The Treasury committee has recently issued a report outlining the obstacles encountered by small and medium-sized enterprises (SMEs) in the United Kingdom. The report has brought to light the significant impact of unfair banking practices and harmful financial regulations on these businesses, ultimately impeding their ability to innovate and expand.
Over the past five years, SMEs have endured a difficult period, navigating through challenges such as the global pandemic and energy crisis. This has resulted in a decrease in confidence among SMEs in obtaining finance, as well as a sharp decline in the acceptance rates for business credit.
A key concern highlighted in the report is the use of personal guarantees, which require borrowers to use their homes as collateral against a loan. This practice has been identified as a barrier for SMEs seeking financial support.
Furthermore, there is growing apprehension about “debanking,” as banks have closed 140,000 SME accounts in 2023 without sufficient explanation. The report also underscores the insufficient mechanisms for resolving disputes between SMEs and their banks, noting that the Financial Ombudsman Service and the Business Banking Resolution Service are ill-equipped to handle complex SME cases.
Harriett Baldwin, a Conservative MP and chair of the committee, has emphasized the necessity for banks and regulators to address these challenges and establish a more supportive environment for small businesses. The committee has proposed several recommendations, including urging the Financial Conduct Authority (FCA) to enforce greater transparency from banks regarding their decisions to close accounts and to tighten regulations concerning personal guarantees.
The Federation of Small Businesses has expressed its support for the report’s findings by submitting a “super-complaint” to the FCA regarding the unfair use of personal guarantees by lenders. The organization is advocating for the government to expand the FCA’s responsibilities to regulate all lending below a certain threshold and implement specific rules to balance the interests of borrowers and lenders.
In response, the FCA has indicated that it is already examining the impact of personal guarantees on regulated lending and has encouraged banks to be equitable in their decision-making processes. UK Finance, the banking lobby group, has also stressed that the majority of account closures are due to concerns related to financial crime or issues with customer due diligence.
The Treasury has also addressed the report, highlighting the government’s commitment to supporting SMEs and economic growth. This includes the extension of the Growth Guarantee Scheme in the budget, which provides a 70% guarantee on finance up to £2 million for small businesses to facilitate their growth.
In conclusion, the report from the Treasury committee illuminates the challenges faced by SMEs in the UK as a result of unfair banking practices and detrimental financial regulations. The recommendations proposed by the committee, along with the backing from industry organizations, underscore the urgent need for reforms to support the growth and innovation of small businesses in the UK.