Select committee: Treasury Committee
Eighth Report - SME Finance
HC 27
Published 8 May 2024
At a glance5 recommendations and 17 conclusions · Government response published 12 December 2024 (deadline 8 July 2024)
The government's response
Summary written by Accountability Index from the government's response. It is not the government's own words.
The Government welcomes the report and sets out a mixed position: it agrees on bank account closures, the British Business Bank and the Growth Guarantee Scheme, but considers a full consultation on a new dispute mechanism "not warranted at this stage".
- On Basel 3.1, the Government notes that the PRA is removing the SME supporting factor but "will make structural adjustments to another part of the capital framework to maintain the current capital requirements for SME lending". It will continue to monitor US implementation.
- On dispute resolution, the Government considers a full consultation is not warranted at this stage and says it is "doubtful" there is sufficient volume to justify a new mechanism outside the FOS. It notes the BBRS closure decision is a matter for the BBRS and will continue to monitor SME disputes.
- On de-banking, the Government agrees current closure requirements could be improved. The Treasury "intends to bring forward legislation" requiring a detailed explanation and longer notice, unless exceptions such as financial crime apply. It says the FCA recommendations are primarily for the FCA.
- The Government agrees the Growth Guarantee Scheme has an important role. It has been extended to the end of March 2026, and any decision on making it permanent "will be taken at Spending Review".
What the committee recommended 22
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Sources
- Eighth Report - SME Finance ↗The committee's report, HC 27, parliament.uk
- First Special Report - SME Finance: Government Response ↗The government's response, 12 December 2024, parliament.uk
Recommendations and conclusions 22
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1
SMEs face narrow access to finance, rising costs, and apathy about seeking funds Conclusion (the committee's words)Small and medium-sized enterprises make a large contribution to the UK economy, accounting for over half of total business employment and turnover. SMEs are struggling with narrow access to finance in the face of rising cost pressures and higher interest rates and are generally pessimistic about their ability to raise funds. Furthermore, apathy about seeking finance is a concerning trend amongst SMEs, and this further reduces access to and awareness of potential sources of business investment. All these pressures will be felt most acutely by the smallest businesses in the SME population, who may have the least resources to withstand difficult economic conditions.
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2
Removal of Basel 3.1 SME supporting factor threatens UK SME finance market Conclusion (the committee's words)The removal of the SME supporting factor under Basel 3.1 threatens to undermine the UK’s SME finance market by increasing capital requirements on lenders to SMEs. This will drive up the cost of finance for SMEs and may restrict the supply of lending as banks shift their loans away from the market. 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. Other jurisdictions like the United States and European Union are also not pursuing as strict an interpretation of Basel with regards to SME lending so removal of the SME support factor risks putting the UK out of step with international peers and competitors, with negative consequences for the competitiveness of the UK market.
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3
Ensure Basel 3.1 implementation does not increase SME lending capital requirements or harm competitiveness Conclusion (the committee's words)The PRA must ensure 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 and that international competitiveness with the EU and the US is not harmed.
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4
Financial Ombudsman Service capacity for complex SME banking disputes remains a concern Conclusion (the committee's words)We support the Financial Ombudsman Service in its role as the primary mechanism for SME banking disputes. We note concerns that the FOS is primarily equipped to deal with less complex cases but note the efforts undertaken by the organisation to improve specialist resource.
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5
Continue dialogue with FOS and review resourcing to serve the SME community Recommendation (the committee's words)HM Treasury and the FCA should continue their dialogue with the FOS and keep resourcing under active review, to ensure that it has the prerequisite capacity and capability to serve the majority of the SME community.
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6
Business Banking Resolution Service eligibility criteria and limited scope restrict effectiveness Conclusion (the committee's words)The BBRS has seen a far smaller number of cases than some expected. This could be due to low demand, but is also likely to be due to the nature of the eligibility criteria attached to it, as shown by the rejection rate of cases. In the best-case scenario, the 55,000 businesses outside of the FOS’ remit would never have been fully served by the scheme, because only the seven participating banks were in scope.
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7
Business Banking Resolution Service lacks perceived independence from the financial industry Conclusion (the committee's words)There is no clear evidence that the seven participating banks control the BBRS on an operational level. However, the structure and remit of the BBRS were determined with their consent. Dispute resolution must be independent, and perhaps as importantly, be seen to be independent of the financial services industry. Despite the assurances we have been given to the contrary, this does not appear to have been the case with the BBRS.
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8
Close the Business Banking Resolution Service as it is not fit for purpose Conclusion (the committee's words)The BBRS is not fit for purpose in providing alternative dispute resolution to the 55,000 SMEs who fall outside of the FOS’ thresholds and this service should close as originally planned.
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9
Find replacement dispute resolution for FOS-ineligible SMEs and consult by year end 2024 Conclusion (the committee's words)HM Treasury must find a way to continue to meet the dispute resolution needs of those SMEs ineligible for FOS access (including considering whether the FCA was correct in assuming that expanding the FOS’ thresholds would be a disproportionate cost). A consultation on a replacement mechanism must take place by year end 2024.
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10
Continue active review of FOS resourcing to ensure SME community capacity Recommendation (the committee's words)HM Treasury and the FCA should also continue to the keep resourcing of the FOS under active review to ensure that it has the prerequisite capacity and capability to serve the majority of the SME community.
