In June, senior Cabinet Minister Michael Gove delivered a thought-provoking speech on the “privilege of public service”. He said that Britain, like other Western democracies, was suffering from a number of “morbid symptoms”. Drawing on great historical examples of countries that had faced and overcome such challenges, he cited the inspiration of US President Franklin D. Roosevelt’s “bold, persistent experimentation” in finding new, innovative policy solutions to the problems of his time.
Chief among the hurdles we face today are the consequences of the COVID-19 pandemic and the resulting worldwide lockdown. It has fundamentally changed behaviours across the globe and challenged assumptions held about our economy and society.
The cause, nature and response to this crisis are entirely different than the last major financial crisis in 2008-09. This one began as a health crisis and rapidly became an economic crisis. On this occasion, the banking sector was not the root of the problem but has worked closely with the government to be part of the solution. The industry has supported millions of people and businesses across our country to manage their cash flows, protect jobs and facilitate government-guaranteed COVID-19 loan schemes.
This rapid, high-impact response by government and industry has helped hundreds of thousands—perhaps millions—of companies survive the initial economic impact of the crisis. But as we look to the months ahead, it is clear that many businesses will need further help to tackle a debt burden that could hold them back or drag them under.
Without urgent and decisive action, our analysis shows that up to three million jobs across the United Kingdom—which is equivalent to every job in the West Midlands—and 780,000 companies are at risk. To address this, TheCityUK, supported by EY, brought together a group of more than 200 senior practitioners from 50 firms across the industry to find novel solutions to this challenge. A project of unprecedented scale and speed in such unprecedented times not only underlines what TheCityUK was set up to deliver but also the commitment and rigour of the many people who played a role.
The group, chaired by TheCityUK Leadership Council Chairman Sir Adrian Montague with the technical work being led by Omar Ali of EY, quickly set up a number of dedicated workstreams. Each of these provided a detailed analysis of the problems facing SMEs (small and medium-sized enterprises) and considered the optimal solutions. This was underpinned by consultation and input from government, policymakers, the Bank of England (BoE), Financial Conduct Authority (FCA) and business trade associations representing a wide spectrum of sectors as well as business owners themselves.
Our final report, published in June, set out a far-reaching set of options for converting, restructuring and repaying the projected unsustainable debt in order to help hundreds of thousands of viable SMEs get back on their feet, save millions of jobs, protect billions of pounds of taxpayer money and help power Britain’s economic recovery and future growth. We believe that, if taken forward, the options present a real opportunity for the government to leave a lasting positive legacy of regional growth and investment across all parts of the country.
The principle behind these options is to offer viable but highly indebted SMEs across the UK a way to reduce their overall debt burdens by allowing them to manage their government-backed loans in more sustainable ways. Depending on the size of their debts, SMEs could access either of two new products: a Business Repayment Plan that would convert unmanageable loans into means-tested tax liabilities or, for larger debts, Business Recovery Capital that would enable the conversion of loans into preference shares or long-term subordinated debt. Both of these instruments avoid the need to issue ordinary equity and remove the concerns of business owners about losing control of the enterprises they have worked hard to build.
Central to these options is the founding of a new government-backed UK Recovery Corporation (UKRC). This entity would issue and hold as well as oversee and manage the unsustainable debt that is already government guaranteed. It would also help prevent moral hazard and maintain a healthy distance between private enterprise and the state. While the government would initially be the principal investor, by inviting private investment into the UKRC over time, it could create an ongoing financing channel for SMEs across the United Kingdom.
Despite the current challenges faced, we must not forget the potential opportunities that the future may hold. Many entrepreneurs will already be considering how to take the next steps for growth. For them, securing the capital they need will be essential. That is why we propose to create Growth Shares for Business, backed by a Growth Capital Fund. This would support viable SMEs that do not have a problem with their current debt pile but still need financing to scale—a critical piece of the puzzle to drive business recovery across the country.
We believe that while these options are new, far-reaching and ambitious, they provide the tools to help SMEs play their important roles in the post-COVID-19 economic recovery. There are no easy options, silver bullets or one-size-fits-all solutions, but what we have put forward is, we believe, the best range of options for recapitalising businesses across the country and saving taxpayer money.
We have been encouraged by the initial response from the government, policymakers, regulators and industry stakeholders and will continue to engage widely on these options over the coming weeks and months. This isn’t something that can be deferred for a later date. Failure to act decisively now will condemn many SMEs and communities across the nation to default and decline, with the consequent impacts on personal lives, communities and taxpayers.
The significant projected levels of unsustainable debt that the nation’s SMEs face in the coming months and years present a real obstacle to the UK’s recovery. These small businesses are the backbone of our economy and a major employer in every region and across the nation. What our work has shown is that the current unprecedented challenge requires more than greater flexibility or experimentation in the policymaking process. It demands greater experimentation in our industry’s capacity to collaborate and work together with the government and regulators to drive forward change.