the process laid out in the clause. This is purely designed to ask the Minister to provide a little more detail than is currently available in the impact assessment as to where the costs of this change are likely to fall. I beg to move.
My Lords, as a Leeds United supporter, I begin by congratulating the noble Lord, Lord Mitchell, on the success of Spurs. As a young boy, everybody in my class supported either Wolves or Spurs, as this was a time when Spurs were doing rather well in the FA Cup more generally. I supported Spurs. This was a time when no one who lived in Leeds supported Leeds United, because they were not worth supporting. I graduated to better things but am very pleased that Spurs are still doing well. I also congratulate him on the work that he did on payday lending and getting the current legislation in place. I am sure that all noble Lords agree that that has been a beneficial change, and he was absolutely instrumental in bringing it about.
I am also grateful for the opportunity to discuss the issues raised by this group of amendments. I absolutely understand what the noble Lord is seeking to achieve, but I am not really convinced that they are necessary. Taking them in turn, Amendments 13, 14 and 15 would require that designated banks and credit reference agencies provide information about the criteria used to calculate the credit score of a small or medium-sized business customer. The Government agree that it is vital that businesses have the information they need in order to maximise their chances of securing finance. However, I believe that this is best achieved by improving transparency in the banking sector and by educating businesses to help them understand the impact their behaviours have on their credit scores—not through legislation.
The Government have introduced measures in order to make the banking industry one of the most transparent in the world. These include the requirement on the largest banks to disclose lending by postcode areas, the Federation of Small Businesses’ and British Chambers of Commerce’s new Business Banking Insight survey, commissioned by the Chancellor, which helps small businesses see which bank is best for them, and the independent appeals process, which allows any SME rejected for a loan to get a second chance.
There is a wealth of information in the public domain which businesses can use to understand the impact their behaviours have on their credit scores. This includes the information provided by the CRAs themselves, the Money Advice Service, the British Business Bank, charities and other information providers. An excellent example is the Business Credit Scoring Explained pamphlet produced by Professor Russel Griggs, chair of the independent lending appeals process, which is available on GOV.UK and the British Business Bank website. It is a surprisingly easy to read document. I would have thought that any small business seeking to understand how credit scoring worked would find it immensely useful. It is this wider sort of information that is most valuable and useful to SMEs, in our view, when they are considering how to improve their options for accessing finance.
The Government intend to continue to work closely with business groups, banks and CRAs, to build on the existing good work in this area, to help promote existing material and to create new, informative aids for businesses. However, CRAs and banks compete on the accuracy of the models and methods they use to assess risk. An obligation to reveal this proprietary information could undermine the competitive nature of these markets, which would be in nobody’s interest. Just as importantly, I am concerned that detailed models produced by banks and CRAs would be of little use to the average SME. Examples such as the pamphlet I have just referred to are much more suitable in my view and are of course already available.
Amendment 17 is intended to restrict the information that may be shared under the regulations to information specifically identified by the business. I assure noble Lords that this is already the policy intention. Clause 4 requires that businesses must have agreed to have data provided to CRAs. Our intention is that this agreement will have been given when signing the terms and conditions for a financial product, which is the process that businesses are used to. Therefore, we believe that this amendment is simply not necessary.
Amendment 18 aims to ensure that the Government analyse the costs of the measure. The Government have already published a regulatory impact assessment setting out the impact of the changes on banks, CRAs and businesses. It concluded that banks would incur upfront IT costs of £10.5 million and that CRAs would incur upfront IT costs of £3.5 million but that any ongoing cost of sharing these data would be negligible for established lenders. It also concluded that the measures will increase competition in the CRA market and the market for lending to SMEs, which would produce a downward, not upward, effect on prices charged for credit scores and the cost of lending.
I hope that I have been able to assure the noble Lord that these amendments are not necessary and that he will agree to withdraw the amendment.
My Lords, the noble Lord mentioned the whole question of the security of data sharing. I should just like to have confirmation from the Minister that Clause 4 covers that. There is sometimes a risk in sharing data that it can be to the disadvantage of a company, and that would be very unfortunate if it were to happen in this case. I was not sure whether the Minister’s response to the noble Lord, Lord Mitchell, covered that and therefore whether the Bill covers that point.
The important thing is that information which a company has and which might be shared is shared only with the explicit prior approval of the company. As I was saying, this is one of the things that is often included in the terms and conditions of any agreement or relationship that the company has with the bank. Unless the company has explicitly said that it is prepared to have its data shared, they will not be shared. More generally, all the activity that we are talking about is covered by normal Data Protection Act safeguards.
