All this swap and change is bad for SMEs

SMEs face uncertainty.

Last week I sat for an hour or so with a couple of entrepreneurs. They have both founded more than one business and are both heavily involved in helping to promote the UK’s start-up and small business economy, one through Start-up Britain and the other through Young Brits and the G20 Young Entrepreneurs’ Alliance. As often happens when you talk to entrepreneurs, the discussion turned to the relationship between government and business and the role government plays in promoting a better environment for those running a business. Both were clear that the UK has a long and noble tradition of an economy built on small business, with several references during the conversation to Napoleon’s description of a "nation of shopkeepers".

The consensus, as it often is, was that government’s role is to create the conditions for start-ups and existing businesses to grow and thrive and then get out of the way and let them get on with it. "We need an end to this constant political need to announce new initiatives," said Alex Mitchell, co-founder of Young Brits. In short, both wanted a bit less government. In fairness, the stated ambition of most politicians for the last 20 years (and maybe longer) has been reducing red tape. This chimes well with entrepreneurs, but all the talking has hardly resulted in less regulation. The current government has made a lot of its commitment to red-tape reduction. It has appointed two "entrepreneurs in residence" at BIS, launched a Red Tape Challenge and promised that all new legislation will be introduced on a "one-in, one-out" basis.

It was interesting last week to see a number of legislative announcements within a few days of each other, all purporting to make life easier for those running businesses. At least two of them will impose new reporting requirements on some or all listed companies. What’s given with one hand in terms of easing the burden on businesses seems bound to be whipped away with the other.

The Enterprise and Regulatory Reform Act is intended to make life easier for those running small businesses and in large part it has been welcomed as achieving that by those it aims to help. But as is often the case, simplification is complicated and the new rules and regulations surrounding areas such as settlement agreements will require entrepreneurs to put in time and effort to understand them. In the long-term there may be benefits for those running SMEs, but in the short term the time pressures may increase. The entrepreneurs last week were clear the best red tape reduction policy of all would be for the government to just stop doing things. A moratorium on any new policy announcements would be the best initiative.

Less welcome in some quarters (judging by reactions to our story on it) was the announcement of changes to the Companies Act requiring listed companies to divulge information in their annual reports on subjects such as diversity (giving the breakdown of the number of men and women on their board, in senior management positions and across the company as a whole), the company’s greenhouse gas emissions and human rights, as well as a new strategic report that focuses on the business model, strategy and risks to replace the existing business report. Even those who welcomed some of these changes (partly out of desire to see this narrative part of company reports be more useful) reacted negatively to the tight timetable imposed, with the changes due to come into force from 1 October, 2013.

Elsewhere, the EU was also trumpeting simplification while adding in a degree of complexity for some companies. The abolition of mandatory quarterly reporting was welcomed by most, but the requirement for country-by-country reporting in certain sectors was less welcomed by those affected, although it will please those keen to see greater transparency in reporting. The new accounting framework also reduces reporting requirements on small and micro businesses, although the category of micro business is a new addition to the regulations.

These are just some of the recent changes announced and all from last week. The net result of all this change is uncertainty. One thing that those at the sharp end, running businesses, talk about is the need for greater certainty. The confidence to invest in their businesses, which is ultimately what will be behind any sustained economic recovery, depends on it. Perhaps it is time for the politicians to leave business to just get on running and growing their businesses.

This piece first appeared on economia.

Photograph: Getty Images

Richard Cree is the Editor of Economia.

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Let's turn RBS into a bank for the public interest

A tarnished symbol of global finance could be remade as a network of local banks. 

The Royal Bank of Scotland has now been losing money for nine consecutive years. Today’s announcement of a further £7bn yearly loss at the publicly-owned bank is just the latest evidence that RBS is essentially unsellable. The difference this time is that the Government seems finally to have accepted that fact.

Up until now, the government had been reluctant to intervene in the running of the business, instead insisting that it will be sold back to the private sector when the time is right. But these losses come just a week after the government announced that it is abandoning plans to sell Williams & Glynn – an RBS subsidiary which has over 300 branches and £22bn of customer deposits.

After a series of expensive delays and a lack of buyer interest, the government now plans to retain Williams & Glynn within the RBS group and instead attempt to boost competition in the business lending market by granting smaller "challenger banks" access to RBS’s branch infrastructure. It also plans to provide funding to encourage small businesses to switch their accounts away from RBS.

As a major public asset, RBS should be used to help achieve wider objectives. Improving how the banking sector serves small businesses should be the top priority, and it is good to see the government start to move in this direction. But to make the most of RBS, they should be going much further.

The public stake in RBS gives us a unique opportunity to create new banking institutions that will genuinely put the interests of the UK’s small businesses first. The New Economics Foundation has proposed turning RBS into a network of local banks with a public interest mandate to serve their local area, lend to small businesses and provide universal access to banking services. If the government is serious about rebalancing the economy and meeting the needs of those who feel left behind, this is the path they should take with RBS.

Small and medium sized enterprises are the lifeblood of the UK economy, and they depend on banking services to fund investment and provide a safe place to store money. For centuries a healthy relationship between businesses and banks has been a cornerstone of UK prosperity.

However, in recent decades this relationship has broken down. Small businesses have repeatedly fallen victim to exploitative practice by the big banks, including the the mis-selling of loans and instances of deliberate asset stripping. Affected business owners have not only lost their livelihoods due to the stress of their treatment at the hands of these banks, but have also experienced family break-ups and deteriorating physical and mental health. Others have been made homeless or bankrupt.

Meanwhile, many businesses struggle to get access to the finance they need to grow and expand. Small firms have always had trouble accessing finance, but in recent decades this problem has intensified as the UK banking sector has come to be dominated by a handful of large, universal, shareholder-owned banks.

Without a focus on specific geographical areas or social objectives, these banks choose to lend to the most profitable activities, and lending to local businesses tends to be less profitable than other activities such as mortgage lending and lending to other financial institutions.

The result is that since the mid-1980s the share of lending going to non-financial businesses has been falling rapidly. Today, lending to small and medium sized businesses accounts for just 4 per cent of bank lending.

Of the relatively small amount of business lending that does occur in the UK, most is heavily concentrated in London and surrounding areas. The UK’s homogenous and highly concentrated banking sector is therefore hampering economic development, starving communities of investment and making regional imbalances worse.

The government’s plans to encourage business customers to switch away from RBS to another bank will not do much to solve this problem. With the market dominated by a small number of large shareholder-owned banks who all behave in similar ways (and who have been hit by repeated scandals), businesses do not have any real choice.

If the government were to go further and turn RBS into a network of local banks, it would be a vital first step in regenerating disenfranchised communities, rebalancing the UK’s economy and staving off any economic downturn that may be on the horizon. Evidence shows that geographically limited stakeholder banks direct a much greater proportion of their capital towards lending in the real economy. By only investing in their local area, these banks help create and retain wealth regionally rather than making existing geographic imbalances worce.

Big, deep challenges require big, deep solutions. It’s time for the government to make banking work for small businesses once again.

Laurie Macfarlane is an economist at the New Economics Foundation