Small businesses are being put off from innovating and growing by
damaging financial regulations and inadequate support from banks,
the Treasury Committee warns in a new report out today (Wednesday
8 May).
In its report on access to banking services for smaller firms,
MPs on the Committee condemn the unfair debanking of legitimate
businesses and substandard processes for resolving disputes
between SMEs and banks.
They are also calling on the Prudential Regulation Authority not
to go ahead with plans to scrap the SME supporting factor in the
new Basel 3.1 standards because it could lead to British small
businesses falling behind their European and American
competitors.
The Committee is firmly of the belief that any small business
doing legitimate work should be able to access a bank account.
Cross-party members condemn the debanking of legitimate
businesses across various ‘undesirable' sectors, including
defence, pawnbroking and amusement machines, where MPs heard
banks have closed or denied accounts based on the nature of their
work.
During the inquiry, MPs received evidence that more
than 140,000 small businesses had been debanked in the last year
– often with little to no notice. At least 4,214 of the closures
were attributed to ‘risk appetite' without a clear and consistent
definition within the industry. Many banks do not appear to be
tracking formally whether the reputation of a firm or industry
was considered when businesses were debanked, instead using
catch-all terms to define reasons for closure.
The Committee is calling on the Financial Conduct Authority (FCA)
to force banks to be more transparent about why decisions to
debank businesses are taken. Members believe the regulator should
compel firms to send them the number of business accounts they've
closed each quarter split by reason.
HM Treasury assured the Committee that legislative changes would
be introduced to crack down on the debanking of businesses in the
form of a Statutory Instrument. The Committee looks forward to
scrutinising the Government's proposals further when they are
presented to Parliament.
The Committee makes it clear in its report that the Business
Banking Resolution Service (BBRS), which was set up by commercial
banks, has failed due to a perceived lack of independence and
poorly formed eligibility criteria. Having only settled 58 cases
while costing over £40 million to operate, the Committee agrees
it should be closed down.
HM Treasury must rapidly seek to replace the BBRS with a new,
independent system which meets the needs of those small
businesses treated unfairly by their bank but which are not
served by the FOS, MPs conclude.
The Committee warns plans to introduce the Basel 3.1 reforms
could make it harder for British SMEs to compete internationally
as no other major jurisdiction is putting such strict
requirements on lending to small business.
The Committee has also recommended that the Financial Conduct
Authority gives the Financial Ombudsman Service the powers to
address personal guarantees for smaller firms as there is a gap
in its remit which means small businesses are not receiving the
same support as consumers.
Over the course of the inquiry, it was made clear in the evidence
that the landscape has become more difficult for small businesses
in recent years. One piece of written evidence showed the success
rate of SME applications for bank loans fell from 80 per cent in
2018 to around 50 percent in 2023.
Chair of the Treasury Committee, Dame , said:
“There's no hiding from the fact smaller firms have had a torrid
time over the last few years.
“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.”
ENDS
Notes to editors:
· The Committee recently
published details of a surge
in debanking complaints received by the Financial Ombudsman
Service.
· All the evidence published
by the Committee in relation to the SME Finance inquiry can be
found here.
