Source · Select Committees · Treasury Committee
Eighth Report - SME Finance
Treasury Committee
HC 27
Published 8 May 2024
Recommendations
5
Accepted
Para 33
Continue dialogue with FOS and review resourcing to serve the SME community
Recommendation
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.
Government Response Summary
The government accepts the recommendation, stating it will continue engagement with the FCA and FOS, addressing relevant resourcing issues, and aligning FOS rules. It also outlines broader measures announced by the Chancellor to modernise the FOS framework and improve its operational effectiveness.
HM Treasury
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10
Accepted
Continue active review of FOS resourcing to ensure SME community capacity
Recommendation
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. (Paragraph 62) Business debanking
Government Response Summary
The government commits to continuing engagement with the FCA and FOS to address resourcing issues, referencing a package of measures announced at Mansion House, including a Call for Input, an updated Memorandum of Understanding, and a strengthened Wider Implication Framework to modernise the FOS and enhance its operational effectiveness.
HM Treasury
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13
Acknowledged
Para 79
Require banks to submit quarterly data on business account closures and publish aggregated forms.
Recommendation
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 …
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Government Response Summary
The government states a general commitment to ensuring SMEs have appropriate access to redress and proportionate regulation, but provides no specific actions regarding data collection or publication as recommended.
HM Treasury
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16
Accepted
Para 88
Consult with BBB to raise awareness and implement annual criteria for assessing SME engagement.
Recommendation
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 …
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Government Response Summary
The government agrees with the recommendation and commits to working with the British Business Bank (BBB) to improve SME access to finance, providing over £1 billion in funding for the BBB. It notes that the BBB has already published an SME Impact Report addressing the assessment of its reach.
HM Treasury
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21
Deferred
Para 112
Provide FOS with powers to address SME personal guarantees and investigate other identified remit gaps.
Recommendation
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 …
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Government Response Summary
The government notes these recommendations for widening FOS powers regarding personal guarantees for SMEs and investigating other gaps are primarily intended for the independent Financial Conduct Authority (FCA) to consider.
HM Treasury
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Conclusions (17)
1
Conclusion
Accepted
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 …
Government Response Summary
The government welcomes the report on SME finance, recognising their significant contribution and challenges, and commits to a range of actions including launching consultations by Spring 2025, extending the SME Digital Adoption Taskforce, announcing a £4m pilot package for tech adoption, and bringing forward a Small Business Strategy Command Paper next year.
2
Conclusion
Acknowledged
Para 25
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 …
Government Response Summary
The government acknowledged the Committee’s concerns regarding the removal of the SME supporting factor under Basel 3.1 but made no specific commitments to action.
3
Conclusion
Acknowledged
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. (Paragraph 26) Dispute resolution
Government Response Summary
The government acknowledges the Committee’s concerns regarding the removal of the SME supporting factor under Basel 3.1 but provides no commitment to action.
4
Conclusion
Acknowledged
Para 32
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.
Government Response Summary
The government supports the FOS's role, noting its ongoing programme to improve service following a 2021 review, and commits to continuing regular engagement with the FOS to address operational issues and ensure aligned rules.
6
Conclusion
Deferred
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 …
Government Response Summary
The government notes the committee's conclusions and the BBRS's decision to close, stating that further decisions about the service are a matter for the independent BBRS in discussion with relevant parties.
7
Conclusion
Not Addressed
Para 59
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 …
Government Response Summary
The government notes the committee's conclusion regarding the Business Banking Resolution Service's (BBRS) perceived lack of independence, and states that the BBRS will close to new registrations on 13 December 2024, with its future being a matter for the BBRS itself.
8
Conclusion
Deferred
Para 60
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.
Government Response Summary
The government did not address the recommendation to close the BBRS, instead highlighting the role and importance of the Financial Ombudsman Service (FOS) for dispute resolution.
9
Conclusion
Acknowledged
Para 61
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 …
Government Response Summary
The government generally supports the Financial Ombudsman Service (FOS) and describes its important role in resolving disputes, but does not commit to finding a new mechanism for ineligible SMEs or consulting on a replacement.
11
Conclusion
Accepted
Para 77
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 …
Government Response Summary
The government agrees that account closure requirements need improving and intends to bring forward legislation to ensure customers receive detailed explanations and longer notice periods when accounts are closed, except in financial crime situations.
12
Conclusion
Acknowledged
Para 78
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 …
Government Response Summary
The government stated its commitment to ensuring SMEs have appropriate access to redress and proportionate regulation but did not commit to the specific actions or timelines recommended for the FCA or HM Treasury.
14
Conclusion
Acknowledged
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,
Government Response Summary
The government expresses a general commitment to ensuring SMEs have appropriate access to redress and proportionate regulation, but does not specify action to introduce the proposed debanking regulations before the parliamentary summer recess.
15
Conclusion
Acknowledged
Para 87
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.
Government Response Summary
The government agrees on the British Business Bank's important role in supporting SMEs and expresses a shared desire for more SMEs to utilise its Finance Hub, committing to work with the BBB to improve access to finance through targeted interventions.
17
Conclusion
Deferred
Para 95
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 …
Government Response Summary
The government responded with a general statement about the importance of banking services and financial inclusion, rather than directly acknowledging the Committee's welcome for the new Growth Guarantee Scheme.
18
Conclusion
Acknowledged
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 …
Government Response Summary
The government states a general commitment to high standards of protection and financial inclusion in the banking sector, but does not address consulting on making the Growth Guarantee Scheme permanent.
19
Conclusion
Acknowledged
Para 110
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 …
Government Response Summary
The government provides a general statement of commitment to high standards of protection and financial inclusion, without specifically addressing the FCA's investigation into personal guarantees or its remit.
20
Conclusion
Deferred
Para 111
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 …
Government Response Summary
The government notes that the committee's conclusion regarding the FOS's inconsistent support for SMEs on personal guarantees is primarily for the independent Financial Conduct Authority (FCA) to consider.
22
Conclusion
Deferred
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. (Paragraph 113) SME Finance 39
Government Response Summary
The government completely changed the subject, welcoming the FCA's work on bank account rejections and closures and generally discussing access to banking services, instead of addressing the recommendation about personal guarantees for SMEs.