Dame Harriett Baldwin (pictured), chair of the Treasury Committee, said: “Unfortunately, what we have 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.”

Basel 3.1

The committee was strongly critical of the current plans to introduce the Basel 3.1 reforms, which will see the removal of the SME supporting factor. MPs argued this threatens to undermine the UK SME finance market by increasing capital requirements on lenders to SMEs.

This regulatory widening risks driving up the cost of finance for SMEs and may restrict the supply of lending as banks shift their loans away from the market.

The report noted: “At a time when costs are tight and acceptance rates for finance low, anything that unnecessarily damages the availability of finance to SMEs is unacceptable.”

The committee also highlighted that other jurisdictions, notably the US and EU, are not pursuing as strict an interpretation of Basel 3.1 rules making it harder for British SMEs to compete internationally.

It recommends the PRA ensures that the final implementation of the Basel 3.1 standards leaves capital requirements on SME lending no more stringent than they are under the current system.

Personal guarantees

The committee also considered the issue of banks asking SMEs for personal guarantees and the Federation of Small Businesses (FSB) super-complaint to FOS.

MPs pointed out that FSB’s calls for a widening of the FCA’s remit to deal with this issue would require commercial lending to enter the regulatory perimeter, and said the evidence they received was mixed on whether this would ultimately lead to positive outcomes.

In evidence to their inquiry, Funding Circle argued that this regulatory expansion would negatively impact the accessibility of finance for SMEs, saying that bringing some, or all, of commercial lending within the perimeter would increase costs which would likely be passed on to SME customers.

In addition, the move would make it harder for new lenders to enter the market, reducing competition; stifle innovation from FinTech firms and prevent new products from being developed; and lower the commercial incentive for traditional lenders to serve less profitable customers, who are often the smallest businesses.

The National Enterprise Network similarly stressed that that this would “make it costlier to lend and will drive providers out of the market […] What may seem a well-intended action will lead to reduced options and increased market failure.”

In its evidence, FSB noted that extending regulation to commercial lending should not be done lightly, pointing out that: “The significant increases in FCA fees, and the costs and complexities of becoming (and staying) a regulated lender […] means that simply increasing the scope of the regulation to cover SME lending will likely lead to a short term reduction in the number of lenders in the market.”

The Treasury Committee said that it supported the FCA’s investigation into the fair and proportionate use of personal guarantees that fall within its existing remit, but did not feel that widening its remit (which is set by Parliament) would be appropriate at this time. MPs argued that the unintended consequences of introducing new regulatory frameworks to deal with specific issues in SME lending market could actually result in a reduction in the accessibility of finance for SMEs.

However, MPs want the FCA to address what they called “an unfair inconsistency” in how the FOS supports consumer versus business cases, since the Ombudsman cannot currently assist business owners or directors over misapplied guarantees, but can do so for consumers. The committee recommended that the FCA should provide the FOS with the necessary powers to address personal guarantees for SMEs to close this gap.

Edward Peck, AFC CEO, said: “Our community has been raising concerns about regulatory creep and regulators’ lack of understanding of how the SME finance market operates, and it is clear that MPs share our worries that regulators are hindering innovation and growth rather than promoting good practice.”

Martin McTague, FSB’s National Chair, is a key note speaker at AFC’s UK summer conference on 6th June at etc venues, County Hall, London, when he will be discussing the FSB perspective on SME lending, and what lenders can do to make the SME journey better.

The conference also features a dedicated stream examining current regulatory challenges. For more details, visit the event website at https://afcconferenceuk.com/assetfinanceconnect2024/en/page/home