Why is this Tory Government intent on destroying SMEs?

Wrecking ball destroying SMEsAt the October 2018 Tory party conference, the Prime Minister reiterated her support for businesses, calling them “the wealth creators, the risk takers, the innovators and entrepreneurs …. who generate jobs and prosperity for our country” yet the Government’s actions seem set on destroying SMEs and entrepreneurial initiative.

Whenever a SME encounters financial difficulty that make it difficult to keep up to date with its VAT and PAYE payments, it is invariably HMRC (Her Majesty’s Revenue and Customs) that is criticised for its heavy-handed and unsympathetic behaviour in recovering monies owed.

There is some truth to this given recent revelations of a surge in HMRC action to seize assets, which had risen by 45% in the tax year to March 2018, following a 23% increase in asset seizures the previous tax year. It is debatable whether asset seizure is an effective arrears-gathering measure, given that the seized assets are often then sold at auction for little value and the seizure effectively prevents a business from continuing to trade in a way that can pay off arrears.

It is worth remembering that HMRC does have discretionary powers, such as to agree Time to Pay arrangements to help businesses in arrears to settle their outstanding taxes over time although it is not obliged to offer this facility and no doubt is reluctant to do so if previous arrangements have failed.

Crucially, it must be remembered that HMRC is a tool of Government such that if HMRC is increasing its pressure on businesses, whether via asset seizure or by resorting to litigation, as I have reported in several previous blogs, then surely it is because the pressure is coming from the Government to improve its collections and recoveries.

However, the recent changes to HMRC’s creditor status and to directors’ liabilities in the October 30 Budget are telling.

Firstly, the Chancellor announced a restoration of HMRC’s status as a preferential creditor albeit behind employees unlike its pre Enterprise Act 2002 status of ranking pari pasu (equally) with employees. This means that the recovery of unpaid PAYE, CIS and VAT as any other taxes collected by businesses on behalf of HMRC will rank ahead of suppliers and unsecured creditors in insolvency.

Secondly, the Chancellor announced a measure in the Budget that has so far provoked little comment; he proposes to make directors and advisers jointly and separately liable for the preferential tax liabilities in insolvency. The details no doubt will clarify the nature of any actual liability such as if the insolvency is deliberate or not but this will effectively allow the appointed insolvency practitioners to hold directors to ransom by threatening expensive litigation against the directors personally.

This second measure is likely to be a significant deterrent to anyone becoming a director and also to entrepreneurs and indeed anyone wanting to set up a new company.

Since there also seems to be a disparity between HMRC enforcement action towards SMEs when compared with the seeming light touch on larger enterprises, it is reasonable to conclude that this Tory Government has abandoned entrepreneurs and is intent on destroying SMEs.

Who will become a director once they know what potential liabilities they are taking on?

As ever, government actions speak louder than words.

Is fear for the future the explanation for a rising numbers of insolvencies?

does fear for the future rule your business decisions?The increased number of insolvencies, largely due to CVLs (Creditors Voluntary Liquidations) between July and September this year is a worrying, but hardly a surprising, trend.

There has been a gradual upward trajectory in insolvencies for much of 2018 but it seems to be accelerating. The latest figures, for Q3, show an increase of 8.9% on the previous quarter and an increase of 19.3% compared with Q3 in 2017. CVLs make up the bulk of the quarter’s insolvencies at 71.6% of the total, that is 3,083 out of 4,308 and the highest number of quarterly CVLs since January to March (Q1) 2012.

As for much of the year the construction industry had the highest number of insolvencies in the 12 months ending Q3 2018, followed by the wholesale and retail trade and the repair of vehicles industrial grouping.

For some time now, it has been clear that businesses have been holding back on investment for growth given the climate of uncertainty that the economy has been in for two years now, and yes, many cite the lack of clarity over the outcome of the Brexit negotiations as their reason for holding off.

My regular readers know that I believe no SME business can afford to stand still without risking eventual failure and that in difficult times I advise focusing relentlessly on cash flow as well as a regular review of margins and Management Accounts.

Nevertheless, it is understandable that there is little confidence in the future after two years of tedium, and, some would argue, incompetence in the negotiations and it may be that the rising insolvencies are a sign of businesses – and creditors – running out of patience or room for manoeuvre.

