Small Businesses Urge UK Financial Regulator to Address Unfair Banking Practices

In a significant move, the Federation of Small Businesses (FSB) has submitted a "super-complaint" to the Financial Conduct Authority (FCA), urging the regulatory body to intervene in what it deems as "harsh" banking practices adversely affecting small businesses.

This marks the first super-complaint directed at the FCA since its inclusion in the regulatory framework in 2012.

The Federation of Small Businesses primary concern centres around the lending practices of banks, particularly those demanding excessive personal guarantees for business loans. The lobby group argues that such practices are putting entrepreneurs' personal assets, including their homes, at unnecessary risk.

A super-complaint is an expedited procedure allowing designated consumer groups to bring attention to issues they believe significantly harm customers. The Financial Conduct Authority is now obligated to outline its plan for addressing the complaint within 90 days.

Banks commonly request personal guarantees from directors of small businesses to secure loan repayments. However, the FSB contends that this practice acts as a "straitjacket" on business growth, compelling entrepreneurs to pledge their homes or other assets, even when their businesses have limited liability.

Martin McTague, FSB National Chair, emphasized the need for proportionality, asserting that while guarantees might be reasonable for businesses with limited assets, an imbalance exists, particularly when the sums involved are significant for small business owners but comparatively small for banks.

The FSB is calling on the FCA to scrutinise the frequency of banks demanding personal guarantees and is considering extending the regulator's remit to encompass such guarantees for business loans. Presently, business loans to limited companies or exceeding £25,000 fall outside the FCA's regulatory perimeter established by the government and parliament.

The FSB argues that the insistence on personal guarantees could impede enterprise by discouraging businesses from borrowing for growth, fostering an atmosphere of undue caution. City minister Bim Afolami has previously advocated for regulators to permit more risk-taking by businesses to stimulate the UK's sluggish economy.

This development raises the prospect of renewed tensions between banks and small businesses, reminiscent of the mis-selling scandal involving unsuitable interest rate swaps leading up to the 2008-09 financial crisis.

David Raw, Managing Director at trade group UK Finance, countered the FSB's stance, asserting that personal guarantees reduce risk for lenders, potentially resulting in increased loan availability, lower interest rates, and rarely activated guarantees.

The FCA, in response to the super-complaint, stated that it will carefully consider the submission before providing a comprehensive response. This move echoes previous super-complaints, such as Citizens Advice's 2018 submission to the competition watchdog and Which?'s successful push for increased protection against push-payment scams, highlighting the effectiveness of consumer advocacy in shaping regulatory policies.

Article by The Financial Times