UK financial regulators warn banks to serve small businesses better

By Puja Sharma

The Bank of England warned last week that SMEs had lower cash buffers and higher levels of debt than before the pandemic. At least 70% of their outstanding debt was issued outside of government loan schemes.

The U.K. Financial Conduct Authority (FCA) warned banks that they should provide better service to small and medium-sized enterprises (SMEs) that are struggling with debt, or they will face more severe regulatory actions.

According to the letter by FCA, it has provided feedback to the individual firms it reviewed. However, it wants to see the whole sector take action. It has been written to the chairs of all retail banks with small business customers. The letter also has directed the boards of these banks to ensure that they are meeting the FCA’s expectations and to inform the regulator if they are unable to do so.

Sheldon Mills, the FCA’s Executive Director for Consumers and Competition, said: “People across the country will be affected by the rising cost of living – and this includes small businesses. We were disappointed to find repeated instances of these customers not being treated fairly by banks when they’re struggling. We expect the whole sector to act quickly to improve this. We will take action if problems continue.”

The Bank of England warned last week that SMEs had lower cash buffers and higher levels of debt than before the pandemic. At least 70% of their outstanding debt was issued outside of government loan schemes, the BoE said, with a large proportion exposed to further bank rate increases within a year. Mills warned in the letter that the regulator would use its “supervisory and enforcement powers” to ensure lenders acted. This could include forcing them to compensate customers or imposing fines on the worst offenders.

FCA issued this warning as part of its plan to address the cost-of-living crisis. The regulator warned lenders in June to ensure that retail customers are treated fairly. As a result, the regulator raised concerns about the banks’ practices of identifying customers at risk based on their data.

Despite the FCA’s soft approach, it might soon change its tone by recommending specific actions or imposing new regulatory obligations. It is expected that the new rules concerning the New Customer Duty will be finalized by the end of the year, according to Mills’ last letter. Before the Duty takes effect, the regulator warned banks that it expected them to improve consumer outcomes.

On the news that the FCA has warned banks over the treatment of small businesses Ross Gandy, UK Managing Director at Estateguru, said: “The FCA is right to warn the banks, whose one-size-fits-all approach to lending criteria simply can’t give SMEs the help they need as the cost of living crisis continues to pile the pressure on. But nothing is going to change overnight, and SMEs need a solution now to help deal with rising costs, lower demand, and ongoing supply chain issues.

“Thankfully, there are other options available to SMEs looking to secure funding. Alternate lenders take a far more holistic approach to the underwriting process and deal with applications on a case-by-case basis, taking into account the individual needs of the applicant in the hopes of finding a solution that suits them best and providing a much-needed lifeline,” he added.

Key highlights

• Lenders do not treat small businesses fairly when they try to agree on a sustainable payment plan – for example, arranging payment plans which are unaffordable based on the information provided by the customer.
• Staff not having the right training to provide effective support to customers and make fair decisions about cases.
• Lenders do not have clear policies to help staff identify and support vulnerable customers – meaning these customers may be missing out on the support they need.
• Not having quality assurance and testing for their processes to ensure that they deliver fair results for consumers – this can mean problems going undetected.