Spring Statement: A springboard for an inclusive economy?
Philip Hammond’s brief, twenty-minute Spring Statement scheduled for Tuesday is not expected to hold any substantial policy announcements. Nonetheless, the Chancellor should set out some thinking about longer term economic priorities, says Responsible Finance.
There is a growing sense of alienation across the UK. An enterprising economy is impossible without investment in innovation. An inclusive economy is impossible without the removal of barriers to accessing finance: ‘the entrepreneurial spirit of economic aspiration is the essential fuel that powers the engine of social mobility.'
Responsible Finance calls on the government to use the Spring Statement to commit to its vision of creating an ‘inclusive economy’ by supporting the responsible finance industry to deliver a fair financial services system for all.
The SME finance monitor shows that success rates for SME first time loan or overdraft applicants has declined to 53%, and the percentage of all recent successful applications has declined from 82% in 2015 to 78% in 2017. The influx of alternative online lenders has not proved to boost productivity. Evidence shows that peer-to-peer lenders are lending to low-risk bankable businesses, and not filling the finance gap for the businesses that cannot or are discouraged from seeking bank finance. A new market of online lenders potentially lend to these underserved businesses, but as the market is unregulated there is little transparency on pricing and terms. Responsible finance providers are the only lenders that are actively targeting the gap in access to finance with fair and affordable products.
There are 27 responsible finance providers in the UK that lend to business that struggle to get finance from the mainstream banking industry. The businesses they lend to are often deemed too risky or unprofitable by mainstream banks due to a lack of trading history or small scale: 93% of business customers lent to by the responsible finance industry in 2017 were declined by other lenders. In 2017, responsible finance providers lent £67 million to 5,072 UK SME.
Responsible Finance calls for the following commitments which will provide a roadmap for building an economy and a financial services system that works for everyone.
A £150 million responsible finance fund for the sector
The Regional Growth Fund (RGF) programme aimed to increase access to finance for small businesses after the financial crisis, and is a precedent for a responsible finance fund. It allocated £30 million to the responsible finance sector which was matched by a further £30 million commercial investment. It demonstrated success in scaling the responsible finance sector to meet the gap in finance that still persists nearly a decade after the financial crisis. The fund was successful because it was delivered through responsible finance providers – a sector specifically focused on underserved markets. The RGF model is a blueprint for a wider sector fund that can catalyse higher levels of commercial investment and scale its impact.
This type of targeted, good value for money and high-impact initiative is necessary to drive growth in small-scale ventures that feel unconfident or unwilling to engage in mainstream finance. Government interventions aiming to promote investment in enterprise should recognise and promote the responsible finance industry. Responsible finance calls for a dedicated £150 million fund for the sector to help ensure that all segments of the SME market are able to access the finance they need.
Fit for purpose tax reliefs and guarantees for responsible finance providers
Tax reliefs and guarantee schemes are tools widely used by the responsible finance industry to leverage commercial investment, increasing impact on underserved communities. Whilst Responsible Finance welcomes the recent change that the Treasury made to the Enterprise Finance Guarantee (EFG) and the Community Investment Tax Relief (CITR), these tools need to continue to be kept competitive to maximise social and economic return, including:
- Aligning the benefits of CITR with those of the Social Investment Tax Relief (SITR) so that the suite of reliefs for socially-oriented investors is easier to navigate;
- Expanding the wholesale EFG option to incentivise larger scale private investment;
- Ensure that tax reliefs, guarantee schemes, and other tools are appropriate and flexible to enable responsible finance providers to effectively serve the demand across demographic and industrial landscape. This includes inclusivity of industrial sectors and both rural and urban economies.
For further information, please refer to our website responsiblefinance.org.uk.