Committees

Small businesses are facing ‘needlessly tougher’ circumstances due to actions of banks and regulators, MPs find

8 May 2024

Small businesses are being put off from innovating and growing by damaging financial regulations and inadequate support from banks, the Treasury Committee warns in a new report.

In its report on access to banking services for smaller firms, MPs on the Committee condemn the unfair debanking of legitimate businesses and substandard processes for resolving disputes between SMEs and banks. 

They are also calling on the Prudential Regulation Authority not to go ahead with plans to scrap the SME supporting factor in the new Basel 3.1 standards because it could lead to British small businesses falling behind their European and American competitors. 

The Committee is firmly of the belief that any small business doing legitimate work should be able to access a bank account. Cross-party members condemn the debanking of legitimate businesses across various ‘undesirable’ sectors, including defence, pawnbroking and amusement machines, where MPs heard banks have closed or denied accounts based on the nature of their work.  

During the inquiry, MPs received evidence that more than 140,000 small businesses had been debanked in the last year – often with little to no notice. At least 4,214 of the closures were attributed to ‘risk appetite' without a clear and consistent definition within the industry. Many banks do not appear to be tracking formally whether the reputation of a firm or industry was considered when businesses were debanked, instead using catch-all terms to define reasons for closure. 

The Committee is calling on the Financial Conduct Authority (FCA) to force banks to be more transparent about why decisions to debank businesses are taken. Members believe the regulator should compel firms to send them the number of business accounts they’ve closed each quarter split by reason. 

HM Treasury assured the Committee that legislative changes would be introduced to crack down on the debanking of businesses in the form of a Statutory Instrument. The Committee looks forward to scrutinising the Government’s proposals further when they are presented to Parliament. 

The Committee makes it clear in its report that the Business Banking Resolution Service (BBRS), which was set up by commercial banks, has failed due to a perceived lack of independence and poorly formed eligibility criteria. Having only settled 58 cases while costing over £40 million to operate, the Committee agrees it should be closed down. A total of 146 cases have been determined, settled, conciliated or mediated by the BBRS since its formation. 

HM Treasury must rapidly seek to replace the BBRS with a new, independent system which meets the needs of those small businesses treated unfairly by their bank but which are not served by the FOS, MPs conclude. 

The Committee warns plans to introduce the Basel 3.1 reforms could make it harder for British SMEs to compete internationally as no other major jurisdiction is putting such strict requirements on lending to small business. 

The Committee has also recommended that the Financial Conduct Authority gives the Financial Ombudsman Service the powers to address personal guarantees for smaller firms as there is a gap in its remit which means small businesses are not receiving the same support as consumers. 

Over the course of the inquiry, it was made clear in the evidence that the landscape has become more difficult for small businesses in recent years. One piece of written evidence showed the success rate of SME applications for bank loans fell from 80 per cent in 2018 to around 50 percent in 2023. 

Chair's comment

Chair of the Treasury Committee, Dame Harriett Baldwin, said: 

“There’s no hiding from the fact smaller firms have had a torrid time over the last few years. 

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. I hope banks, the regulators and the Treasury take careful note of what we’ve uncovered.” 

Further information

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