SMEF0005
Written evidence submitted by the National Pawnbrokers Association (NPA).
Background
The NPA is a trade body established in 1892 representing 97% of pawnbroking businesses, the vast majority of which are SME’s. Since 2014 more than half our members have had bank accounts closed and the number of stores has reduced from over 2000 stores to around 900. Amongst members undertaking Money Service Business (MSB) activities 82% have had bank accounts closed. The reason cited by banks is often economic, they say it is not worth their investment in compliance for an industry they wrongly perceive to be high risk; however, the low risk nature of the sector is explained in the UK Finance/ NPA guidance, the “Industry Protocol for the Pawnbroking Sector”, January 2023 https://www.ukfinance.org.uk/policy-and-guidance/guidance/industry-protocol-pawnbroking-sector which was welcomed by the FCA.
It is almost impossible for a new market entrant to get a bank account and similarly impossible for any pawnbroker to access bank financing; with evidence of banks having ‘blacklisted’ the whole sector. Our sector is declining specifically because of the attitude of UK banks.
At the same time, especially given the Cost of Living Crisis, the Social Market Foundation (SMF) report “Extending credit: Understanding pawnbroking customers’ options” April 2022 https://www.smf.co.uk/publications/extending-credit/ highlights that pawnbrokers going out of business because their bank accounts are closed means that ‘they can no longer provide a desperately needed safety net which prevents more people becoming financially vulnerable and victims of loan sharks’.
Industry issues
What are the key challenges Small Medium-sized Enterprises (SMEs) face when seeking finance?
It is virtually impossible to access bank financing, and pawnbrokers live in constant fear of bank account closures. Borrowing from banks is not achievable despite excellent profit opportunities at very low risk and high loan security for the banks. This is because banks have made higher level decisions to ban lending to the whole sectors of pawnbroking and also pawnbrokers who supply travel money to the public.
Through which channels do SMEs find the most success when seeking funding and why?
It is impossible for the sector to achieve finance through banks, the market has not therefore shown entrepreneurial growth and is not able to innovate.
What role can financial innovation play in SME finance? Is there more the government and the regulators can do to improve access to finance through innovative firms?
Yes, Government need to stop banks blacklisting whole sectors of business and view each application on merit based on opportunity, security and relative risk levels. Currently, against the background of a blanket ban and ‘no appetite’ for our markets there is no potential for new market growth. Government must break this practice by the banks by instigating penalties for failure to support markets and actively encourage lending. If challenged for the reason for these blanket bans, they would probably use the vague term of ‘de risking’ as a reason and yet no pawnbroker has ever been found guilty or even been prosecuted on the grounds of money laundering.
In April the US Treasury engaged in extensive consultation with the public and private sector— https://home.treasury.gov/news/press-releases/jy1438 which included banks, small and medium-sized companies and Money Service Businesses (MSBs), to understand the root cause and negative impacts of de-risking. The strategy found that profitability is the primary factor in financial institutions’ de-risking decisions. The strategy also highlighted that profitability is influenced by a range of factors, such as a financial institution’s available resources and the cost of implementing AML/CFT compliance measures and systems commensurate with the risk posed by customers. Other factors the strategy identified included reputational risk, financial institution risk appetite, a perceived lack of clarity regarding regulatory expectations, and regulatory burdens. The strategy provided concrete recommendations on how to promote consistent regulatory expectations, provide better incentives to U.S. banks to avoid de-risking, and to advance public and private engagement and cooperation at home and abroad.
UK Government and regulators should adopt a similar approach.
How accessible is finance for SMEs of different sizes?
The current ban on access to finance covers the whole sector regardless of size, even our publicly quoted companies find financing difficult as banks have ‘no appetite’ to support and invest in the sector.
Is finance available to allow SMEs to scale up from venture capital funding?
No, the majority of SME members are too small to attract VC funding, most are single retail stores and small family owned businesses.
How successful has the Bank of England’s Term Funding Scheme with additional incentives for SMEs (TFSME) been at encouraging banks to lend to SMEs?
We are not aware of any pawnbroker who has benefited from this scheme.
What role do credit reference agencies play in supporting SME finance?