The signs for the future are not good

In the last week the CBI (Confederation of British Industry) quarterly survey has revealed that smaller British manufacturers expect their output to dip for the first time in seven years during the next three months. It found that order books are struggling as Brexit approaches, with firms reining in their investment plans as a result. Optimism about export prospects for the year ahead is also at its the weakest level since April 2009.

Lloyds Bank’s monthly barometer of business confidence has also shown a marked slide particularly among smaller SMEs and the net positivity balance had fallen by 9% to -7%.

While the latest IHS/Markit purchasing managers’ index (PMI) for the construction industry improved to 53.2 in October a slowdown in housebuilding across the UK and in new orders is weighing heavily on construction, proof, if any were needed, that in this sector particularly survival depends on growth.

On top of this has come the news that two European suppliers of car parts, Schaeffler and Michelin, announced plans to close UK factories, although both deny this has anything to do with Brexit. Instead they cite dwindling demand for smaller tyres.

As reported in the Evening Standard yesterday, research by Populous World has predicted that around 12,450 smaller businesses in London and the South East may go under if there is a no deal Brexit, with the figure at 7,900 failures even with a deal.

As if that were not enough, there will be more pressure on struggling businesses following the restoration of HMRC to preferential creditor status in last week’s Budget, albeit that this is restricted to recovery of unpaid PAYE, CIS and VAT as the taxes collected by businesses on behalf of HMRC.

Given all the above and that HMRC has become increasingly aggressive in seizing assets and in litigating to recover money owed and, as calculated by Pinsent Masons, that the average length of cases of unresolved tax battles going through the courts is now 39 months, it is perhaps no surprise that creditors are running out of patience and CVLs are climbing rapidly.

Many lenders, creditors and even shareholders would appear to be pursuing a strategy of ‘better some cash now rather than waiting for more later’. Is there a real fear of worse to come?

Is Buy-to-Let property still a good investment?

Buy-to-Let residential property focusThe Buy-to-Let residential property sector is the focus of this month’s sector blog.

For several months now, the rate of growth of UK house prices has been slowing down, although this has been somewhat skewed by significant reductions in London and the South-east of England.

There is no doubt that the UK still faces a housing shortage, particularly for affordable homes, with purchase prices still way beyond the means of many potential buyers. In theory this should preserve demand for privately rented homes given that almost everywhere in the country there are lengthy waiting lists for council housing.

However, there have been a number of measures and announcements in the last couple of years that may signal that becoming a Buy-to-Let landlord is no longer such an attractive proposition, especially for private landlords, rather than for property owning businesses.

Landlords are subject to a number of taxes including stamp duty, a one-off tax on the purchase of a property valued above £125,000. In fairness this applies to all buyers and the amount payable goes up in stages depending on the purchase price. So, the duty payable is £3,750 on the first £125,000, £6,249.95 on prices from £125,001 to £250,000 as examples. Stamp duty for second homes now also attracts a 3% surcharge.

But private landlords must also pay tax on their rental income and the summer budget of 2015 changed the amount of tax relief available on the interest on buy-to-let mortgages, which since April 2017 can now only be claimed at the basic, 20%, level of tax, regardless of whether the landlord is paying this or the higher rate of income tax. The same budget also abolished the “wear and tear” tax relief with effect from 2016, which allowed landlords to claim tax relief of 10% on rental income.

On selling a property a landlord must also pay capital gains tax, but only if they sell at a profit. However, they can deduct some expenses incurred in buying, selling or improving the property.

This build-up of pressure on private landlords over the last couple of years, has, according to a report from the Intermediary Mortgage Lenders Association’s (IMLA), resulted in a reduction in new investment in the Buy-to-Let sector from £25 billion in 2015 to just £5 billion in 2017.

In October this year, the Residential Landlords Association (RLA) called on the Government to force Buy-to-Let mortgage lenders not to refuse mortgages to landlords where a tenant is a benefit claimant. RLA research found that “two-thirds of lenders representing 90% of the buy-to-let market did not allow properties to be rented out to those in receipt of housing benefit”.

Looking further ahead, private landlords may eventually find demand for rental properties reducing in view of the Prime Minister’s announcement at the Tory Party conference in October that the cap on local authority borrowing to finance council-house building would be removed.

