Small Banks Have Big Concerns Over SME Rule Changes

With over 5.5 million in operation, SMEs are the backbone of the British economy, providing job creation and economic growth. However, access to finance is essential for their survival and development.

Proposed regulatory changes are now threatening the availability of business loans for SMEs. A handful of small banks have urged MPs to reconsider, claiming the move would be a “dramatic backward step”.

SME Support Scrapped?

One of the most significant proposals is the scrapping of the ‘SME Supporting Factor’. This approach means small to medium-sized businesses currently benefit from favourable treatment for loans, allowing banks to hold lower capital against them. Under new regulations, SME lenders must hold more capital against loans to the sector.

Richard Davies, CEO of SME-focused bank Allica, voiced concern over the proposals in a recent City A.M. article, calling them a ‘dramatic backward step’. Research commissioned by Allica suggests that they could result in a staggering £44 billion drop-off for SME lending, which would be a major setback for British business.

Secured Lending Punished?

In the same City A.M. article, independent FinTech industry body Innovate Finance pointed out that another aspect of the proposed regulations appears to penalise secured lending by forcing banks to hold higher capital. This decision has raised eyebrows in the banking sector and could inadvertently deter banks from providing secured loans to SMEs.

In the same article, Paul Goodman, Chair of the National Association of Commercial Finance Brokers (NACFB), has warned Parliament of the potential for this outcome, intentional or otherwise. He said: “This framework risks rendering the UK lending sector less competitive than our European peers, who appear more lenient in its adoption. There’s an undeniable friction between prudential regulation and the desire to seize post-Brexit growth potentials.”

Higher Insurance Thresholds?

While the proposals pose challenges for SME lenders, some have recommended raising the threshold on deposit insurance. The current £85,000 mark might not be adequate to cover the more significant balances many businesses hold. Some banks believe that increasing this would encourage small, challenger banks to be the primary account choice for SMEs.

Cashplus CCO Paul Schooley said: “This would properly recognise the higher balances typically held by even the smallest businesses and signal the industry’s support for this vital part of the UK economy.”

What Next?

The Treasury Select Committee, appointed by the House of Commons to examine the expenditure and policy of HM Treasury, has kicked off a new inquiry into the state of SME financing. The committee’s findings are likely to suggest that the proposed changes could impact the availability of business loans for SMEs.

Removing the SME Supporting Factor and inconsistencies in the requirements for secured and unsecured lending presents challenges which may makes it more difficult to secure the financing you need. Small businesses will watch closely as this regulatory process evolves and hope for a solution supporting growth.

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