New capital levels for banks will hit lending

The news that The Bank of England’s new Financial Policy Committee (FPC) wants banks to increase their capital requirements will inevitably result in further restrictions on funds available for lending within the private sector despite claims from Sir Mervyn King, Governor of the Bank of England, that banks will not be allowed to cut back loans to individuals and businesses to make good the capital shortfall.

Anyone that works with SME and owner managed businesses knows that the banks are operating under their own in-house rules in relation to the provision of loans to SME’s below a level of £5million, due to the additional perceived risks and refusing to accept the importance of finance within this sector. The requirements placed on the banks will make what is already an extremely difficult market in terms of raising finance seem almost impossible.

The issue for the banks is that they are still restricted by the requirements to strengthen their balance sheets and are reluctant to lend whilst they are still cleansing the problems they created with toxic debt and bad property loans. 

Unfortunately, the SME sector and in particular good solid businesses that want to develop and grow, are still going to be paying and suffering as a result of the poor lending decisions that were made during the past.  The banks are restricted as a result of a blanket policy rather than a reasonable consideration of each business proposal on its own merits. This latest move by the FPC, asking banks to meet additional capital levels in a way that will not restrict lending is just not going to happen.

Banks have been told that they should reduce the size of their investment banking operations, sell assets, slash staff bonuses and cut dividend payments to investors instead of reducing lending but this does not appear to be the policy that is being adopted.

The idea that banks should be forced to raise new capital at the current time is misguided and potentially damaging as it is likely to prolong the time it takes for the British economy to recover and reduce further the levels of lending to SMEs.

The Hodgson Report – A green/amber response so far

I think it is true to say that we are pleased that a robust and objective review of charities was commissioned and Lord Hodgson took up the challenge.  My own view is charities have come a long way from support groups of people getting together to relieve suffering.  They have evolved into sometimes large and extremely commercial organisations; in some instances charities are clearly taking on the private sector, providing services and using ‘charity wrappers’ to do so.  The fact that his report I believe tends to address this ‘commercialisation’ of the sector is welcomed.

Since his report was published, we have now had the benefit of various responses from interested parties followed by the Hurd interim report by way of his letter to Lord Hodgson.  Nick Hurd has responded with a very practical ‘traffic light’ system to either approve recommendations (green) disapprove of them and effectively kick them into the long grass (red) or suggest that the jury is still out and more work needs to be done (amber).  This is clearly effective for him to set out how his office feels about the proposals.

So where does that leave the report and what might happen? I believe one of Lord Hodgson’s aims was to address the recruitment of trustees and their retention.    I am pleased to see that the Government has shared my own view that to remunerate trustees of larger charities would have been a mistake.  My personal view is that a fundamental defining feature of a charity is that those charged with ultimate governance do so without financial motive.  Therefore to remunerate a large number of trustees would fundamentally change this and I do not believe would be any particular benefit.

I am not aware that large charities experience difficulties in recruiting experienced and able people to act as trustees and in certain limited cases if they do need to remunerate particular trustees they can apply to the Charity Commission for exemption.  This clearly regulates what is going on and ensures that they make a sound case for remunerating them.  I also believe that the charities which really struggle with recruiting trustees are those at the small end of the sector who would not have been able to enjoy the exemption anyway. 

The strongest green light would seem to be Government and Lord Hodgson are in agreement over the definition of charity and public benefit.  This comes as no great surprise given the high profile cases which have taken place over the last year or so regarding fee paying schools.   The Charity Commission has clearly had difficulty in trying to come up with any sort of framework for defining public benefit.  Recently we have seen these disagreements spill over into the religious sector and it will be interesting to see how these cases develop.  I am in agreement though with both Lord Hodgson and the Government that it is simply too big a task to try and distil years of case law and guidance into a statutory definition and the answer has to be reliance on the tribunals and courts to adjudicate on the matter as quickly as they are able.  I have no doubt that this is an area which will become increasingly relevant as the nature of the charitable sector continues to change both in areas in which it operates and the manner in which it does so. 

It is interesting to see that overall the role of the Charity Commission is agreed between Lord Hodgson and the Government in that it should remain an independent body.  I also agree that the name of the Charity Commission should not be changed as I think it is only recently that it has increased significantly in public awareness.  I understand that Lord Hodgson believes the Charity Commission should focus on being a regulatory body and not used by charities for free professional advice.  I have to say I would strongly disagree on this point in that I believe the fundamental difference between the Charity Commission and other bodies such as Companies House or H M Revenue & Customs is that it does provide a ‘soft’ regulatory body for charities which is an essential feature of the sector.