However, this week, an article in the Independent newspaper revealed that more than half of local authorities in England, many of them in areas of greatest need for new homes, would be unable to take advantage of this because they did not have the right type of accounts, known as housing revenue accounts (HRAs).

This, and a feared slowdown in new builds by Housing Associations, has led to the Office for Budget Responsibility (OBR) predicting that the result would be fewer than 9,000 new homes over the next five and a half years, rather than the 10,000 a year predicted by the Government.

The future for the private Buy-to-Let sector is therefore less certain than it was. Despite the pressure on landlords, those who see property as a long-term income investment will benefit from the demand providing their borrowings and maintenance costs are minimal. A change of government might of course change all this.

November 2018 Key Indicator – investment and asset classes

choosing asset classes is like crystal ball gazingIn such a febrile market it takes nerves to make investment decisions about which asset class to follow when there is the danger that an asset’s value can reduce. At the moment it seems as if choosing between asset classes is a bit like consulting a fortune teller.

Why? Because the global, regional and national economies are beset by influences that are making them very volatile for a variety of reasons.

In October, the IMF (International Monetary Fund) forecast that global growth would remain at its 2017 level but that “expansion has become less balanced and may have peaked in some major economies”. It notes also “the negative effects of the trade measures implemented or approved between April and mid-September”.

However, this is as much political as it is economic, notably, the USA’s imposition of trade tariffs particularly on China, but also its threats of sanctions on Iran.

The prospect of a trade war with China is particularly alarming and has wide-reaching implications in that the Chinese economy has been slowing and its currency, the Yuan, has been devalued substantially over recent months. While this should make Chinese exports more competitive, tariffs might reverse this. It must also be remembered that China holds some $1.2 trillion worth of US government bonds and should it decide to dump them, this would cause a rise in US interest rates triggering a knock on impact on inflation which would reduce the demand for Chinese goods.

Similarly, in the UK as the Brexit negotiations near their endgame with little or no clarity in sight, businesses and investors have been holding back on investment with some setting up outposts in Europe, as a precaution against the absence of any sensible agreement.

Growth and productivity in the UK economy have been anaemic for some time, arguably since the 2008 Great Recession.  In Europe, too, growth is slowing.

The result has been huge volatility in share prices across the world’s stock markets and in exchange rates, not least £Sterling, which has been yo-yoing in response.

What asset classes to invest in?

There are four main asset classes:

* Equities, or shares

* Bonds, debt or fixed-income securities

* Cash, or marketable securities

* Commodities such as agricultural products, metals, including gold, energy supplies such as oil

Alternative asset classes include real estate, or valuable inventory, such as artwork, stamps and other tradable collectibles.

While the advice is always to invest in a range of assets to spread the risk and it is often argued that one investor’s loss is another’s gain, in this climate it is difficult to determine which asset classes are the safer option and which offer growth prospects.

After a long period of share price growth, here in the UK at least, the appetite for buying equity in a business is low. The recent stock market declines and volatility are an indication of the uncertainty investors are currently feeling. Another concern that has been emerging is that businesses in the technology sector have been over-valued or will be unable to sustain their current profit levels in the future.

The equally volatile currency exchange rates has made the buying bonds, debt and fixed-income securities somewhat risky although they are being seen as a medium-term safety investment until the stability and predictability of other asset classes is restored.

With commodities, again there is a political dimension.  Oil prices have been rising, partly out of concern for supply from Iran given Donald Trump’s threatened sanctions, and partly because the Opec countries have been keeping prices high in the light of this. Also, commodities rely on consumption and growth which have stalled.

Gold, on the other hand, has been plummeting since February according to quarterly reports published on the website investingnews.com. it were down by 6% in Q2 this year (April to June) and by a further 5% in Q3 (the three months to August). Their analysis attributed this to investors switching to the $US as a safe haven against geopolitical concerns. This is apparently consistent across the metals and mining sectors, they say.

The underlying theme seems to be that the future income and growth of most asset classes are uncertain, at least for the moment, making it harder to decide what, if anything it is relatively safe to invest in.

