This is a House of Commons Committee report, with recommendations to government. The Government has two months to respond.
This is the report summary, read the full report.
The last five years have been a torrid time to be running a business. A global pandemic and an energy price shock have made trading conditions difficult for everyone and every business. After rising steadily from 4.5 million small and medium-sized enterprises in 2010 to 6 million SMEs in 2020, these two shocks have reduced the number to 5.6 million. While the Government has launched a range of initiatives to help businesses both during the pandemic and since, the Treasury Committee launched this inquiry to consider the wider issue of Access to Finance and what more can be done to help these businesses grow.
Confidence amongst small and medium-sized enterprises (SMEs) in accessing finance has fallen and acceptance rates for business credit has lowered significantly. This is accompanied by increasing de-banking and ineffective recourse for bank disputes. Over 140,000 SMEs had their accounts closed in 2023. Unfair banking practices (such as the alleged requirement of collateral for disproportionately small loans) may have further limited access and suppressed demand. This difficult small business environment is disincentivising risk-taking, innovation and, potentially, growth.
SMEs make up over 99 per cent of the UK’s business population and provide nearly half of employment in our economy. They include everything from early-stage startups to local businesses and rapidly growing innovators. Access to finance for SMEs must not be jeopardised further. Our report identifies areas where the burden can be eased.
- The Prudential Regulation Authority’s introduction of the new Basel 3.1 standards risks tightening conditions for SMEs even further. Any more stringent capital requirements for SMEs should be abandoned. The removal of the SME support factor could pull millions of pounds of funding out of the market. It also puts the UK at odds with international peers in the USA and European Union.
- The Government must find a way to support the 55,000 SMEs currently served by the Business Banking Resolution Service (BBRS). BBRS has been ineffective and perceived as lacking in independence, and should close as planned. However, SMEs above the Financial Ombudsman Service (FOS) turnover thresholds still need a route to complain about treatment from their bank. A consultation on a new mechanism should take place by year end 2024.
- The Financial Conduct Authority (FCA) must provide clearer instructions on the use of ‘risk appetite’ and ‘reputational risk’ criteria. SMEs conducting legal operations must have access to banking services and banks should not be able to use risk appetite assessments to close accounts. HM Treasury’s recently announced rule changes, to provide greater transparency when business accounts are closed, should be implemented by summer 2024.
- The Government must conduct annual assessments of the effectiveness of the British Business Bank (BBB). The organisation plays an important and positive role in providing both debt and equity solutions to SMEs seeking finance, including the rebranded ‘Growth Guarantee scheme’, but awareness of BBB and its schemes is too low.
- The FCA must also use their announced review and existing powers to tighten rules around any misuse of personal guarantees and provide the FOS with the appropriate remit to address related business complaints.