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February 2011 minutes

FiSAB Meeting - 23 February 2011

Hosted by RBS

Present:

Board

Rt Hon Alex Salmond, First Minister of Scotland (Chair)

John Swinney, Cabinet Secretary for Finance & Sustainable Growth

Jim Mather, Minister for Enterprise, Energy and Tourism

Mark Tennant - JP Morgan and SFE Chair (Industry Deputy Chair)

Wendy Dunsmore - Unite the Union

Lena Wilson - Scottish Enterprise

Gerard Kelly - Scottish Enterprise

Ian Ferguson - Aviva

John Mason - Scottish Government

Aileen McKechnie - Scottish Government

Magnus Swanson - Maclay, Murray Spens LLP

Gary Roberts - HM Treasury (Observer)

John Rendall - HSBC

Benny Higgins - Tesco Bank

Stephen Boyle, RBS

Presentations

Jim Watson - Finance Sector Jobs Taskforce

David Thorburn - Financial Services Skills Gateway

Gerard Kelly - Scottish Investment Bank

Scottish Government

Suzanne Henderson (Secretary)

Liz Shea

Simon Forrest

Katherine Hart

Apologies:

Martin Gilbert - Aberdeen Asset Management

Archie Kane - Lloyds Banking Group

Tim Keaney - Bank of New York Mellon

Rob McGregor - Unite

Andrew McLaughlin - RBS

Otto Thoresen - AEGON UK

Margaret Wallace - Morgan Stanley

Anton Muscatelli - Universities Scotland

1 Welcome and introductions

1.1 The First Minister welcomed everyone to the meeting, including Gerard Kelly of Scottish Enterprise who would be presenting the agenda item on the Scottish Investment Bank.

1.2 MT addressed the issue of member attendance, indicating that he had discussed this matter with the First Minister. The potential to allow alternates had been considered and the view was that if a date for the FiSAB meeting is set and remains unchanged then alternates should not be permitted. MT reminded members that they were present in an individual capacity. If, however, a date is set and subsequently changed then members should be allowed to nominate an alternate. Members indicated agreement to this proposal.

Action Point: Secretariat to ensure that FiSAB members are aware that they may nominate an alternate only if a FiSAB meeting date is changed.

2 Chairman's Remarks

2.1 The First Minister raised the Access to Finance survey, Basel III and Project Merlin as items of note since the last meeting in November. The First Minister noted an apparent disconnect between Basel III and Project Merlin and had difficulty seeing how they related to one other. MT commented that the stringent capital requirements as they related to SME lending did not seem sensible. The key issue is the exposure to industries and significant businesses rather than SMEs. DT commented that the need to hold more capital for SME rather than corporate lending meant that banks were incentivised to lend to corporations.

2.2 The First Minister noted that the countercyclical buffer, agreed on 10 January, would allow regulators to raise the capital requirement up to 9.5% in boom times; that the Northern Rock tier 1 capital ratio was 75.7%; and that in fact every major lender has a higher ratio than is called for in a boom time. The First Minister suggested this indicated a disconnect. DT reported that every lender has capital add-ons. JR commented that the banks would not have agreed to fund the lending growth commitments in Project Merlin if they could not meet them. He also noted that there was more to Project Merlin than simply capital issues. It also required certain behavioural changes such as business mentoring and changes to the appeals process. DT noted, however, that net lending is flat and that lenders are finding it difficult to increase lending. DT noted that 40% of lenders' books were in areas such as property and leisure where their exposure limits were largely used up and thus any slack in terms of increased lending had to be taken up in the other 60% of the portfolio. The First Minister suggested an apparent disconnect between capital ratios and lending growth. He also noted a discrepancy between the messages from lenders and the cases that MSPs were hearing about from businesses in their constituencies. LW commented that there is an issue around getting companies into a state where they are investor ready and that it was often a matter of presentation. She suggested that more could be done together with the banks to help address this. She advised that only 5% of Scottish companies are currently exporting and that this must be increased.

2.3 The First Minister then invited JM to outline the key findings emerging from the forthcoming Access to Finance 2010 survey. JM outlined that new lending appears to be constrained and while the situation was improving for some sectors, exporters were experiencing particular difficulties. Overall new lending to Scottish SMEs is lower than in 2009 and the demand for lending has fallen as a result of costs and deleveraging. Rejection rates are high at 24% indicating that there is an issue with the viability of business propositions and readiness for finance. JR commented that a rejection rate of 1 in 4 applications sounded about right, noting that the price issue was one of competition and that borrowers have a choice of lenders.

