24 May 2024
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SME's Access to Finance - Recent Developments

To The Point
(4 min read)

The regulation of SME lending continues to be a hot topic with two recent developments. First, the report from the House of Commons Treasury Committee following its long-running inquiry into SME's access to finance; and second as well as the FCA's response to the Federation of Small Businesses' (FSB) 'super-complaint' regarding the current lending practices of banks that demand personal guarantees for business loans. The debate on the extension of the regulatory perimeter for SME lending is live as the review of the Consumer Credit Act 1974 retained provisions gathers pace and the potential for the expansion of the regulatory perimeter for SME lending as part of that review remains a possibility.

On 8 May 2024 the House of Commons Treasury Committee published a report on SME Finance following its inquiry into access to finance for SMEs. The Committee received 119 written evidence submissions and held four oral evidence sessions. The report states that confidence amongst SMEs in accessing finance has fallen and acceptance rates for business credit has lowered significantly. Some of the reasons mentioned in the report include de-banking, ineffective recourse for bank disputes and unfair banking practices such as asking for personal guarantees for business loans. The report states that this difficult small business environment is disincentivising risk-taking, innovation and, potentially, growth. It identifies areas where the Committee believes the burden for SMEs can be eased and makes several recommendations for the Government and the regulators.

As stated above, one of the areas of concern highlighted in the Committee's report is the alleged misuse of personal guarantees in business lending. The FCA is currently looking into this issue pursuant to a 'super-complaint' by the FSB relating to the current lending practices of banks that demand personal guarantees for business loans, often forcing entrepreneurs of SMEs to put their homes or other assets on the line when taking out finance and causing harm to those businesses and individuals. The FSB states that this type of lending, which is currently outside the FCA's regulatory perimeter, makes many business owners more likely to abandon their business or growth plans or push them into being over-cautious in their decision-making. It is therefore asking the FCA to investigate and assess the extent of this practice and to consider asking the Treasury to expand its perimeter to cover the regulation of personal guarantees on business loans. This is the first ever super-complaint to the FCA under section 234C of the Financial Services and Markets Act 2000 since the regime was applied in 2013.

So what?

These are significant developments and ones to watch for lenders undertaking business lending.

The Government has two months to respond to the Committee's report, which makes several recommendations to the Government and the regulators to take steps to enhance access to finance for SME's and help these businesses grow. These recommendations are likely to drive regulatory changes, including expanding the FCA's current regulatory permiter for business lending. These include:

  • Closure of the Business Banking Resolution Service (BBRS) and introduction of new avenues for dealing with business banking disputes. The Committee is recommending that the Government must find a way to support the 55,000 SMEs currently served by the BBRS and consult on a new mechanism by year end 2024.
  • New laws and regulations in relation to access to banking services for SMEs. The Committee recommends that the Treasury introduce the proposed rule changes on de-banking, which will offer greater transparency to customers facing account closures, before the parliamentary summer recess in 2024. It is also asking the FCA to publish clear guidance by Q3 2024 on the use of ‘risk appetite’ and ‘reputational risk’ criteria by banks in closing accounts, particularly how such criteria can and cannot be used within the existing regulations.

The Committee is also asking the FCA to use their announced review and existing powers to tighten rules around any misuse of personal guarantees. As mentioned above, the FCA is already looking into this issue and has already confirmed that it will investigate in relation to lending under the super-complaint which falls within its perimeter. Under the FCA's planned actions - during the period April-June 2024, lenders are being asked to provide data to the FCA on the number of personal guarantees in place as a proportion of total SME lending. The FCA will share this data on an anonymised, consolidated basis with FSB. Lenders are also being asked to provide information to the FCA on their policies and procedures for requiring personal guarantees for regulated loans.

Based on the above, the FCA states that it may consider further supervisory work and engage with the Treasury to consider extending its regulatory perimeter, as necessary. Although this is to be seen, but if the FCA finds harm, it is likely that the Government will legislate to extend the regulatory perimeter and the FCA will make new Handbook rules to protect the interests of small business borrowers and guarantors. It has already mentioned that it may consult on guidance for lenders on the use of personal guarantees.

All these changes would have a significant impact on how lenders currently approach personal guarantees for business lending. Firms need to assess the possible implications on their business lending activity, their risk appetite and the relevant policies and procedures, and alter their approach to seeking personal guarantees to ensure compliance with any future regulation in this space. However, currently the future framework is not clear. Any additional requirements on firms in relation to lending to SMEs is likely to increase the cost of lending to that market segment which ultimately will be passed onto borrowers as well as potentially restricting the number of firms who participate in the market.

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