Treasury Committee Report makes significant recommendations for the future of SME finance

The Treasury Committee has published its latest report into SME (Small and Medium Enterprise) Finance, highlighting a number of issues that have contributed to a business environment that is "disincentivising risk-taking, innovation and, potentially, growth" amongst SMEs. The main areas of focus for the Treasury Committee's report includes de-banking, of which the Committee said 140,000 small business had been de-banked in past year, the 'failure' of the Business Banking Resolution Service (BBRS) and the slowing down of SME's seeking 'mainstream' lending. The report also cites the 'disproportionate' use of personal guarantees in driving down access to finance for SMEs. This article analysis those main areas of focus, the Committee's proposed recommendations in addressing them, and provides commentary on how those recommendations could affect lenders.

De-banking

Whilst so-called "de-banking" has been brought to the forefront of public attention recently, the report does not set out any significant recommendations to tackle any of the perceived challenges. However, the Committee is keen to encourage regulatory bodies (i.e. the FCA) to broaden its understanding of the factors that might sit behind why lenders de-bank their customers (e.g. via the call for transparency and submission of quarterly data). The Committee is adopting a watching brief on this developing area and continues to gather data on the subject.

The BBRS

The Committee's report also highlights the 'failure' of the BBRS, and the conclusion that the service has underdelivered. The Report says that the "data on which the BBRS was founded was optimistically high…" and delivered less than £2 million in settlements at an operational cost of £40 million. The expectation of cases far outweighed those that were actually considered. The Report also highlights how the eligibility criteria and the level of control that participating banks had over the service were at the heart of complaints made to the Treasury regarding the BBRS. The Report concludes that a consultation on a replacement mechanism for the BBRS must take place by the end of 2024 but stops short of actively proposing an alternative service to meet the dispute resolution needs of SMEs ineligible for the FOS. Nevertheless, lenders should be conscious that they may be required to engage in a consultation with regard to another complaint resolutions process in the near future.

Personal guarantees

The use of personal guarantees by lenders is also addressed by the report in detail. Where lenders offer finance to SMEs unable to offer security, then a personal guarantee is an effective (often the only) way to address the risk associated with that lending. However, the Committee has described taking of personal guarantees by lenders for SME lending as 'disproportionate'. The FCA is in the process of investigating the use of personal guarantees by lenders by collecting data, reviewing samples of firms' policies and procedures, and working with the FOS to monitor levels of complaints relating to guarantees. This assessment is undertaken to determine whether the current use (and frequency of use) of personal guarantees is 'fair and proportionate'.

The Report also highlights a gap in FOS authority to deal with complaints raised by SMEs regarding the taking of personal guarantees – as, currently, the FOS has no authority to deal with these types of complaints. The Committee calls on the FCA to provide the FOS with that authority. It is unclear whether the FCA will adopt the recommendation of the Report, and to what extent new legislation is needed to achieve this. It is clear, however, that despite this debate, they remain a vital tool in giving lenders ongoing confidence to finance SMEs. The Report also comments on the slowing down of SMEs seeking 'mainstream' lending, with the indication that personal guarantees play a part. However, the continuing rise of alternative lenders, coupled with high interest rates and rising costs mean it is unsurprising that businesses (particularly SMEs) are less likely to raise finance through mainstream high street lending.

Our comment

Whilst it is not yet clear as to the extent that the Treasury Committee's recommendations will be implemented, it is important for lenders to recognise the scrutiny that SME lending is under and the areas of concern for their customers. In reviewing the outcome of the report, lenders may wish to reflect on how they operate in this space to ensure "best practice" is adopted when lending to SME customers - particularly where that lending is, currently, largely unregulated.