All eyes on the SME
Around 2009 Britain's banks lent £80bn to SMEs across the UK.
All the peer-to-peer platforms combined currently provide between £1 billion and £2 billion, depending on which source you consult. So as alternative funders argue over whether the term “alternative” is fair and helpful any more, one part of the definition of the term is still tied up in scale. It seems obvious to point that out, except when you hear people talking about how alternative funders are here to fill the funding gap.
Of course we still have the high street banks to fill the gaps – the Association has always worked with traditional funders alongside the alternative lenders. But it’s a reminder that most small businesses finance themselves out of their profits and never borrow from anyone. This might be because indebtedness has a bad press and starts looking like an extra cost, but it’s also because if a business is growing organically, out of its own profits, that in itself is a reward and a symbol of success to the business owner; why would he or she suppose that they are growing too slowly? It’s a lot simpler to revise your expectations to match reality, than to take out a loan simply to inflate reality in order to beat predictions.
The NACFB has for a long time been approaching this problem from the position that says borrowing to grow faster is the smart thing to do. But our office’s contact with SMEs is something of a one-way street. We know what they need, because they tell us, and then it’s over to our brokers to make the relevant contact. That’s why we’re reliant on our relationships with trade bodies such as the FSB, to spread the “funding is out there” message.
Small business owners who wake up to find they are being charged less tax will reinvest in themselves and to a smaller extent spend additionally among the businesses around them that they rely on. The net result is as if they have successfully applied for a loan, and it’s a result that didn’t involve a heap of extra paperwork. It’s a result that could be imposed on them, by tax law changes, rather than incentivised as we are aiming to do with a message from our local friendly broker.
Of course, such a move would be completely out of line with HMRC’s take on VAT, for instance. But a tax law change would be a very welcome component of the right answer. In theory at least, such a move would alienate no one. Big businesses are unlikely to see smaller ones as current or short-term rivals, entrepreneurs would shake their MPs’ hand off, and the theory runs that in the medium term, a business that’s paying a lower rate of tax, but has increased its turnover, will pass on the same amount to HMRC.
In the meantime, we are sending in the educators to help SMEs grow without any tax regime changes. Our brokers will soon be learning about the minimum standards agreed on by our patrons. They’re likely to look a lot like the FCA’s guidance, just a bit more hands-on. The FCA has been saying for a while that you must do x and you must do y, and that they might knock at your door at any moment. In practice, though, they can’t see everyone, and so the ball is in the lender’s court; if the FCA can’t physically check everybody, then it’s down to our Association and our patrons to ensure everything is right. That’s one of our 2016 plans.
Regulatory advice for brokers in 2016
If you’re trying to decide what to do differently in 2016, my tip is to go one step beyond what the FCA is asking.
Even if you’re only trading under Limited Permission – as opposed to Full Permission – the FCA is asking that you have in place:
- A company structure chart
- A compliance monitoring plan and compliance procedures
- Details of key business risks
- A business plan
- Treating Customers Fairly procedures
- Anti-money laundering procedures
So even the smallest office has to imagine itself functioning like the largest bank, and to have the same safeguards in place against a variety of worst case scenarios.
How could you go beyond these criteria – and why would you want to? Well, one way is to have Professional Indemnity Insurance, which isn’t (yet) an FCA requirement, but has always been an NACFB one. Another way is to double up on your note-taking particularly when deciding which lender to approach. A third way would be to lean harder on the templates produced by, for example, the Consumer Credit Centre, or the NACFB itself. The idea is that because our templates have been created by solicitors, and then signed off by yet more solicitors, they’re probably a little bit more secure than documents you’ve drawn up yourself, with the added comfort of knowing the body that put them together will stand up for you if you use them.
The NACFB’s own Terms of Business is a good example, as it’s been subject to continual revisions to keep it up to date with the FCA’s clarifications during 2015. It’s now offered in two flavours, Regulated and Non-Regulated. The latter goes hand in hand with our Unregulated Members Policy, a document which we spent a long time putting together and which, paradoxically, we’d like to see used as little as possible.
The recent changes to our industry have also meant revisiting our Code of Practice, a new version of which is now available in hard and soft copies. Neither of these documents made mention of the Financial Conduct Authority until recently, nor did they have very much to say on the intricacies of being an Appointed Representative (AR). Although the spirit, the underlying themes and values of the Code of Practice haven’t changed since the Association’s inception, the wording of our criteria and expectations was plainly in need of alterations, and so that was topic number one on the old 2015 to-do-list.
A lot of the new rules can be translated into simple English as follows: the consumer needs protection: from lack of clarity, from unreasonable costs, from a shortfall of knowledge about commercial finance per se. Members who have been unable to get FCA permission will not be allowed to:
- accept business from individuals, sole traders, partnerships of 3 or fewer partners or an unincorporated body; because the FCA thinks they probably don’t know enough to understand what’s going on, and so you’re in loco parentis
- act on behalf of nor advise an individual or partnership of up to 3 persons in relation to a debt due under a credit agreement or a consumer hire agreement
Both debt adjusting and debt counselling are considered regulated activities and join the list of things you must not do if you don’t have full permission.
It’s our aim to encourage brokers away from a situation where they find themselves unable to help clients, and that means we won’t want large numbers of unregulated brokers. We just need people to exceed, not simply meet, the regulatory criteria.