‘Unfair banking’ and ‘damaging’ financial rules harming UK’s small firms, MPs warn | Small business

Unfair banking practices and “harmful” financial regulators are hurting small businesses and putting innovation and growth at risk, Parliament’s finance committee has warned.

A report from the commission’s inquiry into access to finance for small and medium-sized enterprises (SMEs) says a lack of supportive policies is compounding problems for firms that have weathered a “difficult” five years that included the global pandemic and energy crisis.

“Confidence among SMEs in accessing finance has declined and business credit take-up levels have fallen significantly,” the report said.

“Unfair banking practices … may further restrict access and suppress demand. This difficult environment for small business discourages risk-taking, innovation and, potentially, growth,” he warns.

MPs said a number of practices hurt businesses, including the use of personal guarantees – where borrowers often have to put up their home as collateral against a loan.

The commission’s report also highlighted growing concern over so-called ‘debanking’ – when customers’ accounts are closed by their bank – noting that lenders closed 140,000 SME accounts in 2023 alone, often without adequate explanation.

He said the closures often hit specific sectors considered less desirable by banks, including those involved in defence, pawnshops and amusement machines.

As for the disagreements, MPs said there were “non-standard processes” to resolve disputes between SMEs and their banks.

For example, they found that the Financial Ombudsman Service lacked the necessary resources and expertise to deal with some of the more complex SME cases, while businesses Banking Resolution Service (BBRS) was deemed “ineffective” and “should close as planned”.

BBRS was established with commercial banks in 2021 and is funded by them. It was criticized for a lack of independence and “poorly formed eligibility criteria”, the report said. It has only 58 cases have been settled since the beginningbut cost more than £40 million to operate.

The chair of the committee, Conservative MP Harriet Baldwin, said: “There is no hiding the fact that smaller businesses have had a tough time over the last few years.

“Unfortunately, what we found in the course of the investigation is that there are some cases where banks and regulators are making an unnecessarily difficult world for small businesses more stringent.

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

The committee made a number of recommendations, including that the City regulator, the Financial Conduct Authority (FCA), force banks to be more transparent about their account closure decisions and to share quarterly data on their closure decisions.

MPs also proposed that the FCA tighten the rules on the abuse of personal guarantees and extend the powers of the Financial Ombudsman Service so that it can properly deal with related business complaints.

The Federation of Small Businesses lodged a “supercomplaint” with the FCA about the alleged unfair use of personal guarantees by lenders late last year.

The lobby group called on the government to extend the FCA’s responsibilities so that all loans below a certain amount are subject to regulation and specific rules are put in place to properly balance the interests of borrowers and lenders. Small business lending is not regulated in the UK and businesses do not enjoy the same protections as personal borrowers and consumers.

MPs on the committee also called on the Treasury to quickly replace the BBRS with a new, independent system that can serve small businesses that fall outside the Financial Ombudsman’s responsibilities.

An FCA spokesman said: “We already consider how the lending we regulate is affected by personal guarantees and have been clear to banks that they need to be fair to people, including businesses, when considering closing accounts.”

A spokesman for UK Finance, the banking lobby group, said: “While a small proportion of business accounts are closed, the main reasons are financial crime concerns, the inability to carry out due diligence on the customer or the account being inactive. This is also what the FCA found when they looked into the issue last year.

A spokesman for the Treasury said: “SMEs play a vital role in fueling economic growth, which is why in the Budget we have extended the Growth Guarantee scheme, which provides a 70% funding guarantee of up to £2m for small businesses to help them grow .

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