2.4 The First Minister then reported a set of good economic statistics noting that Scotland's growth rate is better than the UK's in 2010 and local government figures are also positive. There is urgency to ensuring that this impetus is transferred to the private sector given that these figures are unlikely to be sustained in 2011. The First Minister advised of the planned publication of the Scottish Government's Strategy for Growth on 3 March, which focuses on growth companies, growth sectors and new international growth markets in Scotland. He cited the example of the current success in China for Scottish produce such as salmon. The ability of companies to grow their market share through exporting depends significantly on companies having access to finance.

2.5 The Cabinet Secretary reported that we are in a position of a much strengthened labour market and that our suite of interventions has been focused around support for 3 key activities: employment creation; exporting; and capital investment. However, everything that can be done in terms of accelerating wider public sector capital investment has now been done and significant reductions in public spending now have to be managed. Central and local government are now operating in an aligned way and are able to respond positively to market opportunities and to intervene where it is required and appropriate. It is important that banks are able to operate in a like manner. The Cabinet Secretary cited the example of the closure of a major life sciences facility and the opportunity that could present for the incubation of a cluster of smaller life sciences companies with global potential. The ability to realise that will depend a great deal on the quality of available SME finance. The Cabinet Secretary suggested that a more focused discussion between the banks, SE and SDI may be required on specific opportunities for growth, where collective action would be a positive lever. LW reported that Scottish Enterprise already engages bilaterally in that way but agreed that there was scope to host a wider session with the banks, which considered existing and potential sectoral opportunities and challenges and scope for aligned approaches. JR noted that different sectors will have different needs and opportunities. MT added that there was scope to do more to connect sectoral growth opportunities with the global reach of the banks. IF asked that insurers be involved in any sessions to ensure that the scope for protection from liabilities would be covered. LW agreed to explore how such workshops could be taken forward on a sectoral basis.

Action point: Lena Wilson to develop proposals for workshop sessions for individual sectors involving banks, insurers, local and central government and appropriate sectoral and business representatives.

3 Matters Arising

Attendance constraints

3.1 Covered under item 1.

Micro Finance

3.2 Following agreement at the 10 November FiSAB meeting, a meeting was held on 14 January attended by key stakeholders to discuss the scale of any market failure in the provision of micro finance for business start-ups in Scotland and how that might be addressed. Magnus Swanson reported back on the discussion at the meeting, noting that attendees had been enthusiastic about this agenda and that they had welcomed FiSAB's interest. The discussion had acknowledged that this was a complex area and that there was no clear understanding of the landscape and therefore what might be required to improve performance. It was agreed that it would be useful to map activity and that Glasgow Caledonian University or the Hunter Centre for Entrepreneurship would take this forward. In terms of micro finance, however, the issue is not so much one of funding but of inefficiency in terms of provision and complexity in the landscape. LW noted that the Business Gateway is a key point of contact for potential start-ups. The Business Gateway is also able to signpost those who are not yet ready for the types of support it can offer. The Cabinet Secretary noted the complexity and lack of cohesion in this area and acknowledged the need to bring the raft of existing initiatives together and to recognise the role of the PSYBT.

Action point: The Scottish Government to consider with relevant stakeholders how to bring about greater cohesion in micro finance landscape. Secretariat to ensure that the PSYBT is involved in any future discussions.

ICT infrastructure

3.3 LW reported that Scottish Enterprise has been working on a fuller version of the ICT infrastructure paper which had been brought to FiSAB at its 10 November meeting. Further research has been commissioned which will include an examination of cost structures and will look ahead to ensure a future proofing of the infrastructure. This will be completed by the end of May and will be brought back to a future FiSAB meeting.

3.4 FiSAB members then agreed the 10 November meeting note.

4 FiSAB annual report

4.1 Aileen McKechnie reported that the sixth annual report of the Strategy for the financial services industry had been produced and was proposed for publication on 17 March. She noted that the purpose of the report was to record achievements and key successes across the past year but it also recognised some continuing challenges. As with last year's report, case studies are used to highlight particular achievements under each pillar of the Strategy. AMK acknowledged the input of FiSIG communications group in producing the annual report, which would be launched by way of a press release on 16 or 17 March. She invited FiSAB members to approve the content and the proposed publication arrangements.

4.2 The First Minister welcomed the annual report while noting that the document possibly undersold the work of the Finance Sector Jobs Taskforce under the People pillar. Members then discussed the publication arrangements and the potential for a higher key launch event. GR suggested that FiSAB should take advantage of the opportunity to make more of the positive contribution that the financial services sectors make to society and the economy. The First Minister noted that a higher profile event would require a strong story and that the production of an executive summary might assist with this. He suggested that FiSAB members should be involved in an event, possibly hosted at Bute House, to which specialist financial and business journalists could be invited. The First Minister and MT agreed to discuss this further. IF indicated that members could do more to disseminate the annual report within their organisations.