For smaller charities I believe this is an invaluable service and if it helps them to be compliant when otherwise they would have carried on regardless as they would not be able to afford suitable professional advice that has to be a benefit.  In my experience the large charities will take professional advice before proceeding in these situations in any event.

One area which received an amber light was Charity Commission fee charging.  Whilst Lord Hodgson was researching his report I was fortunate enough to attend one of the meetings of interested parties with him.  The discussions on fees reflected the view that paying a filing fee such as that charged by Companies House for companies would not be too bigger burden for charities and if this helped to provide funding for the Charity Commission to continue providing advice then surely that must be a good thing.

In his response Nick Hurd introduced a fourth category of ‘green / amber’ and as an accountant I am delighted to see it is not just us who sit on the fence!  One of the areas getting a ‘green / amber’ was social investment and I find this disappointing.  I believe this is one of the most exciting elements in the charity sector that we have seen for a number of years and this is something I would like to see encouraged as much as possible.  I appreciate it will need careful development and regulation but should be encouraged to the greatest possible extent and surely it is a win- win for all concerned.

The final area I would refer to is that of fund raising regulation and charity collections in public places, both of which receive green lights.  Broadly, I share the view that fund raising is generally well controlled and regulated and also take the view that the one area that does need tightening up on in the dreaded ‘chuggers’ trying to get us to sign direct debit forms on the High Street.  These have been operating in a largely unregulated regime to date.

So I would give Nick Hurd and the Government a green/amber light overall, clearly the sector needs to change if it is to move forward and I feel positive that those changes are generally for the better of the sector.

Joe Bates - Partner

Article first seen on Charities Management magazine

Finance still critical

I found some interesting research recently that reported on the issue of banks not just refusing to lend but seeking to change original loan terms, which was directly in line with my experience.

One SME business that I am advising approached their bank to extend an overdraft in order to buy out a director and secure succession for the business but found that this request was not only refused but the original overdraft was reviewed and withdrawn.

The results from the Mishcon de Reya survey suggest that this is not an isolated problem with more than half (51pc) of respondents saying that their biggest issue with their lender involved attempts to increase margins on loans, while 41pc identified additional fees.

Clearly there are not enough alternative sources of finance available and we are facing a significant funding shortfall unless non-bank finance channels are opened up to small and medium-sized companies.  This view was expressed by Mr Breedon, who led the government backed taskforce into bank lending.  He also predicts that the shortfall could be as much as £191bn within five years.

SMEs are constantly referred to as the driving force behind the UK’s economic recovery with figures from the FSB suggesting they are responsible for 48.5 per cent of the UK’s turnover but without support they cannot deliver much needed growth.

I hope that the professional bodies and organisations that represent the SME sector will continue to lobby government on this matter and that some of the recommendations made in Mr Breedon’s review will be progressed.  In the meantime our experience is that more and more businesses are now looking into peer to peer lending which, whilst potentially being more expensive is proving to be easier and quicker to implement for smaller SME’s.

Incidentally there was a happy ending for the company used in the example above, after finding an alternative source of finance, their bank  had a change of heart and was able to offer the required extra funding after all, proving that it is always worth challenging the banks decision in these circumstances.

Who will fund residential care as the elderly get older?

There are plenty of statistics available to illustrate that we are all working and living for longer.  Whilst this may at first seem like a good thing there is a consequence on how residential care is funded that was brought home to me when I recalled one of my first experiences as a new treasurer of a charitable residential care home in 1996.

The occasion was a party for a  resident that had reached their 100th year.  We invited friends and relatives and the Mayor called in to make a fuss of the individual concerned. As an interesting aside, whilst at first it was quite rare to have a centenary celebration I have noticed that these are increasingly becoming a regular fixture in our calendar. However at that first centenary celebration I enquired from our staff how long the lady concerned had been a resident at the home and was advised it was a mere 42 years! The thought that at the age of 58 she was put into a care home in this day and age is absolutely unthinkable but I would imagine in those days it was quite the norm.  Without knowing the details, I have always imagined that probably her husband died and the children say “that's it mom, now dad’s gone we will sell the house and put you into a home”.

Since then the world has changed immeasurably in terms of people coming into care and without having the figures to hand I would imagine our average new resident coming in is probably in their late 80’s or even 90’s and when they get to us they do require a very high level of care compared to the basic residential care which I would imagine that lady was provided with all those years ago.

