The UK Parliament’s Treasury Committee has issued a stark warning that unfair banking practices – such as lenders requiring personal guarantees and debanking SMEs – paired with detrimental actions by financial regulators, are putting small businesses at risk.
This caution comes from a detailed report following the committee’s inquiry into financial accessibility for small and medium-sized enterprises (SMEs).
The report highlights that insufficient policies are exacerbating the challenges that businesses have weathered across a tumultuous half-decade.
This period has not only covered the global COVID pandemic, but also an energy crisis – both of which have severely tested the resilience and operational capacity of SMEs.
What Did the Treasury Committee Investigate?
The committee’s investigations underscore the urgent need for reform in how financial services and regulatory bodies support and interact with the small business sector, to foster – rather than hinder – its growth.
Members of Parliament have identified several harmful banking practices affecting small businesses, particularly emphasising the risk posed by the requirement for personal guarantees.
Such guarantees often necessitate that borrowers, typically small business owners, pledge significant personal assets like their homes as collateral for loans.
The Treasury Committee’s report also draws attention to the concerning trend of debanking, where banks abruptly close customer accounts.
In 2023, banks terminated approximately 140,000 accounts held by small and medium-sized enterprises (SMEs), frequently without providing a sufficient rationale for these actions.
This practice of debanking disproportionately affects certain industries that financial institutions may view as less desirable or higher risk, such as those involved in defence, pawnbroking, and operating amusement machines.
These findings highlight a critical need for greater transparency and fairness in the banking sector’s dealings with small businesses, pointing to a systemic issue that could undermine the stability and growth of crucial sectors within the economy.
What Did the Treasury Committee Report?
Parliamentarians have expressed concerns over “substandard processes” in resolving disputes between small and medium-sized enterprises (SMEs) and their banks. This issue is exemplified by shortcomings in the mechanisms designated for such dispute resolutions.
The Financial Ombudsman Service, tasked with handling complaints from SMEs, has been found lacking the necessary resources and expertise to address complex cases effectively.
Moreover, the Business Banking Resolution Service (BBRS), established in 2021 as a collaborative effort with commercial banks and funded by them, has been criticised for its operational inefficacies.
The committee’s report calls the BBRS “ineffective” and supports its planned closure. Criticisms of the BBRS focus on its lack of independence and “poorly formed eligibility criteria,” which have significantly hampered its functionality.
Despite a substantial operational budget exceeding £40 million, the BBRS has managed to settle only 58 cases since its inception.
These findings underscore a critical gap in the support infrastructure for SMEs, highlighting the urgent need for reforms to ensure fair and competent handling of banking disputes within this vital sector of the economy.
What Did the Treasury Committee Recommend?
The Treasury Committee has made several key recommendations aimed at improving the transparency and fairness of banking practices affecting small businesses.
One such recommendation is for the Financial Conduct Authority (FCA) to mandate banks to clarify their account closure decisions and to regularly publish data on debanking actions every quarter.
Additionally, MPs have advised that the FCA should enforce stricter regulations regarding the use of personal guarantees by banks and expand the scope of the Financial Ombudsman Service.
This expansion would enable the service to more effectively handle business-related complaints that involve complex issues surrounding personal guarantees.
In addition to these recent recommendations, the Federation of Small Businesses took significant action by submitting a “super-complaint” to the FCA last year, criticising the potentially unfair use of personal guarantees by lenders.
Furthermore, the committee has called upon the Treasury to swiftly implement a new, independent resolution system to replace the Business Banking Resolution Service (BBRS).
This system would address the needs of small businesses that are beyond the purview of the Financial Ombudsman, ensuring a more effective and impartial dispute resolution mechanism for the sector.
This move is seen as critical for bolstering the support infrastructure for SMEs and fostering a more equitable business environment.
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