My Lords, I just wish to raise a slight qualm that I have on this issue. I applaud the idea of data sharing and the theory that it would enable small firms to shop around for credit more easily in the Funding Circle that the noble Lord, Lord Mitchell, mentioned—it is one of those organisations that can respond very quickly if it gets the data that it needs—but Amendment 17 seems to offer the possibility of small firms picking and choosing which bits of the data are made available. We all support small firms but some do not always behave entirely honourably, and I would be very nervous about a proposal that allowed a small firm to say, “This little bit of the verdict on what I do can be relayed to a potential lender but not that little bit because that little bit tells a very different story”. Therefore, I think that we need to be clear that when we are saying that a small firm, or indeed any firm, can give its permission for data to be shown to an alternative lender, it needs to be the whole picture, otherwise we are in danger of getting to where we have got to now—with references to individuals, for instance—where the reference is meaningless. You are very lucky if the reference says, “You would be very lucky to get this person to work for you”, which of course can be interpreted in two different ways. People are now very nervous about committing anything on the basis of just a corporate reference.
I think, my Lords, that that concern is dealt with by the fact that approval or agreement that data might be shared tends to take the form of being included in the standard terms and conditions of the bank, so one will not be able to pick and choose. One will be presented with a standard form that states, “You agree to the following forms of data being used”. There will not be much scope for negotiation as to which data are open for discussion.
I should like to respond to the Minister by thanking him for his support on the subject of payday lending. There were some dark days in this three-year campaign, and he and I had private meetings in which he gave me a lot of encouragement. Me saying that from this Dispatch Box will have totally ruined his career, but he was very supportive and for that I am grateful. I thank him for the points he made, which are helpful. We will, of course, come back to all this on Report. I beg leave to withdraw the amendment.
Amendment 13 withdrawn.
Amendments 14 and 15 not moved.
16: Clause 4, page 5, line 37, after “to” insert “include an appropriate term in its standard terms and conditions or to otherwise”
My Lords, these amendments make a number of technical changes to Clauses 4, 6 and 7 to ensure that the credit data and finance platforms measures work as the Government intended. The amendments also specify the commencement date for the Government’s cheque-imaging provisions.
Beginning with the amendments to credit data and finance platforms, Amendment 16 is a clarificatory amendment to Clause 4 to ensure that banks do not deliberately circumvent their obligations to share credit data with credit reference agencies. Amendment 20 would ensure that the regulations under Clause 4 may require credit reference agencies to provide all the data obtained by them under the credit data measure to the Bank of England, not only data provided by designated banks.
Amendments 22, 23 and 29 would allow the Government to accept the recommendations of the Delegated Powers and Regulatory Reform Committee that any future change to the regulations made under Clauses 4, 5 or 7 be subject to the affirmative rather than negative procedure.
Amendments 27 and 28 would ensure that providers of invoice discounting and factoring services are covered by the definition of “finance provider”. This allows them to benefit from government measures to improve access to credit data and to implement platforms for rejected small business finance applications. Providers of invoice discounting and factoring are a key part of the financing landscape for smaller businesses and it is essential that they are able to benefit from these measures.
Finally, Amendment 103 specifies the date for the commencement of the provisions enabling cheque imaging in the UK as 31 July 2016. This amendment will therefore help ensure the banking industry delivers this payments innovation to customers as quickly and ambitiously as possible. The Government are tabling this amendment to help ensure that the benefits of cheque imaging are delivered to a clear, fixed and timely schedule. I beg to move.
My Lords, the Opposition are happy to accept the great majority of what has been produced in this group. We see the logic of the amendments and understand their rationale. It is sometimes amusing to find the Treasury in a situation in which it appears not to have been quite as convincing as it ought to have been in its submissions to the DPRRC. The noble Lord made a good fist of it but it must have been a bit galling to realise that in some ways the mighty writ of the Treasury, which normally runs everywhere, got washed away by the firm rebuttal of the idea that somehow a Henry VIII clause, when introduced by the Treasury, was okay but not when it was introduced by others. I am glad to see that the changes made here bring back a more coherent and consistent approach. Other than that, this is a welcome step forward.
Amendment 16 agreed.
Amendments 17 and 18 not moved.
Clause 4, as amended, agreed.
Clause 5: Small and medium sized businesses: information to finance platforms
18A: Clause 5, page 6, line 43, at end insert—
“impose a duty on the finance platform to offer specified information to a designated financial adviser.”
My Lords, as disclosed on the register of interests, I declare that I am a senior partner at Cavendish Corporate Finance (UK) Limited, and my involvement with BIS, which I shall amplify in a moment. Like the noble Lord, Lord Mitchell, I very much welcome the Bill as further evidence of this Government’s commitment to SMEs, and in particular to providing assistance for SME finance. Unlike the noble Lord, I would say that the Government have done a huge amount to assist SMEs on finance not just in the UK, but overseas as well. I should particularly mention the pleasure of working with BIS, and I actually travelled to China with the Prime Minister on his trade mission. That jumbo jet was full of SME businessmen. The Prime Minister made a point of taking SME businessmen to help their export trade, and as I travel around the country, I have businessmen telling me how dramatically different the Foreign Office is when working in conjunction with BIS to assist SMEs.