STOP PRESS: In the light of the above it is no surprise that the Bank of England today voted unanimously to keep interest rates unchanged at 0.75% “because of rising uncertainty among UK businesses” about the outcome of the Brexit negotiations.

Autumn 2018 Budget offered some cheer for SMEs and the High Street

Budget - pulling rabbits out of hatsThere were few surprises in yesterday’s budget given that much of it had been leaked in advance although it did allow the Chancellor to make a joke about no new rabbits being pulled from hats.

Much of the budget was aimed at addressing the concerns of SMEs on the High Street with a promise to cut business rates by a third for those retailers in England with a rateable value of £51,000 or less. This offers an annual saving of “up to £8,000 for up to 90% of all independent shops, pubs, restaurants and cafes”, which should please the FSB (Federation of Small Businesses), which had asked that any relief be applied to “hospitality and service businesses, not just retailers”.

However, the Chancellor also stressed that the High Street had changed forever and that therefore there would be £675m of co-funding to create a “Future High Streets Fund” to support councils to draw up plans for the transformation of their High Streets, such as perhaps including converting empty shops into homes to increase town centre footfall.

SMEs and especially those in rural areas will also welcome the confirmation of a 30% growth in infrastructure spending (both on roads and IT) amounting to £30 billion, which included the £420 million already announced for pothole repairs.

Although the BCC (British Chambers of Commerce) wanted to abolish the apprenticeship scheme, SMEs did at least get some relief on their contributions which was reduced from 10% to 5%.

In a bid to stimulate stalled business investment in capital such as in plant & machinery, the Annual Investment Allowance is to be increased from £200,000 to £1m for two years from 1 January 2019.

The Chancellor announced that the UK would introduce its own tax on large digital companies, the likes of Amazon, with a global revenue of at least £500 Million a year.  He stressed that it would not be a tax on sales but on the in-country earnings of these companies expected to be at a rate of 2% and applied from April 2020.

The question is whether it will actually be introduced given that there will first be consultations and, given the time frame, how much help it will be to those SMEs already struggling because of the online competition?

Fuel duty rates were frozen for the 9th successive year, which will be welcomed by the Freight industry as well as others that rely heavily on vehicle use.

Entrepreneurs’ Relief was also tweaked with a number of measures including an increase in the minimum period throughout which the qualifying conditions for relief must be met to be extended from 12 months to 24 months.

While subject to further consultation before it is introduced on 1 April 2020, the maximum recoverable R&D tax credit in any tax year is to be restricted to three times the company’s total PAYE and NIC liabilities.

From April 2019, the PAYE tax-free personal allowance threshold increases quite significantly from £11,850 to £12,500 and the 40% higher rate tax threshold from £46,350 to £50,000.

The VAT registration threshold was frozen for the next two years at £85,000.

The budget also covered insolvency & tax avoidance by directors

And, slipped in with virtually no reaction from anyone so far is a change to the status of HMRC, which will now become a preferred creditor in insolvencies. Given that I have already reported on HMRC’s use of increasingly aggressive tactics including an increase in asset seizure from small businesses it will be interesting to see what difference this makes to HMRC tactics. This would overturn the 2002 Enterprise Act which removed HMRC as a preferred creditor but we have yet to see the detail.

Directors and others involved in tax avoidance, evasion or ‘phoenixism’ are to be made jointly and separately liable for company tax liabilities where there is a risk that the company may deliberately enter insolvency

And some fallout from Carillion

In the wake of the Carillion and other high profile business failures involving PFIs (Private Finance Initiatives) there will be no more such arrangements. PFIs will be abolished.

Finally, the national living wage is to increase by 4.9%, from £7.83 to £8.21, something that will bring little comfort to SMEs.

Of course, all of the above comes with the large caveat, that depending on the outcome of the Brexit negotiations there may have to be a second budget in the spring.

 

What are the benefits to SMEs of collaboration with corporates?

skydiving collaborationThe 2018 Global CEO Outlook by KPMG found that 70% of the 150 UK CEOs involved were in favour of collaboration with start-ups and SMEs.

Many cited the benefits to them of collaboration helping them to drive innovation to remain competitive and support their growth objectives, particularly where new businesses in the tech sector can help their larger partners to become more agile.

