Closing the funding gap for small firms must be part of the levelling-up agenda

Soon the Chancellor will deliver his annual Mansion House speech. While his recent comments regarding financial services have been well received, his message to the City should be that London will continue to be a major global financial sector, enhanced by its common law rooted financial regulation.

Equally, UK financial services encompass more than the Square Mile and have an important role to play in ensuring that levelling-up is a success.


Thus, a vision and strategy for the City and UK financial services is needed and it should have two over-riding aims.


One is to boost the City’s competitiveness. Its global success depends upon its inherent characteristics, the regulatory environment and being “the” place where clients want to conduct business because of its liquid, deep and broad markets.


It is important for the UK not to be passive in its approach, which includes pushing back against a politically motivated EU. The bias should be towards less burdensome regulation without undermining stability.


It is time for the UK to provide a clear, positive message globally that changes the terms of the debate, which is too often pessimistic and wrong about the City’s prospects.


The second – and equally vital part of the City’s future strategy – should be to strengthen the link between financial services and the wider economy. The City’s significance is not only as a global hub, but also as a tool to deliver strong, sustainable, domestic growth.


Recently, in a report for Policy Exchange, I outlined 26 policy recommendations to deliver this strategy. Many can provide quick wins.


Take, for instance, the need to boost lending to small and medium-sized enterprises (SMEs).


The UK is an imbalanced economy. It has world-leading sectors, including finance, while at the other end, two out of five people work in low skilled, low productive and low wage roles. The debate about levelling up focuses almost exclusively on place, but it is only part of the issue.


The City has a role to play domestically, particularly in closing the funding gap faced by SMEs. This used to be known as the ‘Macmillan Gap’ since being identified in 1931 by a Parliamentary Committee into finance and industry. It is as important an issue now as it was nine decades ago.


In June 2019, in its reply to the future of finance report that it had commissioned, the Bank of England stated that the funding gap to SMEs was a huge £22 billion.


The very fact that such a figure could be stated – without senior people at the Bank or HM Treasury making it a high priority that needed addressing urgently – highlights a disconnect between those that set policy and how it impacts on the ground.


In part, it is because it is not a new problem, but also it reflects, perhaps, a view that this might be a demand-side problem. Many SMEs might differ in their thinking.


Banks appear incentivised to lend to the residential mortgage sector and to buy gilts, with the latter attracting a zero-risk weighting. Should they be lending more to UK firms is a legitimate question.


Encouragingly, in the recent Kalifa Report it was noted that FinTech has led to small firms having “digital access to a wider array of lenders”. But FinTech cannot solve the underlying problem and, overall, addressing this funding gap issue should be an urgent priority now for policy makers.


Linked to this is the need to reassess capital requirements on smaller to mid-tier banks, to boost bank lending to the regions, while still maintaining tough regulatory controls to ensure financial stability.


Delivering upon a clear strategy for the City should ensure success, both in strengthening London’s global competitiveness and in helping finance domestic growth: the two are symbiotic.



Please note, the value of your investments can go down as well as up.



This article was published in The Times on 28 June 2021.

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