SMEs and commercial lenders: would further regulation help or hinder?

When individual consumers need to take action against financial services firms, they’re able to do so via the Financial Ombudsman Service (the FOS). It’s also comforting for them to know that the mortgage on their home is regulated by the Financial Conduct Authority (the FCA). But what about when SMEs are faced with the same kinds of problems? Until recently, if a financial services provider didn’t agree with a customer’s dispute, an SME’s only method of seeking compensation was to go through the court system. Not only was this a costly and time-consuming process, but it was also often very stressful.

Now, there’s been an increase in the options SMEs have for resolving disputes in the commercial lending world. The global financial crisis of 2008, as well as the high-profile complaints and remediation schemes that have impacted many SMEs, have been catalysts for change. A significant shift in attitudes and the industry’s culture has taken place, and a (under debate) regulatory shift looks set to follow. This will finally offer SMEs more protection, as well as more ways to access what they’re owed.

For example, the recent expansion of the FOS’s jurisdiction has given qualifying SMEs another method of making complaints against, and seeking compensation from, financial institutions. The long-awaited Business Banking Resolution Service (the BBRS) has now been launched , and it will seek to resolve disputes between SMEs and their banks on a voluntary basis. It’s understood that it’s likely the BBRS will look at both historical and current complaints that meet certain eligibility criteria.

As well as this, the FCA’s Senior Managers and Certification Regime (SMCR) was rolled out across the banking industry in 2016 and has now been extended to all authorised firms. The SMCR aims to emphasise a cultural shift in firms to ensure they are ‘doing the right thing’, operating transparently and honestly and holding senior individuals to account.In spite of the changes that have already been made, many believe there’s a need for more regulation in the commercial lending space.

The FCA is also considering placing a duty of care with firms, encouraging them to think beyond compliance to the ethics and morals of what they’re doing. This is yet to move past the consultation phase, but it seems this is part of a wider effort from the FCA to create an overarching regulatory standard of care. This will run alongside the SMCR to further restore customer trust and motivate firms to put customer interests first.

While few would argue these changes are a bad thing, compliance with more regulations comes at a cost forfirms. To make sure that lending is still commercially viable, firms may have to pass the cost of compliance on to its customers. What’s more, increasing regulation means many firms will need to recalculate how risky or commercially sound their products are. 

One of SME lending’s main strengths has been its willingness to lend to more entrepreneurial, “riskier” borrowers. This offers a platform for new and innovative small enterprises to grow and inject new energy into their sectors and the wider economy. If such lending becomes more regulated, it could discourage lenders from offering funding to those at the riskier end of the SME spectrum. This could harm expansion within a key component of the British economy at a time of significant challenge. 

Therefore, it’s fair to consider whether further regulations, however well intentioned, could in fact hinder the funding and expansion options for a wider range of SMEs. By attempting to provide routes to compensation, could the steps taken inhibit SME growth instead? To stop this happening, it’s important all stakeholders stay wary of how the SME market, and economy more widely, could be impacted if certain groups of SMEs were restricted by heavy regulations.

Regardless of your opinion, it’s clear the overall level of regulation in this space continues to grow. All stakeholders need to keep a close eye on the changes that have been made and that might be on the horizon.

For more information contact Peter Richards-Gaskin, Partner (peter.richards-gaskin@tlt.com) or Jack Hargreaves, Solicitor (jack.hargreaves@tlt.com, in TLT's Financial Services Disputes and Investigations team.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at January 2020. Specific advice should be sought for specific cases. For more information see our terms and conditions.