Collaboration is not a one-way street

One of the difficulties cited with collaboration, however, is achieving the right fit in terms of shared aspirations and culture. So, it is important that potential misunderstandings are ironed out before working together.

Both sides should want to establish a relationship based on trust which includes understanding others’ as well as their own needs and agreeing how any shared knowledge will be used. Equally, both sides need to be prepared to learn and this may be more difficult for those involved in a large corporation, where there are often clear and bureaucratic lines of communication and decision-making.

There is an argument that to be sustainable the corporate can learn much from the SME/start-up and how to think like a smaller business.

However, the benefits should not be one way.  While it is clear how large corporations can benefit, it is less clear what is in it for SMEs or start-ups unless they are agreed in advance such as access to contacts, finance, resources, technology and distribution channels.

A mistake that corporates make is thinking SMEs want advice when they generally want help to grow. Indeed, all too often the executives of large firms have little understanding of the problems facing small firms. They do however have access to resources that can benefit the SME.

A small business is unlikely to have the spare capital to be able to invest significantly in marketing or R&D. When resourced are limited and there is a prospect of running out of money, the issue for SMEs is the uncertainty of spending time and money while they search for sales that can be replicated. This can take longer and use more resources than the SME can fund hence the benefit to them is a leg up from a larger partner.

Once the SME finds its formula for growth, a larger partner can be particularly useful by helping with the planning and implementation. SMEs can learn how the “big guys” operate, how they establish supply chains and install systems and processes.

Working with others can be frustrating and is often a choppy ride, according to Stefan Tan writing in a blog for dashmote.com.

He describes it as being a bit like white water rafting, with all its thrills and spills but “the experience can be truly rewarding if you are able to endure the ride”.

He says it can take time to build a solid relationship and depends on both partners working to understand the benefits and limitations of each one’s corporate culture. Often this can be achieved by running a pilot project to iron out the differences and once that phase has been completed to then scale up activity, being mindful of KPIs and costs.

Above all, he says, they should be mindful that there will always be some cultural differences and that it is important to recognise that neither’s business model is better than the other’s.

Is the insolvency of your business a failure?

business failureLike old buildings that are decaying or no longer fit for use, businesses often need to be pulled down and rebuilt. Should this be regarded as failure or renewal?

There are three definitions of failure in the Cambridge Dictionary:

Someone or something not succeeding;

Not doing something that you must do or are expected to do;

Something not working or stopping working as well as it should.

Much has been written about the role of directors and how it contributes to the failure of a business but less about the lessons that can be learnt and how they contribute to the future success of entrepreneurs.

Failure is something the business writer and chairman of Risk Capital Partners, Luke Johnson, has written about and must have had further cause to reflect on following his injection of £20 million into Patisserie Valerie, which recently announced that it was in danger of imminent collapse after what may turn out to have been the subject of accounting and auditing irregularities that are currently being investigated.  Johnson was one of the company’s founders and main investors and it is perhaps no surprise that his blogsite and website that cover matters such as prudent financial management and spotting fraud have both been offline since the announcement.

Contributors to business insolvency

The potential causes of a business becoming insolvent are many but the most common is simply running out of cash which can be the result persistent losses, non-payment by customers, over trading and the consequential inability to meet liabilities. These are often attributed to the economy, market conditions and increased competition but essentially derive from decisions by directors or more specifically indecision by directors.

Changes in market conditions, or indeed in the wider economy, are arguably outside the control of the directors, although even here, it could be argued that they should have seen these coming and taken steps to protect it by focusing on shoring up profitability and cash flow.

However, the essential point is that any business failure is down to the actions or non-actions and the mindset of the directors.

How? Here are some human traits:

A lack of reality: this might be down to over optimistic assumptions, over confidence or excessive hubris. This can lead to insolvency following a failure to monitor the situation and take the necessary action to make appropriate changes.

Other, equally understandable and human emotions that can lead to inaction by directors are guilt and shame about their business being in financial difficulties.

Business restructuring advisers often cite these factors as the reason why they are called in too late, since all too often the situation has escalated beyond one which they believe can be recovered.

Where is the blame for failure?

Failure of systems and processes: a good example is the tracking of invoicing and payment processes to protect a business from late-paying customers.  If a business does not have robust systems in place and key people to monitor and act on them, it can quickly find itself in financial trouble.

