City regulator should force lenders to be more transparent on SME ‘debanking’, MPs urge

An influential group of MPs has urged the City watchdog to force banks to be more transparent on why they “debank” businesses amid criticism that regulators and lenders are hamstringing growth and innovation among small firms.

In a report on its inquiry into the barriers small and medium-sized enterprises (SMEs) face to accessing finance, the Treasury Committee called on the Financial Conduct Authority (FCA) to compel lenders to send them the number of business accounts they close each quarter, split by reason.

It cited evidence from eight major banks showing they closed 142,000 UK small business accounts last year. Banking trade body UK Finance said closures affect a small proportion of business accounts and are mainly due to a lack of information sharing, dormant accounts and financial crime concerns.

However, MPs argued that many banks do not seem to be formally tracking whether the reputation of a firm or sector was considered when closing an account, instead using “catch-all terms” to explain their reasoning.

They noted that 4,214 closures were attributed to “risk appetite”, despite this term not having a clear and consistent definition within the industry.

The committee heard that legitimate businesses in “undesirable” sectors, including defence, pawnbroking and amusement machines, were being unfairly “debanked” or denied accounts because of the nature of their work.

“We welcome the committee’s report and will carefully consider its recommendations,” an FCA spokesperson said, adding that it has “been clear to banks they must be fair to people, including businesses, when considering closing accounts”.

Following a surge in complaints and a high-profile row between Natwest and former Ukip leader Nigel Farage last summer, the government proposed a draft law that would force banks to give customers more advanced notice and an explanation before closing their accounts. A Treasury spokesperson said it remained “committed to legislation”.

Life ‘needlessly tougher’ for SMEs

Harriett Baldwin, a Conservative MP and the committee’s chair, commented: “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.”

Among its other recommendations, the committee called on the Bank of England’s Prudential Regulation Authority to scrap plans to remove a “supporting factor” for SMEs in new Basel 3.1 rules that would force banks to hold more capital against loans to the sector. UK Finance has also opposed removing the factor.

MPs said scrapping it could result in UK firms falling behind competitors in Europe and the US as no other major jurisdiction has proposed similar requirements on small business lending.

They also called on the Treasury to “rapidly” replace the independent British Business Resolution Service (BBRS), designed to resolve complaints between SMEs and lenders. MPs argued the current system had “failed due to a perceived lack of independence and poorly formed eligibility criteria”.

The committee noted that the BBRS had settled just 58 cases since its establishment in 2021 while costing more than £40m to operate.

UK Finance said the number of larger SMEs registering for the service had been “much lower than estimated, despite regular, proactive marketing campaigns by the BBRS”.

MPs also recommended the FCA give the FOS powers to address a “gap” in its remit on personal guarantees whereby small businesses do not receieve the same support as consumers.

The Federation of Small Businesses filed a “super-complaint” to the regulator in December, arguing that banks were “excessively” demanding personal guarantees for business loans. The FCA said it was considering how the limited commercial lending that it does regulate is affected by personal guarantees.

UK Finance argued that in certain types of business lending, the practice “reduces risk for lenders and therefore increases the availability of finance that might not be available without a personal guarantee”.

The committee’s report comes as lending to SMEs has languished after Covid-19, with MPs citing evidence showing the success rate of SME applications for bank loans fell from 80 per cent in 2018 to around 50 per cent in 2023.

The banking sector has pinned the decline on demand uncertainty, higher interest rates and the impact of lending taken out during the pandemic. UK Finance said there is a “competitive” market with “a wide range of different types of financing available”.

The Treasury cited the extenstion of the government’s Growth Guarantee Scheme in March’s Spring Budget, providing a 70 per cent guarantee to participating lenders on finance up to £2m for small businesses.