By Nick Lee, Head of Regulatory and Government Affairs at OakNorth
As the UK strives to solidify its economic standing in a post-Brexit world, exploring innovative strategies to unlock growth is imperative. The new Government has three pivotal opportunities that could help catalyse significant economic expansion in the UK.
1. Creating a dedicated Government Scale-up Unit to support burgeoning startups
Although scale-ups (businesses with £1m-£100m turnover) tend to represent a very small proportion of total SMEs, they have outsized impact. For example, we know from our research in the UK that while scale-up businesses represent just 1% of all SMEs, they account for 22% of SME turnover and 8% of SME employment. Imagine what could be achieved in terms of GDP growth, productivity, innovation and employment if we could increase these numbers ten-fold by helping more SMEs become scale-ups. We are leaving so much untapped growth potential and value on the table by not doing more to support these businesses.
That is why a dedicated Scale-up Unit, led by the Department for Business and Trade, should be created. The Unit’s mission should be to generate £50bn in public market cap value from UK scale-ups by 2028, by facilitating support and removing friction to enable more start-ups to become scale-ups.
The Scale-up Unit would coordinate government policies, schemes, and public funding across various sectors such as: immigration, health, treasury funding, workplace and pensions, research, and tax incentives. A cross-governmental approach ensures that promising businesses receive comprehensive support, from facilitating talent acquisition to securing research grants. Targeted interventions could amplify the impact of public money, directing it to the most effective areas, thereby accelerating the growth of startups into market leaders.
2. Fostering an environment that attracts growth investors to diverse sectoral hubs across the nation
To attract growth investors, the UK must develop an industrial strategy to identify and prioritise key sectors such as green/climate science, fintech, life sciences, data science/AI, therapeutic care, hospitality/tourism, and creative/performing arts. A geographical hub should be established for each sector, leveraging regional strengths while ensuring a nationwide distribution of these hubs.
These hubs will become magnets for global talent, facilitated by streamlined visa processes. Investment in local universities and adult education, including up-skilling and re-skilling, should be scaled up, tripling research spending to create a dense talent pool in each hub. Financial interventions, including EIS/SEIS schemes and R&D credits, should be tailored to support firms within these promising clusters, encouraging equity investment through the British Business Bank. Moreover, planning reforms must be enacted to boost business infrastructure and housing, creating a conducive environment for these hubs to flourish.
3. Leveraging Labour’s planned Regulatory Innovation Office to ensure banking regulations are proportionate and risk-based, enabling UK banks to lend more to growing UK SMEs in a safe and controlled way
In the UK, SMEs – the drivers of economic growth – continue to face challenges in borrowing to grow. New digital banks such as OakNorth are helping solve this problem, successfully lending over £11bn to UK SMEs since launch in September 2015. UK Finance estimates that 59% of UK SME lending now comes from banks outside the ‘big six’: Lloyds, Barclays, HSBC, NatWest, Santander and Nationwide.
However, the regulators – pursuing ever-tighter capital and regulatory requirements post-financial crisis – are penalising these ‘mid-tier’ banks by making them hold more capital per pound of risk than their larger competitors. This is inadvertently creating meaningful risk to the UK and the international economy, as credit provision in the unregulated ‘shadow banking’ sector rises. S&P estimated that non-bank financial institutions held $63 trillion in financial assets in 2022, representing 78% of global GDP – up from $28 trillion in 2009.
The establishment of Labour’s Regulatory Innovation Office presents a golden opportunity to refine the UK’s financial regulatory framework and enhance the role of banks — particularly the emerging ‘mid-tier’ bank sector — in lending to SMEs.
For instance, by adjusting MREL requirements for mid-tier banks to increase their lending capacity, we can free up capital to lend to the UK SME sector. In terms of the recently announced Basel 3.1 rules, Parliament must hold the Bank of England to its promise that it will not add additional capital requirements to those banks and mutuals lending to the UK SME sector.
The UK remains a regulatory outlier on a number of these measures, requiring far tighter requirements than those faced by banks in the EU or the US, and our growth since the financial crisis has lagged far behind these regions (source: the Institute for Fiscal Studies). All this could be achieved without any meaningful increase in systemic risk. In a recent report, EY estimated that changes to MREL for alone could generate an additional £64bn in lending from mid-tier banks to the real economy over a five-year period.
Unlocking UK growth will require a multifaceted approach, integrating regulatory reform, targeted support for scale-ups and strategic investment in sectoral hubs. By establishing a dedicated Scale-up Unit, fostering sector-specific hubs and optimising banking regulations, the UK can create a fertile ground for innovation, attract global talent and secure its position as a global economic powerhouse. These strategic interventions will not only stimulate growth but also lay the foundation for sustained economic prosperity across the whole of the UK and help ensure we are able to pay for the world-class public services we all desire.