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11
SME bank account closures for 'risk appetite' reasons lack transparency and consistency Conclusion (the committee's words)Any SME with a legal business should be able to access a bank account. Banks may need to close business accounts because of regulatory requirements and concerns around financial crime, but thousands of accounts are being closed for vaguely defined reasons relating to “risk appetite” or “reputational risk”. What qualifies for this type of account closure varies from bank to bank with little regulatory guidance. SMEs deserve to know why their account has been closed, and the lack of transparency, alongside inconsistency in how criteria are being applied, is unacceptable.
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12
Publish clear instructions by Q3 2024 on permissible use of 'risk appetite' criteria Conclusion (the committee's words)The FCA should continue their work into better understanding how financial institutions are using criteria like “reputational risk” or “risk appetite” and report their findings by the end of Q2 2024. It is essential that the FCA publish clear instructions by Q3 2024 to the market about how such criteria can and cannot be used within the existing regulations. These instructions should be designed to ensure consistency between institutions and prevent the above criteria from being applied more broadly than the law permits. HM Treasury should keep the findings and subsequent action taken by the FCA under review, and it should be prepared to widen the FCA’s remit as needed should the action taken not be robust enough under the current regulations.
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13
Require banks to submit quarterly data on business account closures and publish aggregated forms. Recommendation (the committee's words)The FCA should also require banks to submit quarterly data on business account closures to assist their wider review. The FCA should publish an aggregated form of this data on a periodic basis to improve transparency over business debanking and allow SMEs to make informed decisions on their choice of finance provider. The FOS should also continue to publish statistics on complaints from businesses around account closures. We would not want Environmental, Social and Governance SME Finance 37 measures requested by investors to be interpreted as meaning that businesses engaged in perfectly legal defence or energy activities were unable to open a bank account.
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14
Introduce new regulations on business debanking transparency before the parliamentary summer recess. Conclusion (the committee's words)We welcome the Treasury’s proposed rules changes on debanking, which will provide a greater deal of transparency to customers who suffer from an account closure. HM Treasury should introduce these regulations before the parliamentary summer recess,
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15
British Business Bank praised for SME support, but greater engagement required. Conclusion (the committee's words)We commend the British Business Bank for its role in providing support to SMEs. We would like to see more smaller businesses visiting the Finance Hub and making use of its resources, as well as wider BBB programmes.
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16
Consult with BBB to raise awareness and implement annual criteria for assessing SME engagement. Recommendation (the committee's words)Government, including HM Treasury and the Department for Business and Trade, should consult with the BBB on an ongoing basis to ensure that everything possible is being done to raise awareness and increase engagement from the SME community. This should include assessing whether the BBB has sufficient resources to publicise its services effectively. Government should subsequently implement criteria by which they can assess the effectiveness of the BBB in reaching SMEs, which they should publish annually.
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17
Recovery Loan Scheme successful, with welcome extension and rebranding to Growth Guarantee Scheme. Conclusion (the committee's words)The Recovery Loan Scheme appears to have been successful in supporting SMEs with access to finance throughout the pandemic and beyond. We welcome HM Treasury’s decision to extend and rebrand it into a “Growth Guarantee Scheme”, which can provide support to many more businesses seeking to access finance in the coming years.
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18
Consult on making the Growth Guarantee Scheme permanent to provide foundational SME finance support. Conclusion (the committee's words)HM Treasury and the BBB should consult on the merits of making the Growth Guarantee Scheme permanent, in order to provide a foundational support programme, which can be scaled up appropriately in a crisis. This would build long term security in the accessibility of finance for the SME population and provide a greater level of certainty.
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19
Disproportionate personal guarantees may reduce SME finance access; support FCA investigation within current remit. Conclusion (the committee's words)Disproportionate use of personal guarantees may be a factor in driving down access to finance, either owing to lack of collateral or simple risk aversion from businesses who do not wish to take them out. We support the FCA’s investigation into the fair and proportionate use of personal guarantees that fall within its existing remit. The FCA’s remit is set by Parliament, and we do not feel that widening it would be appropriate at this time. This is because 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. We may revisit this in the future and will monitor the FCA’s progress on the matter of personal guarantees.
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20
FOS remit for business lending personal guarantees reveals an unfair, inconsistent support gap. Conclusion (the committee's words)We agree with the FOS that the current approach to personal guarantees on business lending represents a gap in its remit that fails to provide the kind of support to 38 SME Finance SMEs that the service exists for. The fact that the FOS cannot assist business owners or directors over misapplied guarantees, but can do so for consumers, represents an unfair inconsistency in how the FOS supports consumer versus business cases.
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21
Provide FOS with powers to address SME personal guarantees and investigate other identified remit gaps. Recommendation (the committee's words)The FCA should provide the FOS with the necessary powers to address personal guarantees for SMEs, so that their service is consistent with consumers. The FCA should also investigate widening the FOS’s remit to cover the other gaps they identified and keep the Committee informed of their conclusions.
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22
Unfair use of personal guarantees constrains growth and investment for SMEs. Conclusion (the committee's words)Unfair use of personal guarantees has the potential to constrain growth and investment for SMEs, particularly the smallest businesses. We welcome HM Treasury’s review on this matter, and look forward to seeing what it will do to ease the burden on the smallest businesses.