The Wilson Committee and Small Firm Finance

In January 1977, amid the economic struggles and concerns about key industries, Labour set up the Committee to Review the Functioning of Financial Institutions chaired by former Prime Minister Harold Wilson. The Committee was composed of a varied membership (in terms of their backgrounds and views) of 18 members and, over the next three years, it held 55 meetings at a cost of £334 000 (Hansard, HC Deb. 30 June 1980 vol.987 col.372). As well as several interim reports (including an important one on small firms discussed further later), the Committee produced a substantial final report (not published until June 1980) and 13 volumes of evidence.

The terms of reference for the Committee were:

To enquire into the role and functioning, at home and abroad, of financial institutions in the United Kingdom and their value to the economy; to review in particular the provision of funds for industry and trade; to consider what changes are required in the existing arrangements for the supervision of these institutions, including the possible extension of the public sector, and to make recommendations.

This included institutions such as the Bank of England, other banks, finance houses, life insurance companies, pension funds, building societies and the Stock Exchange, together with the arrangements in place for export credit.

The Committee produced an interim report in 1979 on The Financing of Small Firms. This report, and the wider work of the Committee, attempted to weigh the contrasting views and complex nature of small firm access to finance and whether the Macmillan gap still existed. The authors of the report explained their rationale for focusing on small firms:

The main reason for singling out small firms for special treatment in this way is the virtual consensus in the submissions we have received that there are problems with the arrangements for financing smaller businesses, whatever the availability of funds to industry and trade as a whole. There appeared to us to be a case for closer examination of these claims, both because of their importance in their own right and because of the general lessons which might be expected from the scrutiny of the financial system at what is so widely believed to be one of its weakest points. Moreover, the Government has specifically asked for our views on the subject so that they can take them into account in deciding about further action to help small businesses.

(p. 1)

This work was informed by several relevant research projects the Committee commissioned. For example, Jones (1979) conducted research for the Committee on 296 incorporated companies with less than £4m capital employed (from a population of nearly 0.25m companies), analysing accounts submitted to Companies House. Jones found that small companies predominantly relied on retained funds within the business, but were also more dependent on bank finance than were large companies. Other studies also confirmed the importance of retained profits and overdraft facilities, but that banks were generally perceived as indifferent to small businesses.

A commissioned study by Mitchell and Clay (1979) looked at ICFC through interviews with area managers and controllers in two ICFC area offices and with 18 successful small firm owners recommended by the managers. Mitchell and Clay found that ICFC staff felt themselves operating in a competitive environment but that small firms did not perceive this and believed there to be no practical alternative. Those firms with criticisms of ICFC felt they were given poor advice and that the terms were too high.

However, access to finance, despite its ongoing prominence in enterprise policymaking, was perceived as less of a problem than the economic environment in which businesses were operating. Nor was lack of external finance regarded as a major constraint on business growth. What did exacerbate the challenges faced in the tough conditions of the 1970s was what was perceived as excessively high and overly complicated taxation and by legislation and restrictions concerning employment (which, for example, made it difficult to deal with staffing problems by laying off employees).

Overall, the Committee identified some supply side problems in SME finance, alongside the information asymmetry problems in assessing the risks involved for all parties. There was also an important highlighting of the reluctance on the part of small firms to give up equity. The report acknowledged that many of the relative difficulties in accessing finance relate to the higher costs and risks of providing loans to these businesses

(Wilson, 1979). Ultimately, in terms of the Macmillan gap, the interim report on small firms concluded:

There can be little doubt that at the time of this report there are deficiencies in the availability of equity finance for small businesses and that this is putting undesirable constraints on their rate of creation and growth. The present equity gap is now seen as having two consequences—a shortage of initial capital for new start-ups and a deficiency in the provision of development capital to finance the expansion of established enterprises.

(p.9)

On this basis the report recommended, for example, the creation of a Small Firm Investment Company; a publicly underwritten loan guarantee scheme; and that the Department of Industry review their schemes to ensure small firms were not excluded. They also noted (p. 35) that ‘what is required now is not any further increase in the volume of information and advice but improvements in its quality and effectiveness.’ They recommended, for example, that accountants and banks become better equipped to offer advice to small firms. Some of these themes will be taken up in terms of the policies discussed in the following chapters.