Challenges faced by SMEs highlighted
The committee voiced strong criticism regarding the prevalent requirement for personal guarantees, where borrowers must secure loans against personal assets, such as their homes. Additionally, the report addressed concerns around “debanking” practices, revealing that in 2023, approximately 140,000 SME accounts were closed, often with inadequate explanation. These closures were notably prevalent in sectors like defence, pawnbroking, and amusement machines.
The existing dispute resolution mechanisms between SMEs and banks were condemned as insufficient. The Financial Ombudsman Service is currently under-resourced and lacks the expertise needed for complex SME-related cases, whereas the Business Banking Resolution Service (BBRS) has proven to be ineffective and is recommended for discontinuation. Despite an expenditure exceeding £40 million, the BBRS has resolved only 58 cases.
Recommendations for fairer SME banking
The committee has made several recommendations to improve transparency and fairness in banking for SMEs. These include compelling the Financial Conduct Authority (FCA) to enforce stricter transparency concerning account closures and revising personal guarantees regulations. It also advocates for expanding the Financial Ombudsman Service’s scope and calls on the Treasury to create a new, independent system to support SMEs beyond the Ombudsman’s current scope.
Following a “super-complaint” from the Federation of Small Businesses about the misuse of personal guarantees, there is a push for the government to extend the FCA’s oversight to encompass all SME lending and to formulate rules that balance the needs of borrowers and lenders. Small business lending remains unregulated in the UK, leaving firms without the protections available to individual borrowers.
Reactions
Conservative MP, Harriett Baldwin, said:
“There’s no hiding from the fact smaller firms have had a torrid time over the last few years.
“Unfortunately, over the course of the inquiry, we have found 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 do. I hope banks, regulators, and the Treasury take careful note of what we’ve uncovered.”
An FCA spokesperson said:
“We are already considering how the lending we regulate is affected by personal guarantees and have made it clear to banks that they must be fair to people, including businesses when considering closing accounts.”
A spokesperson for UK Finance, the banking lobby group, said:
“While a small proportion of business accounts are closed, the main reasons are financial crime concerns, inability to complete customer due diligence or an account being dormant. This is also what the FCA found when they looked at the issue last year.”
A Treasury spokesperson said: “SMEs play a vital role in fuelling economic growth, which is why we extended the Growth Guarantee Scheme at the budget. This scheme provides a 70% guarantee on finance up to £2m 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.”
