There has been much publicity about the fair treatment of SMEs by their lender and their ability to access finance, which has left a trust gap to bridge between SMEs and banks. In their recent annual report, the British Business Bank states that many SMEs do not seek an alternative lender if the bank they have their relationship with turns them down for finance. The report also goes on to say that many SMEs draw on cash resources, such as existing capital and that of family and friends rather than accessing the wide range of lenders and products that are available on the market. As is true with most things in life, trust is hard to gain, easily broken and takes a long time to rebuild.
It is worth reminding ourselves what an important part SMEs play in the UK economy. At the start of 2016, there were approximately 5.5 million private sector businesses in the UK, of which 99.9% fell within the SME definition. These businesses employ 15.7 million people, accounting for 60% of all private sector employment in the UK. There is, therefore, compelling evidence to support the widely-held belief of politicians, industry experts and economic commentators that small businesses are integral to the success of the UK economy and will be even more so post-Brexit. Essential, therefore, that these businesses are given every chance to thrive. Access to finance is central to this, supported by adequate protection throughout the customer journey.
The launch of the government portal, enabling SMEs declined by high street banks to be referred to an alternative lender, will hopefully help in terms of access, although the Treasury has commissioned an early review of bank referrals to the portal as usage has been lower than anticipated. Meanwhile, banks stand ready to lend and there are also many new lenders on the market—start ups, peer to peer platforms, crowdfunders, fintechs—offering innovative products, with a desire to provide finance for SMEs and encourage entrepreneurs. In addition, the British Business Bank offers excellent support to small businesses, working with partner organisations to unlock finance for them. The finance and range of products are clearly there for SMEs to access.
So back to rebuilding trust; it is clearly important that not only do SMEs have access to finance but that they are afforded an appropriate level of protection throughout their relationship with their lender. And, in particular, that SMEs can have confidence that they are receiving a fair deal and that their lender is there to support them in growing their business.
The Lending Standards Board (LSB), by introducing the new business Standards of Lending Practice, is aiming to play a pivotal role in providing that protection and helping the industry to rebuild trust with their customers. The Standards represent a major step up from the former Lending Code with the limit having been increased from €2m to £6.5m turnover, taken at the time of borrowing; this will now capture nearly all small businesses. This figure has been selected as it is consistent with the separation of retail and investment banking operations under bank ring-fencing regulations.
Secondly, we are committed to widening the product scope, and increasing the number of registered firms, thus extending protection to more business customers. The Standards went live from 1 July this year with existing products—business loans, credit cards, overdrafts and charge cards – but we are seeking to extend the product scope later in 2017 to asset finance and commercial mortgages, and, in early 2018 to peer to peer lending and invoice finance.
Thirdly, we have moved away from prescriptive rules, instead focusing onhigh-levell principles, customer outcomes and individual standards. In designing the framework, we wanted to ensure four things: a focus on customer outcomes; ensuring that the market continues to work well, avoiding any unintended consequences and encouraging innovation; flexibility, enabling all firms seeking to do the right thing to be able to become registered; and agility, being able to develop the Standards quickly. The focus on customer outcomes can be lost with very detailed rules; the new Standards have been designed to avoid this and, instead, encourage a dynamic approach to voluntary regulation, enabling us to be proactive and adapt to innovation in the market.
The Standards are designed around the lending customer journey and introduce protection in those areas, which have previously caused detriment. They include measures that seek to ensure that business customers receive timely and transparent information throughout the customer journey, in particular making it clear what charges will be incurred if they exit early from an arrangement; they provide for the fair treatment of business customers where the business is in a turnaround situation; and there are measures to protect customers if their debt is sold to a third party. In addition, the Standards consider the potential impact on a business where a key individual is in a vulnerable situation.
Fourthly, we want the Standards to be a catalyst for different organisations to work collaboratively in improving the protection and support available to small businesses. We have worked with many different organisations in the development of the Standards and we feel that this should continue to ensure that the Standards evolve effectively. Close working with lenders and a wide range of stakeholders such as the Federation of Small Businesses, the Money Advice Trust’s Business Debtline, HM Treasury, the British Business Bank and the ICAEW, will accelerate improvements and ensure the right solutions are developed.
Finally, we need to ensure that the Standards are working in practice and that firms are adhering to them. Voluntary standards will not increase consumer confidence unless they are seen to be independently overseen and enforced. The LSB will be undertaking a programme of independent oversight combining risk assessments and relationship meetings to test how firms are meeting the outcomes and thematic reviews focused on those areas where there is the highest impact on fair customer outcomes. Where firms do not meet the Standards then we will agree remedial action to address any issues identified and if they fall significantly below what is required then we will hold those firms to account, which could result in public censure.
There is a collective will from our registered firms and stakeholders to ensure that SMEs receive consistent, fair treatment. Our hope is that firms will use the Standards and the ongoing oversight and collaboration as a vehicle for improvement. We believe we can build trust back in the industry but we know that we will have to work hard to maintain it.
For more details on the Standards visit our website at www.lendingstandardsboard.org.uk
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