The Treasury Committee has published a Report on SME Finance with a recommendation to appoint a Financial Services Tribunal to help SMEs resolve disputes with lenders. The report says the Financial Services Tribunal is needed to handle complex SME disputes and expanding the Ombudsman’s remit to handle SME cases should not be rushed through.
The report describes the treatment of some SME customers as ‘scandalous’ and that commercial lending should be regulated to protect SMEs. The report says the Treasury should develop a strategy to overcome SME’s unwillingness to apply for finance.
- The only option for many small and medium-sized enterprises (SMEs) to settle disputes that cannot be resolved directly with the bank in question is going to court, which can be time-consuming and costly. As a remedy to this, the Financial Conduct Authority (FCA) published near-final rules in October 2018 to allow greater access for SMEs to the Financial Ombudsman Service (FOS), which provides an independent dispute resolution service for individuals and micro-enterprises. The Committee is doubtful of the FOS’ readiness for an increase in its remit, and warned against rushing through the FCA’s ambitious and risky proposals. Providing SMEs with access to the FOS is a sensible step, but if the Ombudsman in under-prepared and under-resourced, it will yield little benefit.
- Expanding the FOS’ remit as the FCA proposes will leave a gap in the market for larger and more complex disputes. Simon Walker’s review of the dispute resolution landscape for SMEs concluded that this gap should be filled by expanding the FOS’ remit to include a voluntary redress scheme funded by banks. Given the Committee’s concerns about the FOS’ capability, broadening its remit beyond the FCA’s proposals would be unwise and potentially damaging. The Committee believes, therefore, that a Financial Services Tribunal (FST) is required to handle more complex disputes. It would complement the expansion to the FOS’ remit, and seek to level the playing field where there exists an imbalance of power between disputing parties.
- Lending to SMEs for business purposes is outside the FCA’s regulatory perimeter, meaning commercial lending is mostly unregulated. There have been numerous high-profile cases of poor treatment of SME customers, including the scandalous treatment of SME customers at RBS’ Global Restructuring Group (GRG). The FCA is not taking enforcement action against this misconduct, which is a damning indictment of the regulatory regime and a sad reflection of its inadequacies. The existing regulatory framework is failing SMEs.
- The justification for not regulating lending to SMEs – for example, to encourage innovation and that SMEs can fend for themselves – is feeble. Many small business owners are no more financially sophisticated than everyday consumers, so to deprive them of regulatory protection is wrong. In addition, the personal and business finances of many SME owners are often closely intertwined, increasing the potential for personal catastrophe due to SME banking misconduct. The Treasury and the FCA, therefore, should introduce a regulatory regime that protects SMEs.
- Demand for external financing amongst SMEs remains subdued compared to recent years. Reasons for this include a lack of awareness of the various sources of finance available, mistrust in the banking sector, and the perception that an application for external finance will be unsuccessful. The British Business Bank and the Small Business Commissioner have important roles to play in assisting SMEs by building awareness and understanding of the financing options available to them. The Treasury should seek to identify why an unwillingness from SMEs to apply for finance is commonplace, and develop a strategy to overcome this.
- A lack of competition in SME banking has long-plagued the UK market. Challenger banks face a significant task to break the stranglehold of the large incumbents. Capital requirements in the UK, which stem from EU law, remain a specific source of dissatisfaction for the UK’s smaller banks. Whilst Brexit should in no way herald a new era of laxity in capital regulation, there is an opportunity to consider how the regime can better support competition without compromising safety and soundness. The Government should provide its assessment of how this could be achieved.
- RBS’ Alternative Remedies Package – the set of initiatives that RBS was required to undertake following the Government’s £45 billion bailout of the bank – provides an opportunity to improve competition in the banking market. Many firms are concerned by the eligibility criteria for the grants, arguing that large, well-established firms will benefit most, whereas the package would be better targeted at smaller challengers. Many banks are also concerned by the delays to the implementation of the package. These concerns are disappointing. Banking Competition Remedies should administer the package in as timely a manner as possible.
Commenting on the Report, Rt Hon. Nicky Morgan MP, Chair of the Treasury Committee, said “A regulatory black hole for commercial lending to SMEs has led to numerous cases of poor treatment of many small businesses, including the scandalous events at RBS’ GRG. The Treasury should bring commercial lending inside the regulatory perimeter, allowing the introduction of a regulatory regime that adequately protects SMEs. The FCA’s proposals to allow greater access for SMEs to the FOS are sensible. However, the FOS is under-prepared and under-resourced, so rushing through the proposals will yield little benefit.”
“For many SMEs, going to court is the only option for resolving disputes that can’t be settled directly with their bank. Yet it’s widely argued that the courts offer a slow and expensive process that is out of reach for many. For more complex cases, which the FOS lacks the expertise to handle, a Financial Services Tribunal is required. This will provide the UK’s small businesses with access to justice and reassurance that they are not vulnerable to exploitation and mistreatment.”
Responding to the Treasury Committee’s report on SME Finance, Stephen Pegge, Director of Commercial Finance, UK Finance, said “Small and medium-sized businesses play a vital role in our economy which the financial services sector is committed to supporting. The finance sector has undertaken a number of significant initiatives in recent years to improve standards and promote access to finance for SMEs.”
“Banks provided £57 billion of lending to SMEs in 2017 and continue to approve eight in ten applications for finance. Firms who are turned down for a loan can access an independently-monitored appeals process and are offered the chance to be matched up with alternative finance providers. However, we recognise that more clearly can and should be done to enhance confidence and ensure SMEs can access the full range of support and guidance they need. UK Finance and its members will review this report, alongside other relevant evidence, and continue working constructively with all key stakeholders to deliver the best possible outcome for SMEs.”