SME lending

Industry reacts to SME finance inquiry

The current regulatory framework surrounding SME lending is "outdated", according to one asset finance brokerage.

Earlier this month, the Treasury committee launched an inquiry into SME finance to look at the state of the market and the lessons to be learned from RBS’s Global Restructuring Group (GRG).

The Treasury’s inquiry will look at the extent of competition in the market, the various sources of funding available to SMEs – including P2P lending and crowdfunding – and whether the current regulatory framework provides enough protection to SMEs when they borrow money.

What is the current regulatory framework for SME lending?

A spokesperson for the FCA told Bridging & Commercial that SME lending was largely unregulated.

An FCA discussion paper stated that while many financial services provided to SMEs are within the regulatory perimeter, lending to SMEs for business purposes is mostly outside the regulatory perimeter.

For example, unsecured lending to an SME borrower for the purposes of their business will only be regulated if the SME is unincorporated and the amount being borrowed is £25,000 or less.

Meanwhile, mortgage lending for the purposes of a business will only be regulated if (among other things) the borrower is an individual or a trustee.

In general, the boundaries of the regulatory perimeter are determined by FSMA (Financial Services and Markets Act) and various pieces of secondary legislation, primarily the RAO (regulated activities order), and also EU law.

In January, the FCA revealed that it was looking into widening access to the Financial Ombudsman Service (FOS) for SMEs.

Is more regulation needed?

Joel Perlman, co-founder of OakNorth, welcomed the news that the FCA had launched a consultation on plans to give more SMEs access to the FOS, adding: “This is a step in the right direction and demonstrates to SMEs, along with this inquiry, that the government is taking their concerns seriously.

“A revamp in regulation could be helpful as it will hopefully ensure that SMEs are treated fairly, regardless of which lender they go to.”

Mark Sismey-Durrant, CEO at Hampshire Trust Bank, also welcomed the review.

“While the rise in popularity of crowdfunding and peer-to-peer lending is understandable – as it’s a relatively simple way for many SMEs to access funding – there are concerns that it is an unregulated sector, and this may raise issues for the protection of customers.

“We support innovation in our sector, but … believe that regulation would better serve the interests of customers in the crowdfunding and peer-to-peer lending sector.”

Tom Perkins, director at asset finance brokerage Charles & Dean, felt it was imperative that both lenders and regulators provided an improved environment for SMEs to offer greater protection.

“I believe the current regulatory framework is outdated and would benefit from being revised when considering the protection of today's small businesses.

“In many cases, small businesses trading as either a sole trader or a partnership may look to incorporate due to tax or ownership reasons, although when doing so, they put themselves into a non-regulated environment, which in turn can reduce confidence in borrowing.” 

Mat Gazeley, head of PR at Folk2Folk, added: “[It’s] right that the Treasury committee re-examines the regulatory framework to ensure that SMEs are treated fairly and protect them from an imbalance of power.

“By providing a more open and transparent form of business finance, we believe it can only help foster trust and encourage more SMEs to borrow to help enable their growth, diversification and development.”

John Davies, chairman of the Association of Alternative Business Finance (AABF) and director of Just Cash Flow PLC, said: “The challenge you have is that no matter what regulations you have or how clear you make a document, there can always be misunderstandings.

“We would much rather these were addressed before anything is signed.

“You can put a lot of effort into making your documents clear and jargon free, but an independent view from a solicitor ensures the customer knows exactly what they are signing up for. 

“The focus should be on lending to the right SMEs in the first place and one of the key concerns is 'affordability' – ensuring businesses aren't over committed.

“This is the key driver behind the AABF's initiative to create a personal guarantee database so lenders can see what commitments SMEs already have.”

How could more regulation impact SME lending?

“This is a tricky line to walk as anything that protected SMEs too much might increase [the] perceived risk of lending to them and reduce availability of lending even further,” said Stuart Law, CEO at Assetz Capital.

“Getting some changes right may increase SME trust, but may weaken banks’ security and increase [the] cost of lending or reduce [the] availability of it.”

Adam Tyler, chairman of FIBA – who is currently engaged as the author of an industry review to prepare a paper on greater access to finance to be published later this year – felt that the actions of RBS’s GRG were not representative of the SME lending market at all.

“Looking to tighten the current regulatory framework simply in response to the blatant mistreatment of SMEs by RBS could end up as an exercise in using a sledgehammer to crack a nut.

“Let’s not forget that I and many others have spent a lot of time lobbying for SMEs to have easier access to more investment and my concern would be that further regulation – unless carefully drafted, targeted correctly and properly nuanced – would simply deter new entrants and make existing lenders question future participation.

“At a time when business is crying out for investment, the actions of one division of a major bank should not obscure the fact that a growing amount of the investment going into SMEs is no longer reliant on traditional banks.”

However, Tom added: “If the framework were to be revised, we should see more confidence in borrowing across the SME sector.

“Small businesses making significant financial investment should feel that the regulatory environment provides them greater certainty in their own business and greater peace of mind.” 

Daniel Bailey, managing director of asset finance specialist Arkle Finance, said we should be wary of regulation for regulation’s sake.

“The key question when considering further regulation is whether it would help the FCA achieve its three operational objectives – protecting consumers, ensuring market integrity and promoting effective competition – in a balanced fashion.

“Too much focus on any one of the three aims risks hampering at least one – if not both – of the other two operational objectives.

“What both SMEs and lenders need more than anything is greater clarity on how we can apply the existing principles – put forward by the FCA – when dealing with unregulated SMEs.

“Some high-level guidance at this stage could be more effective than a complete overhaul of the infrastructure.”

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