This clause in particular should, it is hoped, have a radical effect on assisting SMEs in the procurement of finance in difficult circumstances for them. I welcome the clause. My amendment relates to a particular and specific circumstance where an SME has gone to its local high street bank and, for whatever reason, that bank has rejected the loan. That is, of course, a minority of situations. The proposal suggests that at that point, the high street bank should put the customer on to a finance platform in order to allow other alternative sources of finance to provide the loan. I welcome the regulations that were published just in time for a Christmas read, and in particular that the Treasury has now agreed to consult the British Business Bank specifically on who will be the designated platform. I firmly believe that the BBB understands who would be the appropriate platform.
I do not intend this in a pejorative sense, but my concern is that the use of “may” in Clause 5(4) means that within the terms of paragraphs (a) and (b), only lenders will have access to those finance platforms. I believe that it would be much more helpful to SME businesses to allow them the opportunity to take advice and have access to advisers who can guide them towards the right source of such loans. Indeed, many lenders to SMEs, because of the nature of the small amount of money involved, will look at loans only if they are packaged in a particular prescribed format. The SME will not have the skills and expertise, or indeed the time, to package up the proposal in a format that suits each possible financial provider. Furthermore, some financial platforms have in mind a large number of lenders, as many as 130, while others have only four or five in mind. If the potential borrower finds himself on the wrong financial platform, he will either be too restricted in the number of lenders he can talk to or possibly overwhelmed by the number of financial providers who contact him to offer their loans.
We are talking here about businesses that range from wanting a loan to finance a small residential development to one that wants to borrow the money needed to buy a forklift truck. Of course, the nature and type of lender will vary enormously according to the circumstances and, indeed, to the geography. My amendment would allow the potential borrower to have access to an appropriate adviser, which is, of course, an adviser that would be approved by the Treasury—which means, in fact, the British Business Bank—to facilitate greater choice for businesses. Let us not forget that these businesses have just suffered a rejection of their loan application and, sadly, they are probably not blessed with a munificent and successful father along the lines of the example we discussed earlier. They therefore need an appropriate level of advice. I beg to move.
My Lords, we have a few amendments in this group and I will speak to just a couple of them. Two of them deal with matters to do with the Regulatory Reform Committee, which I think will be dealt with by the Minister when he comes to respond. The amendments would simply implement the proposals that have not already been dealt with by the previous discussions.
Amendment 19 is a probing amendment. In this set of amendments we deal with the third leg of a three-legged stool that tries to address a set of arrangements around the failure to commit to a financing model for small businesses at the individual level. This is a different attack on the same problem we have talked about throughout the whole of this afternoon: why finance does not flow as well as we would all like to this sector of our economy. The amendment is designed to suggest to the Government that there would be merit if one could extract some lessons from the process, whether or not it also includes the proposals just spoken to. That would add another dimension. We will see how the Government respond to that.
In the context of there being a small business in need of financing, a set of traditional lenders to whom it may or may not have applied, alternative suppliers and others who have expertise and knowledge about that, it would make sense for there to be some lessons learnt from these processes. The suggestion is made in the amendment that the Government might wish to think about providing an annual report to Parliament so that we have a sense of how these things operate. This is to some extent uncharted territory. It may feel like another administrative burden. In some senses, being a probing amendment, the wording is not to be taken at face value. However, this is interesting and new ground. We need to learn the lessons from it and to get the information that we gather out to as wide a group as possible. I hope the sensibility of that would commend it to the Government in some way. I look forward to a response on that.
The converse side of this argument is to be found in Amendment 21. This was slightly touched upon by the noble Baroness, Lady Wheatcroft, who I am afraid is not now in her place. I recognised what she said in her intervention on the last group. We would all be worse off if the credit referencing agencies and those others involved in this stool of three legs that I have talked about were fed information that was wrong. There has to be some means or mechanism for those who feel that the information held on them in these agencies is correctable. The noble Baroness was right to say that this has a sense of the googlisation issue, where you might have the right to correct your own information if you do not like it, but that is not where we are here. We are saying that if it is factually incorrect or in some senses paints a distorted picture, there ought to be some redress mechanism.
There are probably already reasonable direct relationships that could be invoked for that. Of course, there is the Financial Ombudsman Service, which plays a great part in dealing with many issues. I suspect that the people we are talking about in the SMEs, particularly the smaller ones, would find it helpful to have a body like the FOS to which they could pray in aid for help to correct information, question whether information held is correct and iron out any problems. The amendment is there as a suggestion, to the extent that there may even be other systems that would be better able to take this on. If there are not, why should the FOS not be invited to do so? The reason for tabling the amendment was that, in researching this, it turned out that there is a rather low limit for the size of institution that can approach the FOS. It would perhaps be helpful if, as a result of this discussion, the Treasury took this back and looked at it again. It seems wrong to cut off an area that is clearly effective in trying to get things resolved and to get the economy moving and things going. I hope that that is a helpful contribution.