Failure to carry out sufficiently regular reviews of Management Accounts or to identify warning signs of something going wrong:  this is something I have covered in depth in other blogs but essentially without a regular review of such elements as cash flow, profit and loss and success in meeting targets management will potentially miss early warning signs of something amiss and therefore fail to take appropriate action.

Failure of cash and credit management including debt collection, over trading and non-payment by clients.

These are some of the factors that are attributed as the causes or reasons for an insolvency but ultimately it is down to directors as the decision makers.

Insolvency, I would argue, is therefore a consequence of poor judgement and decision making.

However, this is how we as humans learn, indeed the only people who don’t fail are those who don’t try. Failure is necessary for us to make progress. The only issue is whether we heed and learn from our past decisions and from those of others.

 

Beware of withholding payments to push contractors into insolvency as a way of saving money

the consequence of insolvencyIn June 2018 a court awarded a contractor substantial settlements after it challenged the behaviour of a large customer that withheld payments in an attempt to force it into insolvency as a way of avoiding payment.

The Technology and Construction Court (TCC) ruled in favour of the contractor, Merit Merrell Technology Limited (MMT), after it challenged the Imperial Chemical Industries Ltd (ICI) repudiation of its contract with MMT on the ‘claimed’ grounds that its welding work was of very poor quality.

The ICI withholding of payments had a knock-on effect for MMT, which was also owed substantial sums by other clients such that its bank eventually withdrew lending facilities. Following professional advice from lawyers and an insolvency practitioner, MMT survived by agreeing a Company Voluntary Arrangement (CVA) with its creditors.

It was alleged that the CVA damaged its commercial reputation and it certainly encouraged one MMT client to take advantage of the situation to substantially reduce its final account by £1.3 million.

Unfortunately, the CVA did not survive with MMT eventually entering into voluntary liquidation three years after its difficulties with ICI began.

At a trial on liability issues, the court found that ICI had its own cost pressures and had made a spurious allegation as an excuse to push the contractor into insolvency, described by the court as “extraordinary thin, verging on factually non-existent”, of poor work by MMT.

MMT then began proceedings to force ICI to pay a withheld interim payment. However, although the court ruled in MMT’s favour, the lengthy process of several court cases, including one by ICI to try to recover payments already made, eventually pushed MMT into liquidation.

In addition to the adjudicated sum of £7 million awarded by the TCC, the court also awarded a number of other sums to MMT: £1.3 million in respect of the reduced final account settlement accepted from its client; £266,472 for wasted management time; £239,369 for the professional fees incurred in relation to the CVA; £168,599  for additional banking costs including bank advisor fees and £58,994 for a VAT loan that was necessary for cash flow reasons.

Regretfully the court’s decision made in June 2018 was too late to save MMT from entering liquidation in February 2017.

The moral of the tale

While arguably ICI achieved its objective of pushing MMT into insolvency, it came at a high financial cost following the various court proceedings and rulings.

Any business considering going down this route should be aware that it may face counterclaims from its target contractor and an exceedingly costly outcome if the courts rule in the latter’s favour.

It could also carry with it some reputational damage, making it harder to attract bids from other contractors and ultimately to end up with planned works not being carried out.

 

Should SMEs consider appointing non-executive directors (NEDs)?

older woman non-executive director It is hard for SME directors to step back and look at the bigger picture when they are so immersed in day-to-day operations. Could they benefit from having experienced and objective non-executive directors (NEDs)?

Research carried out by law firm TLT, University of the West of England and the Association of Chartered Certified Accountants this summer suggested that SMEs did not understand how to recruit or engage with NEDs. The conclusion was that smaller firms with NEDs were not benefiting as much as they could.

What does a non-executive director do?

The NED is an independent director, who sits on a business’ board of directors but does not form part of the executive management team.

NEDs’ primary responsibility is to attend board meetings and crucially to turn up prepared having read the board pack and researched the key matters that require decisions. They should also monitor reports and carry out their own review so they can ask pertinent questions with view to assisting develop systems and strategy and resolving problems. This can involve offering specific and objective advice but does not require them to know the answers, more important to help find ways of finding the answers.

They should have a longer-term perspective and can act as mentors.