No role, they cannot secure lending from any institution.
What impact has the RBS bailout state aid Alternative Remedies Package and its various funds for SMEs (implemented by Banking Competition Remedies Ltd) had on SME access to finance?
No help at all.
Is securing access to SME finance particularly challenging for women, people from ethnic minorities, people from certain social classes, or any other group? Is so, what should be done about it?
No, the complete lack of finance, investment and support from the banks is completely unbiased, and applied consistently. Banks won’t lend to any pawnbroker regardless of faith, colour, creed, age, social class or gender.
Regulatory issues
Do SMEs have adequate and appropriate access to a complaints procedure when in dispute with their bank or lender?
The possibility of being able to make a complaint is not highlighted by banks as they would do for consumers, but they should be forced to do so. As long as banks are allowed to hide behind ‘confidentiality’ as a reason to not discuss a reason for closure or not providing finance it is difficult for FOS to review a complaint. All that happens is the prescribed number of days passes and the bank write back to the customer and say they have reviewed the case and the complaint is declined.
Pawnbrokers dread what they term the ‘letter of death’ from banks. This gives notice of usually 30 days closure, which is insufficient time to find another account and therefore effectively a notice that a very successful business is going to cease to trade in 30 days’ time. The letters are often backdated, unsigned, with no contact address given and often stating that no correspondence will be entered into. If a pawnbroker does manage to get through to complain, or challenge the closure, they will usually just receive a standard letter after the prescribed time stating the account will still be closed. In 9 years and closure of more than half our members’ accounts there has not been a single occasion where a bank has reviewed the closure and changed their mind.
How effective has the Lending Standards Board’s Standards of Lending Practice been?
No impact whatsoever.
How well does the Financial Ombudsman Service (FOS) work for small business complaints?
We are not aware of any occasion when FOS has successfully challenged a bank on its behaviour towards pawnbrokers.
Is the FOS’s existing role in SME finance appropriate? If not, how should it change?
FOS needs more power in this context to challenge the banks and ensure they properly justify account closures, properly engage with pawnbrokers and where there is an issue that they inform the customer what that issue is and give them a chance to remedy the matter before closing the account. Similarly, when applying for finance they must challenge the banks to make commercial decisions based on merit and not put red flags against whole sectors without any care or thought.
How effective has the Business Banking Resolution Service been, and what lessons can be learnt from it?
Not effective for our market
Should SMEs have the same level of consumer protection and deposit insurance limits as retail consumers?
Yes of course.
Should commercial lending to SMEs be brought into the regulatory perimeter?
The FCA should create a criteria for assessment that banks must follow and SMEs should be part of the new Consumer Duty regime being introduced by the FCA resulting in heavy fines for mistreatment of SME’s.
What impact will the PRA’s proposed Basel 3.1 capital requirements framework, and in particular the proposed removal of the SME support factor, have on SMEs in the context of the PRA’s objectives?
No comments.
Government policy issues
Should the Government do more to enhance SME access to finance? And, if so, what?
The Government should take tough action against banks proven to have blanket bans on an industry. The use of standard letters used over and again is a clear indicator and investigations by HMRC and FCA should make it clear where a red flag is being applied to a sector.
They should also adopt a similar approach to that of the US Treasury mentioned above and develop a strategy to promote consistent regulatory expectations on banks and provide better incentives to banks to avoid de-risking.
What has the impact of the Covid Bounceback Loan Scheme (BBLS) which was followed by the Recovery Loan Scheme, been on SME finance?
It was undoubtedly helpful during the Covid years but now firms are struggling to repay loans, innovate and grow their businesses and need new sources for finance which in most countries is provided by the banks. The UK is unusual in that the banks have no appetite whatsoever to invest in certain industries.
In the US the Treasury approved a fund, (State Small Business Credit Initiative (SSBCI)) for incentivising and supporting underserved businesses. Does the UK need similar provisions?
Yes, but again this needs to be accessible to small businesses and well publicised so that all relevant companies are aware of it.
How useful is the British Business Bank? Does its finance hub improve SME access to finance?
The British Bank has previously told us that it cannot lend to pawnbrokers so it has not been at all helpful.
August 2023