My Lords, as I have already pointed out, Amendment 25 really goes with Amendment 5. Very simply, and hence why it comes up in this section of the Bill, it endeavours to slightly widen the size of SME which can benefit from the provisions on credit information availability by substituting the R&D tax credit definition of an SME for the definition currently pertaining in the Bill.
There is quite an important point here, which is that the crucial measure of the ability of a company to command lending services is really its EBITA. Most companies with an EBITA below £5 million have problems in sourcing capital investment finance. Basically, the argument runs that the definition used for an SME is really too small and that small and medium-sized businesses are in just as much need of assistance in sourcing credit and investment as are smaller companies.
My Lords, I begin by repeating that the Government are completely committed to ensuring that SMEs can access the finance that they need to grow and create jobs. That is why the Bill seeks to build on the progress that the Government have already made on this agenda by bringing forward further innovative solutions to ensure that businesses can borrow and succeed. These include ensuring that alternative lenders can access credit information on smaller businesses to help them make lending decisions, and creating a new process for rejected smaller businesses to be offered the opportunity to use government-designated platforms that will help match them with alternative lenders. I will go through the amendments in turn.
Amendment 18A relates to providing financial advice as part of the finance platform offer. The new process provided for by Clause 5 has been designed to address a specific problem affecting smaller businesses’ ability to secure finance: namely, the evidence suggests that a smaller business will go straight to its main bank when it needs to borrow. If the banks says no, the business will give up its search there in the belief that it is already at the end of the road, as the noble Lord, Lord Mitchell, pointed out when we discussed an earlier amendment. However, alternative sources of finance for smaller businesses are coming on stream all the time.
The new process will address this problem by requiring banks to offer businesses that they reject for borrowing a new option alongside making an appeal or going to see a broker. To be clear, going to designated platforms will be a route that rejected businesses can take alongside or in tandem with existing avenues available to them, such as seeking professional advice. It is right therefore that the platforms process remains focused on addressing the issue of access to finance, which is where the real problem is. Of course, platforms will also be able to add additional services on top of the minimum legislative requirements—the Government want to give platforms freedom to compete with each other to offer the best possible service. My noble friend will therefore be pleased to know that the Government’s discussions with the industry have indicated that the majority of providers interested in securing designation intend to support advice for businesses as part of their value added services. However, we do not believe that adding the specific amendment that he suggests is something that we should contemplate at this point.
Amendments 19 and 24 relate to parliamentary scrutiny. I hope that noble Lords will be reassured by, and be happy about, the government amendments that we have just debated, which accept the recommendation of the Delegated Powers and Regulatory Reform Committee to move to the affirmative procedure. The only thing I would say about Amendment 19 is that, in speaking to it, the noble Lord said something slightly different from what the amendment says. The amendment says that the Government should report on the number of times the regulations are used within a year. It does not say that it should be a broader report of the sort that he suggested in his speech. It is unlikely that these provisions will be used many times in a typical year, and the very fact that they will now be dealt with by affirmative resolution means that Members of both Houses will have a much clearer sense of exactly what has happened in any given year, because those who are interested in them will have been debating them.
Amendment 21 relates to small businesses’ recourse to the Financial Ombudsman Service. The Government agree that the FOS is a vital source of protection for small businesses. That is why we are extending its remit as part of this legislation. Currently, when complaining about a CRA, a smaller population of businesses has recourse to the FOS than is the case for complaints about most financial services firms. Through this Bill, we are extending it so that all businesses that meet the general eligibility criteria for bringing a complaint to the FOS—currently microbusinesses with a turnover of less than €2 million and fewer than 10 employees—can complain to the FOS about any designated CRA. This will ensure that these small businesses have the same protections when dealing with a designated CRA as they do when dealing with a bank.
However, the Government do not think that it is appropriate to extend the remit of the FOS beyond its usual jurisdiction in this one isolated case, as suggested by the amendment. The limitation of the FOS’s jurisdiction to complaints brought by individuals or microbusinesses is set by rules of the Financial Conduct Authority. The FCA is due to consult soon on the jurisdiction of the FOS and the Government do not believe it is appropriate to pre-empt this in this legislation.
When considering complaints, the FOS has wide discretion to make the decision that it considers appropriate in each case, so we would not want to restrict its options as suggested by this amendment. If the FOS decides that it is appropriate for a CRA to rectify, block, erase or destroy data, it can make such a direction and its determinations can be enforced by a court. For those businesses that choose to take a CRA to court, this legislation has also created a specific right of action in relation to the data shared under the legislation. This provides a clear basis for the court to order correction or deletion of data and thereby make legal action simpler for the business concerned. It is, however, unlikely that it will ever come to this. The system that a CRA has in place for dealing with complaints by businesses will be a key criterion for continued designation. We would envisage that if a company felt that the data held about it were incorrect, it would go to the CRA as part of that complaints process and the CRA would correct it.
