Treasury committee make recommendations to remove unfairness and eliminate debanking

A new report from a parliament committee underlines how much “unfair” banking practices and “damaging” financial regulations are harming small businesses and holding back growth. 

The latest report into SME Finance focused on the available access to finance for small and medium sized enterprises (SMEs) and found that a lack of supportive policies were compounding existing problems for firms. 

The report said: “Confidence amongst SMEs in accessing finance has fallen and acceptance rates for business credit has lowered significantly. 

“Unfair banking practices may have further limited access and suppressed demand. This difficult small business environment is disincentivizing risk-taking, innovation and potentially growth.”

The panel of MPs said that a number of practices were harming firms including the increased use of personal guarantees – where borrowers often have to put up their home or other important assets as collateral against a loan. 

The report also highlighted growing concerns about “debanking” – where customers’ accounts are closed by their bank with no adequate explanation – noting that lenders had shut 140,000 SME accounts in 2023 alone.

It found that closures were more prominent in sectors deemed less desirable by banks such as defence, pawnbroking and amusement machines.  

Complaints about complaints

The MPs also found that the processes for resolving disputes between SMEs and their banks was “substandard”.

They found that the Financial Ombudsman Service (FOS) didn’t have the necessary resources or expertise to handle some of the more complex cases involving SMES. They also found that the Business Banking Resolution Service (BBRS) was deemed “ineffective” and “should close as planned”.   

The BBRS was set up with commercial banks in 2021 and is funded by them. 

It has been criticised for lacking independence and having “poorly formed eligibility criteria”, the report said. It found that the body had settled only 58 cases since launch and cost more than £40 million to operate. 

The Conservative Committee Chair, Dame Harriett Baldwin MP, said: “There’s no hiding from the fact smaller firms have had a torrid time over the last few years. 

“Unfortunately, what we’ve found over the course of the inquiry is that there are some instances where banks and regulators are making a tough world for small businesses needlessly tougher.

“Banks and regulators can’t wave a magic wand and solve all of the problems facing small businesses in this country, but they can certainly do more than they currently are. I hope banks, the regulators and the Treasury take careful note of what we’ve uncovered.”

The committee stated that access to finance for SMEs must not be jeopardised further and their recommendations identified areas where the burden could be eased. These are:-

  • The Government must find a way to better support the 55,000 SMEs currently served by the BBRS. A consultation for a new mechanism for firms that have a higher turnover than the FOS threshold should take place by the end of 2024.
  • The Financial Conduct Authority (FCA) must provide clearer instructions on the use of “risk appetite” and “reputational risk” criteria. SMEs conducting legal operations must have access to banking services and banks should not be able to use risk appetite assessments to close accounts. HM Treasury’s new rules to provide greater transparency should be implemented by summer 2024.
  • The FCA must also use their announced review and existing powers to tighten rules around any misuse of personal guarantees and provide the FOS with the appropriate remit to address related business complaints.
  • The Government must conduct annual assessments of the effectiveness of the British Business Bank (BBB). It plays an important and positive role providing both debt and equity solutions to SMEs seeking financing but awareness of it and its schemes is too low. 
  • The Prudential Regulation Authority’s introduction of the new Basel 3.1 standards risks tightening conditions for SMEs even further. Any more stringent capital requirements for SMEs should be abandoned. The removal of the SME support factor could pull millions of pounds of funding out of the market. It also puts the UK at odds with international peers in the USA and European Union. 

The Federation of Small Businesses (FSB) submitted a “super complaint” to the FCA over the unfair use of personal guarantees by lenders late last year. 

The lobby group for SMEs called on the government to extend the FCA’s responsibilities so that all lending below a certain amount is subject to regulation and that specific rules be introduced that appropriately balance the interests of borrowers and lenders. 

Small business lending is not regulated in the UK and companies don’t enjoy the same protections that personal borrowers and consumers do. 

A Treasury spokesperson said: “SMEs play a vital role in fuelling economic growth which is why the Growth Guarantee Scheme was extended in the Spring Budget which provides a 70% guarantee on finance up to £2 million for small businesses to help them grow. 

“We have already taken action on debanking – forcing banks to explain and delay any decision to close an account under new rules – and remain committed to legislation.”

We know how tough it can be running a small business and there are no concrete signs that things will be getting any easier in the short term. 

There are no guarantees that any of the Treasury committees’ quite sensible and proportional recommendations will be accepted before any General Election so the problems around SMEs accessing finance on a level playing field could well remain for the foreseeable future. 

This is just one more reason why our offer of a free initial consultation for any small business owner or director is so popular. 

We’ll explore all available options with them based on the unique circumstances facing their company and their short and long term goals and ambitions. 

But we can’t do anything to help until they take the first step and get in touch with us first.