We are halfway through Committee Stage of the Financial Services and Markets Bill which is a good moment to reflect on the Government’s responses to our questions, concerns, and suggestions to improve the Bill, so far.
Today, I’m considering the Government’s responses to the issues that have been raised around improving SME access to finance and other much needed support.
I have written here before about one of my proposals for improving access to SME finance, which is improving regional flows of finance through promoting regional mutual banks.
Another important question, raised by me and several colleagues, is that of protection for SMEs for loans of over £25K. At present, SMEs find themselves in a precarious position through no fault of their own and simply as a consequence of the current FCA rulebook.
I put forward an amendment which aims to improve rights for SMEs and address the power imbalance that can occur between SMEs and financial institutions. When introducing my amendment, I said:
“The government talk, rightly, about the need for growth of the UK economy. That growth will largely come from SMEs. Will the Minister agree that they deserve our support, in a very simple acceptance, of either of these amendments or indeed a government amendment at report stage. It would enable commercial lending for loans over £25K to be brought within the perimeter and give SMEs, not only the protection, but alongside that the support that they should have from the regulator, through that from the government to enable that growth to come through, which we all need for UK economy, UK society and for all of us.”
The full text of my amendment, which aims to bring clarity and greater consistency to this area, is:
“SME rights of action for breaches of FCA handbook
(1) The Secretary of State must by regulations make provision to allow small and medium sized enterprises rights of action for breaches of the FCA handbook.
(2) Regulations under subsection (1) are subject to the affirmative procedure.
(3) The Secretary of State must lay draft regulations before each House of Parliament for the purposes of subsection (1) within the period of three months beginning with the day on which this Act is passed.”
As things currently stand, these rights of action are only allowed to individuals. SMEs, partnerships, and corporates are all excluded. The effective (and unfortunate) outcome of these exclusions is that SME commercial lending is not regulated above £25,000.
If an SME is mistreated by a bank, for example, its ability to go to court relies purely on the letter of the contract or agreement it signed with that bank. Sadly, we do know that there have been significant instances of banks’ activity in this area being – shall we say – sub-optimal.
In such situations, it is more than difficult for SMEs to challenge the banks in any significant way. First, because it is almost impossible to take a bank to court due to the costs involved, and secondly, because when they get to court, they only have the letter of the agreement to assist them.
My amendment would address this imbalance. It would provide greater clarity and consistency across the rules of the FCA. Crucially, it would provide support and appropriate protection to our SMEs: so often described as either the backbone or the beating heart of our economy.
Lord Thomas, an expert in this field, also spoke in favour of the proposition. During the debate he clearly explained why he supported a change to the rules:
“I will make one brief observation and declare my interest as chairman of the Financial Markets Law Committee. It seems to me that the real problem, which both amendments rightly seek to address, is to give SMEs an effective remedy.
“The courts system—for various reasons—and the costs that lawyers charge make it almost impossible for SMEs to take on the banks. Therefore, there seems a good deal of force in the arguments that have been put forward. I would be grateful if the Minister were able to tell us what the attitude of the regulators, particularly the FCA, would be to extending the position in this way.
“It is very important for the Committee to know what they think of this amendment. Really, the object of it is to cure a deficiency in the way in which our legal system functions.”
Sadly, when responding for the Government, Minister Penn declared herself unpersuaded by our arguments:
“The Government are committed to regulating business lending only where there is a clear case for doing so.
“Bringing SME lending into regulation would risk increasing costs for banks and alternative finance providers, which would in turn be passed on to businesses in the form of higher fees and interest rates. This could negatively impact the price and availability of credit for small businesses.”
On a somewhat more positive note, she did go on to say:
“However, the Government see a case for regulation where that asymmetry which we have talked about is at its greatest. At the moment, loans of £25,000 or less to the smallest businesses, are already regulated as consumer credit agreements under the Financial Services and Markets Act 2000. This captures over 60% of all UK businesses and aims to protect them where there is the potential for detriment in their dealings with banks and alternative finance providers.
Even for medium and larger firms outside the perimeter, multiple protections are already in place which, in some instances, act as a de facto extension to the regulatory perimeter, without the associated costs that formal regulation would bring. Over 99% of UK businesses can access independent dispute resolution through either the Financial Ombudsman Service or the Business Banking Resolution Service.
“I note the comments from the noble and learned Lord, Lord Thomas of Cwmgiedd. Alternative dispute resolution services provide a form of access to businesses that can be less costly to them. On his specific question about the views of regulators on the regulatory perimeter, I will write to both the noble and learned Lord and the Committee.”
The Minister also pointed to the voluntary scheme entered into by several large lenders which does have some effect. The problem with voluntary is that it is neither mandatory nor statutory and thus never certain.
The Minister did offer one last glimmer of hope by saying the Government “are open to considered, evidenced arguments on specific regulatory questions related to SME lending” and reminded us of a current consultation on the reform of the Consumer Credit Act. This consultation is open until next month (closes 17 March 2023) and certainly something for us to consider and contribute to. So, some progress as we move to the next stage of the Bill. As ever, I welcome your thoughts and input.
Read more about my SME proposals on my blog.