My Lords, I understand the logic of what the noble Lord is saying and the rationale for what the Government are doing, and that there will be consultations around this. However, the point that he has just made surely exposes the gap. If a medium-sized company, not a microbusiness, has a CRA purporting to report on it in a way that is factually incorrect or gives the wrong impression, is the only redress to take it up directly with the CRA?
Going to the CRA is the logical first port of call, is it not? We are talking about cases here where a company believes or knows that the CRA has incorrect information about it on its books, and it will be in the interests of the CRA to correct any mistakes. As I say, the complaints procedure is part of the designation. We are making sure that the CRAs are open to complaints and have a proper way of dealing with them. The other limb to the argument relates to the role of the Financial Ombudsman Service. The noble Lord is suggesting an extension to the remit of the FOS in terms of businesses, which is a considerable change that you would contemplate only as part of a larger possible review of the role of the FOS in terms of businesses more generally. This is a very narrow area, and to extend the remit of the FOS in respect of firms just for this, and to nothing else, would look slightly odd.
Amendment 25 relates to the definition of small and medium-sized businesses. I apologise to the noble Lord, Lord Flight, that I was unable to be here for the earlier discussion broadly around this issue. The definition that he is suggesting is the one used by Her Majesty’s Revenue and Customs for the purposes of the research and development tax credit. Although I hear his arguments, I would point out that the £100 million figure is very much the outlier in terms of accepted definitions of SMEs. The definition used by HMRC for R&D tax credits is tailored to that one specific policy and flows from the fact that most research and development is done by larger companies. I do not believe that it would be appropriate here.
The turnover figure used in the current definition in Clause 7 is widely accepted as the threshold for an SME. It is used in the Companies Act, by the Bank of England for reporting purposes, and for the Funding for Lending scheme. It is used by various government schemes such as the lending appeals process and is used by the British Business Bank. There is no rationale for dramatically expanding it to businesses with a turnover of up to £100 million. As noble Lords will be aware, these measures are designed to address market failures that disproportionately affect the smallest businesses: namely, a lack of credit information and a lack of awareness of alternatives. These problems do not affect larger companies in the same way. The Government have proposed and consulted on a measure aimed at small and medium-sized businesses. This amendment would go considerably beyond that.
The existing simpler definition in the Bill, based on turnover, mirrors that used by the Bank of England. We believe that it is the most appropriate definition for legislation that applies to banks as they have visibility of the turnover through the company’s primary account and are already used to applying the similar definition used for the Funding for Lending scheme. I would note, however, that even larger companies outside the definition of SME businesses will benefit from the measures in the Bill. For example, a larger company will still be able to apply directly to a designated platform to seek a finance provider. The Government therefore consider that the existing turnover threshold of £25 million is the appropriate place to draw the line for the legislation. I hope, therefore, that the noble Lord will be willing to withdraw his amendment.
I thank my noble friend the Minister. I hear what he says but I would make the point that, as the noble Lord, Lord Stevenson, said, we are entering uncharted waters here. We really do not know how this will work. My amendment would therefore allow for the possibility that the system was not working well, with unhappy companies that want to borrow money the second time around finding the system to be too complex and too much of a muddle and being hassled, shall we say, by too many finance providers. It would simply allow the Treasury the option to suggest that advisers are included in their options. I would encourage the Minister to reflect upon that, but for now I beg leave to withdraw the amendment.
Amendment 18A withdrawn.
Amendment 19 not moved.
Clause 5 agreed.
Clause 6: Sections 4 and 5: supplementary
20: Clause 6, page 8, line 24, after “(a)” insert “or (4)(b)”
Amendment 20 agreed.
Amendment 21 not moved.
Amendments 22 and 23
22: Clause 6, page 9, line 1, leave out from beginning to “5” in line 2 and insert “Regulations under section 4 or”
23: Clause 6, page 9, line 3, leave out subsection (11)
Amendments 22 and 23 agreed.
Amendment 24 not moved.
Clause 6, as amended, agreed.
Clause 7: Sections 4 to 6: interpretation
Amendments 25 to 26A not moved.
Amendments 27 to 29
27: Clause 7, page 9, line 29, leave out “, or” and insert “in the course of a business,
28: Clause 7, page 9, line 30, after “business” insert “, or
(c) provides, arranges or facilitates invoice discounting or factoring in the course of a business,”
29: Clause 7, page 9, line 43, leave out “negative” and insert “affirmative”
Amendments 27 to 29 agreed.
Clause 7, as amended, agreed.
Clauses 8 and 9 agreed.
Clause 10: Disclosure of exporter information
30: Clause 10, page 12, line 4, leave out “negative” and insert “affirmative”
Amendment 30 agreed.
Clause 10, as amended, agreed.
