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.
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