Finance Wales Not 'Fit for Purpose', Claims Report; Finance Wales Accused of Charging 'Exorbitant' Rates

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Byline: Sion Barry Business Editor

ADEVELOPMENT Bank for Wales, combining the current funds of Finance Wales and Welsh Government business support, should be set up, according to a review into the availability of finance to SMEs.

The second report in the Access to Finance Review, commissioned by Business Minister Edwina Hart and written by Professor Dylan Jones-Evans, concludes that the Welsh Government's banking subsidiary Finance Wales is "not fit for purpose" having been charging interest on loans to SMEs at levels much higher than required under EU state aid rules and its reference rate - which sets levels at which state-owned banks can lend without effectively undercutting private lenders.

After receiving the report Mrs Hart told AMs that she is launching a short consultation before making a detailed response to the report's findings.

Speaking in the Senedd she said she had full confidence in the board of Finance Wales and its chairman Ian Johnson, but there were complicated issues to be considered around state aid rules.

Following the publishing of the report FSB Wales called on executives at Finance Wales, whose chief executive is Sian Lloyd Jones and investment director is Peter Wright, to appear before a committee of AMs to explain what it described as its "exorbitant" interest rate regime.

As well as looking at bank funding to SMEs in Wales and other sources of finance - and concluding there is still an annual funding gap to Welsh SMEs of around PS500m - Mrs Hart asked Prof Jones-Evans to examine in detail whether Finance Wales' interest rate charges were too high following his first report published in the summer.

He has now concluded that interest rates charged Finance Wales are at variance to the Welsh Government's stated key economic development aim of looking to support job creation in the economy and that a lower rate regime would prove less of a drain on cash-flows, so allowing firms in receipt of loans to invest more in capital and staffing levels.

Prof Jones-Evans said the Welsh Government should now consider setting up a Development Bank for Wales; making more effective use of EU rules so interest rates charged by Finance Wales could be significantly reduced from the current spread of 8-12% a year - depending on the risk profile of the business seeking debt finance which is repayable over a five-year period.

The report highlights that while the cost of high street bank lending to businesses has fallen significantly, the spread between what Finance Wales could charge on debt without breaching the EU reference rate has widened markedly since the financial crisis in 2008.

The report says that Finance Wales has also failed to use the positive impact of the de minimis rule that could allow Finance Wales, as a stated-owned bank, to offset interest rates to firms by up to [euro]200,000 over three years without being deemed state aid. In theory de minimis, which applies to the whole of Wales, could provide for the provision of interest-free loans.

The report also says Finance Wales could use rules allowing a reduction on interest charged to SMEs in the convergence area of Wales.

Prof Jones-Evans says: "According to the data submitted to the review Finance Wales is offering higher rates of interest on borrowing to SMEs within Wales than it needs to under EC state aid guidelines.

"The evidence gathered also suggests that Finance Wales has not utilised the full range of financial instruments available under EC regulations.

"For example, with two-thirds of Wales qualifying for the highest level of aid [convergence funding] General Block Exemption Regulation could have been used to subsidise the interest rates on loans to hundreds of SMEs and been a significant policy for Welsh Government.

"In addition, there is no state aid impediment to Finance Wales offering loans to the vast majority of micro-businesses under de minimis regulations if it so wished. …