Clause 11: Power of the Secretary of State under section 1 of the EIGA 1991
31: Clause 11, page 12, line 17, at end insert—
“( ) Prior to the commencement of this section, the Secretary of State shall—
(a) commission an independent assessment of the functions and powers of UK Export Finance (“UKEF”) and UK Trade and Investment (“UKTI”);(b) make a report to Parliament of steps to be taken in response to the findings of the assessment referred to in paragraph (a);(c) commission an assessment to determine actions to improve the awareness of UKEF and UKTI to small and medium sized enterprises.”
My Lords, in moving Amendment 31, I will also speak to Amendment 32. Together, they relate to UKTI and UKEF.
The UK is subject to international human rights obligations under customary international law and as a result of the international legal instruments we have signed and ratified. Human rights obligations generally apply only within a state’s territory and jurisdiction. Accordingly, there is no general requirement for states to regulate the extraterritorial activities of business enterprises domiciled in their jurisdiction, although there are limited exceptions to this, for instance under treaty regimes. The UK may also choose as a matter of policy in certain instances to regulate the overseas conduct of British businesses.
The UK has specific laws protecting human rights and governing business activities. As with all UK law, these are set out in legislation and are sometimes protected by common law rules as well which, taken together, ensure certain rights and liberties. Some of these provisions have been in place for many years, will be familiar to business and are well respected by it.
Like all states, we need to continually reassess whether the current mix is right, what gaps there might be and what improvements we can make. The UK has ratified a series of international treaties and agreements—the ILO eight core conventions, the International Covenant on Civil and Political Rights, the International Covenant on Economic, Social and Cultural Rights and the European Convention on Human Rights, which enshrine human rights and fundamental freedoms and have been given effect through the law of this country.
The Human Rights Act 1998 ensures that individuals in the UK have a remedy for the breach of rights which are protected by the European Convention on Human Rights. It applies to all public authorities and other bodies performing public functions, as private companies sometimes do. The relevant legal framework in the UK includes employment regulations—requiring companies not to discriminate against employees on grounds of sex, race, sexual orientation and religious belief—and environmental regulations. Examples of wide-ranging legislation protecting human rights in the business context include the Health and Safety at Work etc. Act, and the Data Protection Act, which applies to companies and ensures respect for the privacy of individuals. Legislation has also been passed to plug specific gaps in the protection of workers under the law such as the Gangmasters (Licensing) Act 2004, which created an agency to prevent the exploitation of workers in agricultural work et cetera.
The UK has created or endorsed a number of instruments that motivate different aspects of good corporate behaviour and respect for human rights. These include: the UK Bribery Act where, in line with our OECD commitments, UK companies are now liable in the UK for acts of bribery committed anywhere in the world; the Declaration on Fundamental Principles and Rights at Work adopted in 1998 and the eight core ILO conventions ratified by the UK on labour standards; the OECD Guidelines for Multinational Enterprises, where the UK has established a national contact point; and Section 172 of the Companies Act 2006, which makes clear that, in fulfilling their duty to act in a way which they consider would be most likely to promote the success of the company, directors must have regard, among other matters, to the impact of the company’s operations on the community and the environment, and the desirability of the company maintaining a reputation for high standards of business conduct.
In addition, the Government exercise controls on the export of “strategic” goods and technology through the export licensing system. Under this, all export licence applications are rigorously assessed against the consolidated EU and national arms export licensing criteria. These assessments take full account of possible human rights impacts. A licence will not be granted if the Government judge that there is a clear risk that the proposed export might, for instance, be used for internal repression.
The Government may be aware that a number of NGOs have raised the question of the powers of UKTI and UKEF, and in particular the question of whether it would be sensible to have a tighter definition underpinning UKTI and UKEF to complement other work under the UN guiding principles, which, like the Government, we support. For example, successive UK Governments have recognised the importance of sustainable development and have committed to policies aimed at achieving this goal. In addition and alongside that, the ECGD has said that it will take account of environmental and social agreements on export credits negotiated at the OECD, but it has also admitted—this is the problem—that these agreements have no legal force in the UK. In this, the ECGD differs from a number of other export credit agencies, notably the US Ex-Im, which has adopted binding environmental and social guidelines.
That situation is surely unacceptable, not least because it has led to the ECGD being in conflict with wider government objectives on sustainable development, the most recent that I can quote being international efforts to ban export credit support for coal-fired power stations. For example, in November 2013 the Secretary of State for Energy and Climate Change announced that,
“the UK will join the United States in agreeing to end support for public financing of new coal-fired power plants overseas”.
He then went on to say that this could not apply to UKEF because UKEF,
“is not presently legally able to discriminate between classes or types of exports”.