The more engaged ones will network, looking for new opportunities and useful contacts and building relationships inside and outside the business.

Obviously, it can be useful for a NED to have experience specific to your business but this is not necessary and can be an impediment since they may be less likely to embrace change.

In a recent description of the role of NED, the IoD (Institute of Directors) said their role was “to provide a creative contribution to the board by providing independent oversight and constructive challenge to the executive directors.”

Referring to the 1992 Cadbury Report it also said, “they should bring an independent judgement to bear on issues of strategy, performance and resources including key appointments and standards of conduct”.

The recent update on corporate governance code introduced by the FRC (Financial Reporting Council) in July specifically referred to the potential role for NEDs as an option for building a wider engagement with stakeholders, particularly the workforce. Having a designated NED for this was one of three options it suggested. The code will become effective from 1 January 2019.

Anyone considering or invited to join a business board as a NED should understand that there is no legal distinction between executive and non-executive directors.  latter have the same legal duties, responsibilities and potential liabilities as their executive counterparts.

It makes sense, therefore, for potential NEDs to carry out proper due diligence and to be properly briefed before being appointed. The ICA has an excellent set of guidelines and advice for NEDs here.

Independent oversight of the strategy and direction, executive remuneration and performance, systems and risk management, and audit of a business is something that surely would benefit their businesses.

While these apply to all businesses, SMEs in particular can benefit from having directors with board and governance experience to introduce best practice and act as a mentor to those SME directors who have had limited exposure to well-run boards.

Will branchless Challenger banks struggle to recruit customers given the concerns about banking technology?

banking technology in the Wild WestThe failure of banking technology has become a wearyingly familiar story with problems this year causing chaos for customers of TSB, Lloyds Bank, Halifax, NatWest and RBS successively and the Visa system in June.

Not only were customers, both individuals and SMEs, unable to access their money, use their debit cards or pay salaries, but in some cases, such as TSB during its system upgrade earlier this year, customers were made vulnerable to fraud.

While this has largely been a problem for the mainstream banks it has affected customer attitudes as a survey by data analysts Consumer Intelligence revealed (as reported by specialistbanking.co.uk).

Stand-out findings included that 25% of online banking customers had experienced banking systems failures in the past year and that 49% of UK adults claimed to have changed their behaviour with regards to online banking due to security concerns. Just over a quarter of respondents said they now carried more cash and 82% said they were more careful about their data, while 43% said they would be put off applying to a bank which had suffered technical issues.

According to Andy Buller, key account director at Consumer Intelligence, bank IT systems are feeling the pressure because of the expansion of digital banking and because “banks are having to work with and update old systems and while they are investing in new technology, there is often a race to be first, which can mean vital testing is not carried out.” He warns that more problems are likely.

Individuals and SMEs are constantly being pressured to use smart phone and internet banking technology as the High Street banks continue to close smaller, less cost-effective branches and even ATMs are disappearing in some locations.

But, leaving aside the preference of many customers to still be able to speak to an actual human being in a local branch, the fact is that internet and mobile phone connectivity in some rural locations is still often patchy or of insufficient strength.

Into this landscape have come the digital Challenger banks most of which do not have branches and are largely based on Fintech banking apps.

The branchless Challengers include Monzo, Starling, Atom, Tandem and Revolut. Their main selling points are that opening an account is quicker and easier, that their fees are lower, that they are able to introduce innovative features more quickly and that they can also be better at security and preventing fraudulent behaviour thanks to their more intelligent analytic capabilities.

Many are relying on the regulatory change introduced early this year introducing Open Banking, which is designed to increase competition and forces banks to share their customers’ data with third parties that can provide financial services if their customers request this.

To be fair the many breakdowns in banking technology also prompted the regulators, The BoE and the FCA (The Bank of England and the Financial Conduct Authority) to impose a deadline of October 5 this year, to detail how they would respond if their systems failed, suggesting that two days is an acceptable limit for disruption to service.

If the contingency plans put forward by banks and other financial institutions are judged to be unsuitable, they could be ordered to make their systems more resilient.

It is early days for the Challengers as they try build their customer base by offering cheaper fees but in many cases have not yet developed business models beyond grabbing market share.

However, they may struggle until customers are convinced that their money is safe and access to it is reliable.