The Treasury Committee has warned about the negative impacts of unfair banking practices and inadequate financial regulation on small and medium-sized enterprises (SMEs). The report, stemming from an inquiry into SME access to finance, highlights the struggles these businesses have faced over the past five years, exacerbated by the global pandemic and energy crisis.
The committee criticised the widespread use of personal guarantees, which often require borrowers to secure loans against personal assets like their homes. It also raised concerns about “debanking”, noting that in 2023 alone, banks closed around 140,000 SME accounts, frequently without sufficient explanation. These closures disproportionately affected sectors such as defence, pawnbroking, and amusement machines.
The report condemned the current mechanisms for resolving disputes between SMEs and banks as inadequate. The Financial Ombudsman Service lacks the resources and expertise for complex SME cases, while the Business Banking Resolution Service (BBRS) has been ineffective and is recommended for closure. Despite costing over £40 million, the BBRS has resolved only 58 cases.
The committee has made several recommendations to enhance transparency and fairness in banking for SMEs. These include urging the Financial Conduct Authority (FCA) to enforce greater transparency in account closures and to amend regulations regarding the use of personal guarantees. Furthermore, it suggests expanding the scope of the Financial Ombudsman Service and calls on the Treasury to develop a new, independent system to support SMEs outside the Ombudsman’s current remit.
Additionally, following a “super-complaint” by the Federation of Small Businesses regarding the misuse of personal guarantees, there are calls for the Government to extend the FCA’s oversight to include all SME lending and to establish rules that balance the needs of borrowers and lenders. Currently, small business lending remains unregulated in the UK, leaving firms without the protections afforded to individual borrowers.
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