We recognise that the coalition Government have taken a number of steps to give effect to the UN guiding principles, and we support these. However, we feel that there is a need to go further. I suggest, as raised in these amendments, that, first, there is now a need to legislate to provide consistent and overarching principles for all government agencies so that they embody human rights concerns across all their work in support of UK companies and businesses and can be held accountable for the human rights impacts on those affected by their operations and decisions. Secondly, there is a need for legislation to ensure that all UK government procurement rules require that human rights-related matters are considered when the Government purchase goods, works and services. Thirdly, under the OECD 2012 common approaches, legislation is required for UKTI and UKEF to take into account potential adverse project-related human rights impacts, as well as environmental and social impacts, when considering funding and support for exporting companies. Fourthly and lastly, there is a need to legislate to ensure that the UK national contact point has a duty to promote the OECD guidelines and all the necessary resources and powers to fulfil its role effectively, including the prosecution of companies found to be in breach of the guidelines. I beg to move.
My Lords, I am grateful to the noble Lord for setting out his thinking on these amendments. I shall comment in turn on the two amendments, taking Amendment 31 first.
The powers in Clause 11 are deliberately drawn as widely as possible to enable UK Export Finance to provide wide-ranging and flexible support, and to respond quickly and imaginatively to changes in market conditions. Our intention is for UK Export Finance to have the widest possible ability to support UK-based firms in their involvement with exporting, whether these firms are existing exporters, those in exporting supply chains or aspiring exporters.
The current requirement for a connection between the department’s support and an actual or contemplated export has made it difficult for the department to respond to the needs of exporters in certain cases, especially in relation to support for the general business of an exporter or a supply chain company. We share the aim that has been expressed today of maximising government support for exports and of maximising the awareness of that support among UK businesses. However, by delaying commencement, this amendment could serve to delay the introduction of new facilities for UK businesses to seek new opportunities and win export contracts that would help us increase UK trade, the aim set out in the Britain Open for Business update announced by the Prime Minister last year.
In view of the points that were made earlier by the noble Lord, Lord Mitchell, I should say that when it comes to promoting British exports, this Government have done an enormous amount. I pay tribute to my noble friend Lord Popat, who is playing an important part in the passage of this Bill. It was on his recommendation that your Lordships’ House established a Select Committee under the chairmanship of my noble friend Lord Cope, who spoke earlier, examining the ways that the Government could support and encourage SMEs to export. That was a very valuable initiative, which reported in March 2013. The Government accepted all 23 of its recommendations, including measures on credit risks for SME exporters and better publicity for services provided by the Government.
We are absolutely committed to increasing British exports to rebalance our economy. As recently as the Autumn Statement, the Chancellor outlined a £45 million package to increase exports, including £20 million for first-time investors. That is in addition to work to increase UKTI’s presence in emerging markets and our work since 2010 to put a much greater emphasis on trade and economic growth in our diplomatic relations. The additional funding that this Government have provided for UKTI has allowed it to double the number of businesses helped since 2010, and we are on track to support more than 50,000 businesses this year. I echo the points made by my noble friend Lord Leigh of Hurley about the export effort for SMEs that he observed on his trip to China with the Prime Minister. Less glamorously, I saw the results for myself on a week’s visit to China in September. I was impressed both by the programme and performance of UKTI and by the scale of business involvement. Again, it was a mixture of SMEs, larger businesses and legal experts.
UK Export Finance is referred to several times in these amendments. In 2011, the Government reintroduced, after 20 years, UK Export Finance support for goods usually sold on shorter terms of credit—mainly those supplied by smaller companies. So far in this financial year, around 120 companies have benefited from direct UK Export Finance support, and almost 80% of them are smaller firms. Companies in the supply chains of exporters benefit indirectly from UK Export Finance support. We want them to benefit directly, hence the provisions in the Bill. UKEF is keenly aware of the need to improve awareness of it among smaller exporters. Last year, the British Exporters Association scored the product range of UK Export Finance at nine out of 10, while the Global Trade Review voted UK Export Finance the world’s best export credit agency. So we are making progress. Awareness of UKTI has also increased significantly over four years, from an average of 51% in 2010 to 65% now.
The noble Lord spoke at greater length to Amendment 32, touching on a very important area. It is of course government policy, informed by an extensive public consultation conducted in 2009-10, that UK Export Finance will comply with international agreements which apply to export credit agencies. UK Export Finance complies with the OECD common approaches, which set out how export credit agencies should undertake due diligence on the environmental and human rights impacts of projects falling within their scope. The OECD common approaches make reference to the UN guiding principles. In undertaking environmental and human rights due diligence in line with the common approaches, it is the practice of UK Export Finance to apply the 2012 performance standards of the International Finance Corporation. These are recognised as comprehensive standards. UK Export Finance is taking an active and leading role in further OECD consideration of human rights issues, which will inform possible changes to the OECD common approaches, should they be agreed.
