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Unfair banking practices, inadequate regulation and barriers to accessing finance for smaller businesses threaten to stall growth and innovation in the UK, an influential cross-party group of MPs has warned.
A report published on Wednesday by the House of Commons Treasury Select Committee concluded that a “difficult environment” for small and medium-sized businesses risks “disincentivising risk-taking, innovation and potentially growth”.
The findings conclude a parliamentary inquiry into the difficulties faced by SMEs in finding finance after being hit by the Covid-19 crisis and an energy shock linked to Russia’s invasion of Ukraine.
According to the Ministry of Economy and Trade, the number of private companies rose steadily from 4.5 million in 2010 to 6 million in 2020, before falling sharply to 5.6 million in 2023.
Dame Harriett Baldwin, chair of the Finance Committee, said banks and regulators could “do more” to support SMEs, which make up 99 per cent of UK businesses.
An earlier finding published by the committee as part of the inquiry found that more than 140,000 SMEs had closed their bank accounts last year.
“There is no escaping the fact that small businesses have had a tough time in recent years,” Baldwin said. “Unfortunately, during the course of the investigation, we found that there are some cases where banks and regulators are causing difficulties for the world. . . unnecessarily harder.”
MPs made a number of recommendations, including that the Financial Conduct Authority require banks to report the number of accounts they close each quarter and the reason for the decision.
The committee said that “legitimate businesses” in “undesirable sectors,” such as defense, pawn shops and amusement machines in particular, had been closed or denied accounts due to the nature of their work.
It also recommended that the Financial Ombudsman Service be given new powers to deal with unfair applications for guarantees, given “evidence suggesting that lenders are requiring disproportionate personal guarantees for smaller businesses seeking finance”.
The committee called on the government to fulfill its promise made in October and introduce legislation to combat debanking. Ministers have committed to increasing the minimum notice period banks must give customers before closing an account from two to three months.
Data provided to the committee by the Impact Investing Institute, a nonprofit that promotes impact investing, found that the success rate of SME applications for bank loans fell from 80 percent in 2018 to about 50 percent last year .
The group also warned that the Prudential Regulation Authority’s current plans to introduce Basel 3.1, a package of global capital reforms, risked further tightening conditions for SMEs.
MPs backed the closure and replacement of the Business Banking Resolution Service, a bank-run system aimed at resolving disputes between SMEs and lenders. The service, which costs more than £40 million to run, has only settled 58 cases so far, the committee found.
UK Finance, the trade body, said the report covered “a number of other important issues” and supported its call to maintain support for SMEs while the PRA implements the Basel framework.
It added that “while a small proportion of business accounts are closed, the main reasons are concerns about financial crime, the inability to conduct customer due diligence or the dormancy of an account.”
“We are actively engaging with various parties, including the Federation of Small Businesses, to understand their concerns regarding personal guarantees,” it said.
The PRA has been contacted for comment.