Unfair banking practices and “damaging” financial regulators are harming small businesses and putting innovation and growth at risk, parliament’s Treasury committee has warned.
A report from the committee’s inquiry into access to finance for small and medium-sized enterprises (SMEs) said a lack of supportive policies were compounding problems for firms that had survived a “torrid” five years, which included the global pandemic and energy crisis.
“Confidence amongst SMEs in accessing finance has fallen and acceptance rates for business credit has lowered significantly,” the report said.
“Unfair banking practices … may have further limited access and suppressed demand. This difficult small business environment is disincentivising risk-taking, innovation and, potentially, growth,” it warned.
MPs said a number of practices were harming firms, including the use of personal guarantees – where borrowers often have to put up their home as collateral against a loan.
The committee’s report also highlighted a growing concern about so-called “debanking” – when customers’ accounts are closed by their bank – noting that lenders had shut 140,000 SME accounts in 2023 alone, often without adequate explanation.
It said closures often hit specific sectors deemed less desirable by banks, including those dealing in defence, pawnbroking and amusement machines.
When it came to disagreements, MPs said there was a “substandard processes” for resolving disputes between SMEs and their banks.
For example, they found that the Financial Ombudsman Service did not have the necessary resources and expertise to handle some of the more complex SME cases, while the Business Banking Resolution Service (BBRS) was deemed “ineffective” and “should close as planned”.
The BBRS was set up with commercial banks in 2021 and is funded by them. It has been criticised for lacking independence and having “poorly formed eligibility criteria”, the report said. It has only settled 58 cases since being launched, but has cost more than £40m to operate.
The committee’s chair, Conservative MP Harriett Baldwin, 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.”
The committee has put forward a number of recommendations, including that the City regulator, the Financial Conduct Authority (FCA), force banks to be more transparent about their decisions to close accounts and to share quarterly data on their closure decisions.
The MPs also suggested that the FCA should tighten rules around misuse of personal guarantees and widen the remit of the Financial Ombudsman Service so that it could appropriately address related business complaints.
The Federation of Small Businesses submitted a “super-complaint” to the FCA over the allegedly unfair use of personal guarantees by lenders late last year.
The lobby group has called on the government to extend the FCA’s responsibilities so that all lending below a certain amount is subject to regulation, and that specific rules be introduced that appropriately balance the interests of borrowers and lenders. Small business lending is not regulated in the UK, and firms do not enjoy the same protection as personal borrowers and consumers.
MPs on the committee also called on the Treasury to rapidly replace the BBRS with a new, independent system that can serve small businesses that fall outside the Financial Ombudsman’s responsibilities.
An FCA spokesperson said: “We are already considering how the lending we do regulate is affected by personal guarantees and have been clear to banks they must be fair to people, including businesses, when considering closing accounts.”
A spokesperson for UK Finance, the banking lobby group, said: “While a small proportion of business accounts are closed, the main reasons are financial crime concerns, being unable to complete customer due diligence or an account being dormant. This is also what the FCA found when they looked at the issue last year.”
A Treasury spokesperson said: “SMEs play a vital role in fuelling economic growth which is why at the budget we extended the Growth Guarantee Scheme, which provides a 70% guarantee on finance up to £2m for small businesses to help them grow.
“And we have already taken action on debanking – forcing banks to explain and delay any decision to close an account under new rules – and remain committed to legislation.”
