On Wednesday, 23rd November, the Chancellor will give his autumn statement.
His options for manoeuvre are limited, with global economic turbulence on the rise and the Institute of Fiscal Studies warning that the Chancellor will need to borrow an additional £25 billion due to slower growth and higher inflation. UK personal debt continues to rise.
According to the Money Charity people in the UK owed £1.503 trillion at the end of September 2016. This is up from £1.451 trillion at the end of September 2015, an extra £1036.58 per UK adult. The average total debt per household, including mortgages, was £55,683 in Septembers. Given this financial situation, providing stability to small businesses, ongoing support to social enterprises and innovative energy and housing projects and helping people manage household finances, is more important than ever.
Responsible Finance has written to the Chancellor highlighting the role of the Responsible Finance sector in achieving these goals. If the Government supported three policy changes, the sector could considerably increase its impact on households, businesses, social enterprises and local economies.
We propose that the Government should enable the use of the Enterprise Finance Guarantee (EFG) on Community Investment Tax Relief (CITR) investments; guarantee the continuation of EU facilities for access to finance (EaSI, COSME, ERDF); and launch a responsible finance fund to provide a similar level of support to the sector to that in other countries.
Access to Finance
Access to finance and financial exclusion continue to be significant barriers to growth and long-term prosperity in local economies across the UK, at the individual, household, and business levels. Despite the economic recovery and a wave of new entrants such as challenger banks and alternative lenders, there is still a large minority of businesses and people that cannot access the finance they need to achieve their goals.
Since 2011, high street banks have withdrawn £26 billion from the SME sector and nearly half of all SMEs are now choosing not to borrow at all. For consumers, 2 million people, or 3% of the population, do not have a bank account and a further 4 million people incur regular charges on their accounts. These indicators point to a persistently significant gap in access to appropriate finance, and the fragile nature of improvements in financial inclusion to date.
This gap has been driven by a lack of competition and transparency in the financial services sector, along with credit tightening policies, low levels of financial literacy and awareness of alternatives to bank finance. The inability to access appropriate financial services creates a drag on the economy and has led to financial instability, problem debt, and decreased productivity. This not only erodes society but also limits people and firms’ participation in the economy.
The impact of the responsible finance sector
From 2005-2015, responsible finance providers:
- Lent £1.6 billion to 280,000 people, businesses, and social enterprises;
- Financed 50,000 businesses and 4,100 social enterprises;
- Enabled the creation of 68,000 jobs and protected another 41,000 that were at risk. This constitutes up to 5% of the UK’s total job growth each year;
- Helped 40,000 new businesses and social enterprises start up, fuelling the economy with £0.6 billion annually (2% of last year’s growth in GDP);
- Helped 216,000 people save £20 million in repayments to high cost lenders, and tackled 2% of the UK’s problem debt;
- For every £1 responsible finance providers lend, they generate £7 in economic value.
This activity has helped to tackle the root causes of financial inclusion and its negative consequences on the economy and society. For this growth to continue, we recommend the Government considers the following proposals in the Autumn Statement:
- Enable the use of the Enterprise Finance Guarantee (EFG) on Community Investment Tax Relief (CITR) investments;
- Guarantee the continuation of EU facilities for access to finance (EaSI, COSME, ERDF);
- Launch a responsible finance fund.
Enable the use of Enterprise Finance Guarantee (EFG) on Community Investment Tax Relief (CITR) investments
The Community Investment Tax Relief (CITR) is a tax relief launched in 2002 to encourage corporate and institutional investment into responsible finance providers for the purpose of on-lending to SMEs and social enterprises that are located in disadvantaged communities and are unable to access mainstream finance.
CITR is an important tool for responsible finance providers to attract new private investment for onward lending. To date over £100 million has been raised through CITR, which has facilitated more than £100 million of onward lending.
The Enterprise Finance Guarantee Scheme (EFG) is a policy guarantee programme that incentivises investment into small and micro businesses that would otherwise likely find it difficult to access finance due to lack of security. It is a useful tool for the responsible finance sector to extend reach into underserved SME markets.
To date EFG has stimulated an additional £42 million in responsible finance lending to SMEs, and £2.7 billion in total lending to businesses that may otherwise be viewed as higher risk.
Responsible finance providers have long looked at the possibility of using EFG and CITR together. CITR provides the investor a return (thus making capital available more cheaply to the CDFI) but it does little to cover the risk of the investment. Using CITR in conjunction with a guarantee mechanism would provide some protection against risk and may encourage greater investment in the sector.
At a time when the availability of first loss funding is diminishing, this would be catalytic in continuing to grow the sector and its social and economic impacts.
Guarantee EU facilities (such as Easi, Cosme, ERDF funding)
The Chancellor of the Exchequer guaranteed that key projects supporting economic development across the United Kingdom which are dependent on European Union funding would continue to receive funding after the UK exits the EU.
Responsible finance providers access EU instruments that incentivise commercial investment into the sector. Loan guarantee facilities available through the European Investment Fund such as EaSI and COSME guarantee a portion of responsible finance providers’ portfolios against potential losses, giving commercial funders the security to invest.
Currently these guarantees are being used to structure a 3-year £75 million fund with a commercial UK bank. A number of responsible finance providers are currently applying for accreditation for these guarantees.
Responsible Finance proposes that EU funding support for the responsible finance sector is replaced following the UK’s exit from the EU. This includes:
- the microfinance allocation of JEREMIE2 funding
- ERDF and ESF allocations to access to finance
- EaSI and COSME guarantee structures
The funding and guarantees play a critical role supporting innovative growth in the responsible finance sector, which by extension supports businesses, social enterprises and individuals who will otherwise become financially excluded once the UK exits from the EU and loses access to European schemes.
Responsible finance fund
Under-capitalisation of the responsible finance sector in the UK has long been identified as a significant constraint to growth. The creation of a dedicated responsible finance fund of £150 million – would complement the measures in recommendations 1 and 2, and unlock significant private sector investment (typical leverage is 1:3, which would equal a total of £600m). In the United States, the government invests $200 million annually into the CDFI Fund.
The CDFI Fund has been an important force in allowing CDFIs to operate sustainably by providing them with equity and is cited as one of the major milestones in achieving their $45 billion loan book. In 2015, CDFIs benefitting from the programme financed over 12,300 businesses and provided more than 35,000 individuals with financial literacy training. The CDFI Fund also manages guarantee programmes, technical assistance to CDFIs, capacity building trainings, and tax relief programmes.
You can read Responsible Finance's full Autumn Statement submission here.