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Local finance is about money working for us

January 17, 2014

Today, Ed Milliband announced a “reckoning with Britain’s broken financial system”. An extraordinary political reversal has taken place, with a conservative chancellor announcing yesterday an above-inflation rise in the statutory minimum wage rate, and, as thinktanker Phillip Blond pointed out, a Labour leader attacking monopolies in the banking sector.

Milliband argued that “part of the reason we rely too much on low-paid, insecure work is that the small- and medium-sized firms – that could create the good, high-paying jobs of the future – can’t get the finance they need.” There are reasons for skepticism here. The Institute for Fiscal Studies found in their last Green Budget that small businesses were contributing to the UK’s productivity gap by hoarding labour – reducing their costs, but cutting hours, training and investment. In other words, keeping people out of the unemployment statistics by running down the quality of work. It was clear in their analysis that the erosion of job quality in response to recession was greater in firms who spent less on wages. The connection between job quality and a productivity Miliband makes is bold and borne out by the evidence: the IFS concludes that much of the UK’s productivity gap results from “an impaired financial sector that is extending forbearance to low productivity firms while being more risk averse in funding new projects”.

The Labour leader’s key policy here is to control the market share of the big five banks and support the entry of at least two new ones. Understandably, he did not feel the need to acknowledge that the government has finally begun to make good on its promises to increase diversity into the banking sector, which despite constant pressure to prove its social and economic contribution, is still not investing in small business at anywhere near the level it should. In March, the former Financial Services Authority announced regulatory changes to make it easier to start new banks. The British Business Bank, spearheaded by the Department for Business, Innovation and Skills, is due to begin guaranteeing loans to small businesses next autumn, with initial capital of £1.25 billion.

But the lack of confidence banks have shown in small business is matched by a similar ambivalence of small businesses towards traditional finance. Cambridge and Counties Bank is one of only four new banks to open in the UK the past three years, the result of a partnership between Cambridgeshire Council, its pensions authority, and a university college, amongst others. They admit that the process has been difficult, but emphasise the importance of working closely with their clients, where relationships with traditional banks have deteriorated. They have also aligned themselves closely to the development priorities of local authorities. As the New Economics Foundation’s Tony Greenham has emphasised, while it is easy for traditional banks to standardise payment functions and achieve economies of scale when dealing with small businesses, their business model is ill-equipped to provide credit where it’s needed. Successful decisions for about lending to companies with limited access to financial information depend on an intimate understanding of localised economies and specialist businesses.

Allowing local councils to set up banking functions was mooted in the 2011 Localism Bill, as part of giving councils a ‘power of general competence’ which included powers to do “anything which it considers is likely to be of benefit” for their localities and citizens. In early 2013, Newark and Sherwood Council established the Think Business Investment and Growth Fund, to provide seed funding to small businesses with growth potential. Working with the fund is not simply a transactional relation: business consultants help develop each loan proposal, which are then considered by an independent panel made up of three people with finance and business experience. The panel then makes an informed, individual decision on whether a loan can be offered and the terms of the loan. This initiative is especially striking considering the eye-watering scale of cuts councils have been required to make in recent years, but the Council insisted that being ‘open for business’ was an essential part of adapting to changed circumstances.

What’s immediately inspiring about local finance is that by bringing finance back down to human scale, it represents some of the most decisive steps taken to address a lack of confidence in our financial institutions, and to face up to the powerlessness many feel with respect to the world of money. Meanwhile, the response from councils – to act proactively and flexibly within the financial and legal constraints they face – shows local government beginning to live up to its promise as the essential partner of innovation. It is encouraging to see an acknowledgement today by a party leader of the dismal failure of politicians to face up to the financial system. Shaky, unproductive firms continue to provide unsustainable jobs, all the while supported by supine banks. Money needs to start working for us fast: local finance is one way of making this happen.

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