Action point: First Minister and MT to discuss arrangements for a possible higher key launch event for the annual report

Action point: FiSAB members to consider how annual report content can be best disseminated within their organisations

Action point: Secretariat to arrange for the Taskforce section to be strengthened.

5 Finance Sector Jobs Taskforce

5.1 Jim Watson, Chair of the Finance Sector Jobs Taskforce, provided an update on recent activity and reported that no major announcements had been made since the last FiSAB meeting. JW reported that relationships among Taskforce members were excellent and that there had been much more on-the-ground activity in terms of recruitment fairs, etc. A promotional event for actuarial services is planned for 28 June, jointly hosted by the Institute & Faculty of Actuaries and Talent Scotland to be held in London involving a number of key employers. In terms of employment, JW said that most redundancies were still voluntary; that there had been significant redeployment; and that there had been noticeable gains (in datacentre projects for example). He commented on the helpful links to the Skills Gateway and the need to consider the disbandment of the Taskforce at some point.

5.2 The First Minister asked members about the current employment issues in their organisations. DT acknowledged that there may be a further wave of job losses in the banking sector. This would primarily be about reducing cost base over the next 3 years. The Cabinet Secretary asked about scale of the return on equity problem over the next 3 years and to what extent this could be addressed through redeployment. DT responded that the nature of the restructuring process and the differing timescales involved at various stages should allow scope for redeployment to be considered. He clarified that it was unclear at this stage where cost savings would need to be made and that the impact on Scotland would not be known until there was greater detail on this. Members heard that it will be critical to create the conditions that will ensure that the employment and operational decisions of both existing organisations and new entrants go Scotland's way. Scotland is well placed to benefit from key decisions on where staff and opportunities are located. Members discussed the importance of understanding where key people and their teams are located in terms of being able to influence decision makers and ensuring that the Scottish proposition is clearly articulated as well as ensuring the careers of those staff can continue to develop in Scotland. The retention of expertise here is critical. MT raised the issue of a shortage of experienced fund accountants and actuaries in Scotland and the need to involve ICAS in consideration of this issue.

5.3 WD raised issues of image and perception in the banking sector and the difficulties that lower level employees are experiencing in dealing with the very negative public perceptions of the sector. This is a major issue in terms of motivation, recruitment and retention and banks need to do more to ensure that all staff feel valued. WD added that interest had been expressed in the potential for the Taskforce model to be used in an EU context.

Action point: Taskforce to continue to consider skills shortages e.g. in fund accounting, and the potential to involve the Skills Gateway and other bodies, such as ICAS, in addressing this.

Action point: Scottish Enterprise/SDI to note need for continuous presentation of Scotland's competitive advantage in financial services, particularly to new entrants.

6 Financial Services Skills Gateway

6.1 David Thorburn reported good progress on the following key areas:

The Gateway Web Offering - SDS is allocating a considerable resource to progress this project, recognising that this activity will also help to shape their interventions with other key sectors. Technical, content and marketing activities are all underway and the plan is to deliver the prototype in March and the fully functioning website, giving full information on employers and the skills base, by the summer. This will be a powerful tool for potential inward investors.

Collaboration with education - a meeting was convened in December with Mike Russell, the Cabinet Secretary for Education and Lifelong Learning, and the Scottish Government's Director General for Education which focussed on improving engagement between financial services employers and education providers. Pilot activity will also be progressed, based on the model developed in Perth by Aviva. The Gateway is also working with the Financial Education Partnership to connect into their contact with schools and with Learning Teaching Scotland to take advantage of the opportunities presented by the Curriculum for Excellence.

Quantifying demand for specialist and technical roles - The Gateway is designing a simple questionnaire that will go to all Employer Council members to assess future demand for particular skill sets and specialisms and is working with schools to identify appropriate early action to address these. Work is ongoing to produce a robust skills demand statement that can be shared with FE/HE institutions and other relevant bodies. The model being progressed is that adopted for the energy sector. DT noted the very helpful contribution of Anton Muscatelli in this work.

Employability - The Gateway is currently working to identify actions for improving the employability of school leavers and graduates through targeted engagement activity with supply side organisations from different sectors and CBI Scotland.

Single sector- wide entry-level qualification - The Gateway is discussing the development of an industry wide entry level qualification that is built around work experience. This had yet to be agreed by the Employers Council.