I pause to comment on the example of fossil fuels given by the noble Lord, Lord Stevenson. UK Export Finance has not supported any transactions in violation of the coalition agreement’s pledge to support green technologies rather than invest in dirty fossil fuel energy production. The Secretary of State made it clear in a Written Ministerial Statement in July that “dirty fossil fuel” should be taken as referring to projects that produce pollution in excess of international environmental standards. The practice of UK Export Finance is not to support such projects.
As I have already said, UK Export Finance complies with the OECD common approaches and has a dedicated environment advisory team that reviews the environmental, social and human rights issues of projects covered by the common approaches prior to the department agreeing to provide support. I hope that gives some comfort. Against this background, the Government consider it neither necessary nor appropriate to impose a statutory duty on the Secretary of State to have regard to only one set of principles—which are, in any case, already taken into account through UKEF’s adherence to the common approaches.
On the second part of the amendment, the common approaches set out how export credit agencies such as UK Export Finance must take account of environmental, social and human rights issues. In line with this, UKEF requires that projects with significant ethical risks are subject to a full impact assessment and that international standards regarding environmental, social and human rights issues are complied with before it provides export credit finance support. UKEF will also monitor these issues throughout the life of projects where relevant, sometimes over periods as long as 10 years.
I was glad to hear the noble Lord, Lord Stevenson, make reference to various changes and improvements made in recent years, including the Bribery Act. That has been pivotal in clamping down on corruption. UK Export Finance also conducts due diligence on the contracts it supports to ensure that they are not tainted by corruption and that the risks associated with dealing with the parties are acceptable. This includes but is not limited to warranties from exporters and checks against prohibition lists maintained by multilateral development organisations such as the World Bank.
The Secretary of State also benefits from the advice of the independent Export Guarantees Advisory Council, whose remit is to advise on UKEF’s application of its ethical policies. The annual report of the chair of the Export Guarantees Advisory Council is published alongside UKEF’s own annual report, which lists the transactions supported by UKEF each year.
I hope that noble Lords are reassured that UKEF takes appropriate consideration of ethical issues in its decision-making and therefore will agree that it is not necessary to place a new statutory requirement upon the Secretary of State. On that basis, I hope that the noble Lord will feel able to withdraw his amendment.
I thank the Minister for her very expansive response. I appreciate the effort that went into it. I know it is not her direct area of responsibility and I am sure that she received assistance from others. They put together a good response and I appreciated listening to it. I was also remiss in not paying tribute to the work of the noble Lord, Lord Popat, which has been referred to in the Committee before and is worthy of further comment. His is a terrific initiative and is doing well. The noble Lord, Lord Livingston, and his predecessor have also done a terrific job, which we support. The export champions, many of whom sit in this House, do a great job right across the world.
We are all on the same side here. Obviously, we recognise that we need more exports. We cannot become the nation that we want to be or enjoy the economic success that we all think we should have if we do not radically increase the amount and volume of our exports. We can take that as common ground. But—there is always a “but”—while I agree that we need to maximise support for exports and we accept that there is a long way to go, it does not have to be a zero-sum game. It is possible—many countries do this—to have regard to the terrible impacts of extractive industries, the difficulty of ensuring responsible trading and the respect for human rights in all aspects of activity, and not to be guided always by, in some senses, the lure of more arms sales. Of course, we have special regimes for them, but it is still very difficult to get a proper sense of what is happening there because they tend so much to dominate the work of both UKTI and UKEF.
Issues were brought up by my brief example, and there are many others. I accept the fact that since 2012, although that is not a long time ago, UKEF has not been involved in supporting the export of dirty fossil fuels—although I note that the quotation we were both referring to states that the situation is that it has not publicly financed new coal-fired plant overseas,
“except in rare circumstances in which the poorest countries have no feasible alternative”.
That seems to me to be a large door through which many rather undesirable practices may have taken place, but I have no evidence of that. However, it makes the point again that it may be that how we are interpreting things is good at the moment, but without statutory underpinning, how can we give sufficient support to people in order to ensure that good practice continues in the long run?
The proposals set out in Amendment 32 are not onerous. The Minister said that she felt that the amendment simply sets out what is common practice now in relation to promoting UK government adherence to the UN guiding principles. That is fine, so why not let us have that in legislation and all agree on it? Further, preparing a report for both Houses of Parliament might well be a way of bringing up some of the issues that do bear on this debate: for example, what exactly is the interaction between the moral and ethical standards we are looking at on the one side and the success or otherwise of exporting around the world?
However, I hear what has been said and I know that this is a complex and difficult area. The work that is going on in government is in some sense at the right level and indeed is of a standard that the rest of the world could easily emulate. However, we must not lose sight of this because it is important and it will have long-term consequences, both good and bad, if we do not get it right. With that, I beg leave to withdraw the amendment.
Amendment 31 withdrawn.
Clause 11 agreed.
Clause 12: EIGA 1991: further amendments
Amendment 32 not moved.
Clause 12 agreed.
Clauses 13 and 14 agreed.
Amendment 33 not moved.
Committee adjourned at 7.03 pm.