Parties Pledge Support for SMEs Amid Banking Overhaul

As British business owners prepare for a significant overhaul of the UK’s banking regulations, the Labour Party and the Conservative Party have assured the public that lending to SMEs will remain unaffected.

This new commitment comes in response to growing concerns from lenders and small business owners about the potential impact of the new ‘Basel 3.1’ rules, which the Prudential Regulation Authority (PRA) should announce in the wake of July’s general election.

Party Promises on Basel III

The Basel 3.1 rules are part of a broader framework of regulations introduced after the financial crisis to strengthen the banking sector. The latest proposals, initially released in December 2022, included removing the ‘SME supporting factor’.

This change would require banks to hold more extensive capital reserves against loans to small businesses, potentially increasing the cost of lending by up to a third. Additionally, the rules proposed higher capital requirements for secured loans compared to unsecured loans, which was cause for concern among business owners.

Labour and the Conservatives have made clear their intention to safeguard SME access to finance to reassure small business owners ahead of July's general election. A spokesperson emphasised the opposition party’s stance: “Labour has always been clear the implementation of Basel III rules must be implemented in a way that considers the needs of the British economy and ensures our small businesses continue to have access to affordable finance.”

The Tories echoed this sentiment in their manifesto, pledging to ‘ensure that Basel III capital requirements do not inhibit lending to SMEs’. Many see this sort of cross-party support for SMEs as crucial.

Industry Voices

Industry leaders have voiced their concerns and welcomed election pledges from the major parties. Martin McTague, Chair of the Federation of Small Businesses, described the potential removal of the SME supporting factor as a ‘looming threat’ for small businesses. McTague said: “That this commitment has been adopted by the two parties with the highest chances of occupying 10 and 11 Downing Street in a fortnight’s time gives hope that the issue will be tackled.”

Allica Bank CEO Richard Davies said a “well-considered and proportionate” implementation of the Basel rules was needed to avoid stifling growth. Meanwhile, UK Finance’s Simon Hills warned that the rules could have “a real impact on SME lending in the market” if not handled carefully, urging the PRA to maintain the SME supporting factor or, at the very least, provide a transition period for companies to adjust.

Banking on Support

A Bank of England spokesperson indicated that the PRA’s work on the Basel 3.1 rules is in its final stages, with official decisions and remaining rules expected to be published soon after the general election. As the UK’s small businesses await critical updates, the commitments from Labour and the Conservatives offer reassurance that they will protect small business access to vital funding.

An Alternative to the High Street?

While high street banks offer the comfort of recognisable brand names, many well-established ‘challenger banks’ present an intriguing alternative for SMEs.

Challenger banks provide several advantages:

• Using tech to deliver more accessible and flexible solutions

• Operating without the limitations of outdated systems

• Adapting to the specific needs of SMEs

• Typically, faster approval processes

Alternative lenders often offer a broader range of options than traditional banks. From invoice financing to asset-based loans, SMEs can select solutions that best suit their unique situations. This diversity ensures businesses are free from the all too common one-size-fits-all approach of traditional banking.

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Sam White