6.2 DT concluded the update by expressing appreciation for the support provided by Scottish Government and Skills Development Scotland officials.

6.3 The Cabinet Secretary noted that great care needed to be taken with forecasting skills requirements. He noted the importance of quality employment data to ensure that if there is a need to change provision then the Government is able to pursue with SFC and others. DT responded an accurate understanding of potential skills shortages would only become apparent when the survey was concluded and that any subsequent action would be based on this data.

6.4 IF noted that it was important to reach children before decisions on FE and HE choices are made. Members heard that head teachers are key and the success of these initiatives is dependent on their willingness to support this work. It can be challenging for head teachers, dealing with competing priorities and who perhaps don't see themselves as enabler in career choices. It is important to ensure head teachers are alert to the importance of their relationships with industry. DT added that the Gateway has proposals to help address this, including the development of a communications plan; a programme for wider dissemination purposes, including seminars and conferences; and the Gateway web offering. The Cabinet Secretary noted that the Curriculum for Excellence was a massive change in Scottish education and that it had been substantially supported by the majority of the profession.

Action point: David Thorburn to provide a further update on engaging head teachers and schools and on the Gateway at the next meeting.

7 Current Issues

Scottish Investment Bank

7.1 Gerard Kelly gave a presentation which provided an overview of the Scottish Investment Bank (SIB). The prime objective of the SIB is to support the development of Scotland's private sector SME funding market by ensuring that both early stage and established companies with growth and export potential have adequate access to growth and capital. The SIB has been established as a division of Scottish Enterprise and operates Scotland wide. The capital base comes from Scottish Enterprise, Highlands and Islands Enterprise, Scottish Government and European Regional Development Funds (ERDF). GK clarified that the SIB is not a bank in the normal sense and is not a deposit taking institution. The SIB's activities are aimed at:

  • Providing a single delivery point for all SE/SG commercial financial instruments for high growth and export potential SMEs in Scotland.
  • Being a source of advice and support to SMEs on where and how to obtain commercial growth capital.
  • Acting as a partner for the private sector to help target high growth and export potential SMEs achieve their growth potential.
  • Pursuing a business model for SIB that will reduce the future public sector financing burden.

7.2 GK described the existing equity interventions within the SIB: the Scottish Seed Fund, Scottish Co-investment Fund and Scottish Venture Fund. All of the investments made under these Funds are commercial, partnered with the private sector. Scottish Enterprise has 42 co-investment partners and over 60 venture partners. GK reported that the Funds are continuing to perform well in a challenging environment. He moved on to describe the new Scottish Loan Fund, which is aimed at a different market offering mezzanine-type loans of between £250,000 and £5m to established growth and exporting companies. The SLF will be managed by independent fund managers, Maven Capital Partners. Maven will have final decision on loan applications and will negotiate individual loans on a fully commercial basis. Most loans will likely have repayment terms of between three and seven years.

7.3 In terms of next steps, GK outlined the role of the SIB Advisory Group, which would:

  • Assess the changing nature Scotland's SME growth capital market and how SIB should intervene.
  • Benchmark other regional/national models that deal with gaps/failures in growth capital market.
  • Investigate new sources of public and private capital that might be exploited by SIB.
  • Develop a SIB business model that will reduce the future public sector financing burden and identify ways to mitigate the limitations of public sector accounting policy.

7.4 GK brought the discussion to a close by inviting questions from members. The Minister for Enterprise, Energy & Tourism asked how the business angels viewed the Scottish Loan Fund. GK stated that since this did not impact on the existing equity funds, they were general very comfortable with it. MT noted that this was a difficult space in which to operate successfully and that the two key issues related to: monitoring and mentoring; and managing risk. GK advised that SE adopted a portfolio management approach to risk which worked well and had resulted in a low failure rate - around 9% since 2003. While he acknowledged this approach was fairly resource intensive, he reported that it was effective.

The First Minister thanked GK for an informative presentation.

8 AOB

8.1 GR commented that there was a need for the industry to better illustrate what it exports and to gather data on the value of the Scottish and UK financial services industry in other national economies. He suggested that this might be something to consider for inclusion in the annual report.

Action point: Secretariat/SFE to consider how financial services exports can be better understood and articulated.

8.2 MT pointed out that this was the last FiSAB meeting before the Scottish elections and, on behalf of members, expressed appreciation for the quality of engagement with Scottish Government ministers through FiSAB.

8.3 The First Minister brought the meeting to a close by thanking everyone for their contribution. A draft meeting note will issue shortly.

FiSAB Secretariat

February 2010