Many care homes now have to ask for top ups as the gap between the amount the local authority is prepared to pay and the economic minimum needed to maintain a place in the home has grown. In reality, the people that bear the costs of these top ups is invariably the children of the resident.  As residents become older and older it is the children who are being called upon to find the top ups and they are themselves retired and pensioners. Bearing in mind by definition, if their parents are being funded, they have not got significant assets of their own so these are not families who have any great expectations of inherited wealth.

This phenomenon is latterly going to be more and more prevalent as we are told that middle aged people today stand a better than even chance of making 100.  These people are likely to go into care in their mid to late 90’s by which time their own children could be into their 70’s, they could even have grandchildren of 58 and above, the age of my first centenary resident when she went into care!

Academies will benefit from innovative and robust financial advice

More and more local authority schools are converting to academies – according to the Department for Education they now make up more than a fifth of all secondary schools – and while the upside is that an academy has greater autonomy, the governing body and management team will be in need of expert financial advice to ensure a smooth transition and effective year-end reporting.

The academies that we have been working with are preparing audited statutory accounts for the first time and have welcomed the strategic advice that we provide in addition to the specific guidance that is needed on the content of the Annual Report and Accounts (ARA).

Clearly regulations have to be met, but the change in status presents a perfect opportunity to review current financial processes and establish innovative and robust systems for the future.

We take a pro-active approach to advice with regard to developments in the sector, helping to identify innovative ways for the new academy to generate income, and presenting ideas so that the ARA is ‘user-friendly’ and readily accessible to the general public so that it can be utilised as an effective reporting and marketing tool.

It’s not just a question of the day-to-day processing of income and expenditure: an academy needs a finance and IT system and business IT solution that can deal with a whole raft of activities, including the production of management accounts, cash flow forecasts, balance sheets, VAT and tax compliance issues.

At Clement Keys, we have specialists in all areas so we can offer advice on key topics such as pensions and VAT.

Academies have to undergo a statutory audit and arrange an audit of pension returns – both to the Teachers’ Pension Fund and any local government schemes to which non-teaching staff belong – our experience in the education sector helps us respond to individual establishment’s needs.

We also have experienced tax and VAT advisors that can advise on liability to VAT and partial exemption as well as perform ad hoc assignments, such as reviewing the use of trading subsidiaries.

Women in the boardroom

Cultural change will put more women in the boardroom

There’s no denying that the bleak economic prospects for 2012 are uppermost in our minds, but one of my personal hopes for this year is to see businesses committing to the cultural change required for more women to make a difference in the boardroom.

Following his Government-commissioned review, Lord Davies recommended that FTSE companies work towards a voluntary target of a minimum of one in four female board members by 2015, yet a report by Cranfield School of Management found that very little progress had been made. 

What I found particularly disappointing was that more than two thirds of the UK’s top 100 companies had not yet decided how they intend to comply with the recommendations. 

This is not only an issue for big businesses, the same situation arises with many SMEs, and it would be fantastic to see change being embraced by all businesses and across all industries.

Whatever the size of the company I don’t believe that a combination of quotas, heavy handed rules and further regulation is the way to create the next generation of women at board level – it simply wouldn’t be beneficial, especially for companies that operate in more gender biased industries.

Research suggests that what typically drives employees to stay in or leave a job is not so much money, as relationships and job satisfaction.  For SMEs, particularly in the current climate, the key to success is surely a matter of finding ways to ensure that talented women are content within the workplace, and this can be achieved at least in part by giving them the opportunity to gain experience and develop the skills required to run a business at the highest level. 

I applaud those companies that are taking this issue seriously and enrolling women onto mentoring programmes, for example, and hope more will follow suit in 2012.  This kind of approach appears to be very effective and I’m convinced it is what we need to achieve a balanced mix of expertise in the boardroom and head off any further talk of mandatory legislation on quotas.

No magic wand but free business advice

There may have been some good news for small businesses in the Chancellor’s autumn statement but there is no doubt that cash strapped SMEs and start-ups still have many obstacles to overcome in this challenging environment.

Whilst I don’t have a magic wand to solve all of their problems I am delighted that Clement Keys is able to offer a helping hand to small business via a free business advice service delivered in association with the Institute of Chartered Accountants in England and Wales (ICAEW).

The Business Advice Service offers local companies a free initial consultation, which could save them money and generate ideas to create more profit.

The service is designed to enable SMEs to source advice on a wide range of issues, such as how to start a business, taxation, financial management and access to finance, so that they come away from the meeting with an understanding of their options and how to resolve a particular problem.

To take advantage of the offer, SMEs and start-ups should visit http://www.businessadviceservice.com/
and follow the initial consultation request button, which can be found next to the Clement Keys entry on the ICAEW Directory of Firms.