THE TREASURY committee has called for commercial lending to be brought inside “the regulatory perimeter” to protect small business owners.
The 11-strong committee of MPs said that “many small business owners are no more financially sophisticated than everyday consumers” yet are deprived of regulatory protection when it comes to accessing finance.
Unlike mortgage lenders or consumer credit providers, an entity lending money to businesses currently does not need to be authorised by the Financial Conduct Authority (FCA).
In a report published on Friday, the committee said that justification for not regulating commercial lending is “feeble” and called on the FCA and the Treasury to “introduce a regulatory regime that protects small- and medium-sized enterprises (SMEs).”
Chirag Shah, chief executive of alternative business finance provider Nucleus Commercial Finance, welcomed the proposals to regulate the sector.
“We welcome the government’s call to construct robust regulation in order to even the playing fields for banks and SMEs,” he said.
“When implemented properly, regulation is a positive force for both sides. For many SMEs who find financial products and decision making daunting, simply enabling products to be compared in a uniform way across providers would be a big step forward.
“In addition, this would establish a more constructive landscape for SMEs, allowing them to realise the benefits of having a well-funded business to realise ambitions and deliver growth.”
The Treasury committee also called for greater support of alternative finance, saying that “the government must not rest on its laurels”.
“The UK’s alternative finance sector has demonstrated impressive growth in recent years. This is beneficial for SMEs seeking funding, and is in part down to measures introduced by the government to encourage the sector’s development,” the report said.
“However, it still accounts for a relatively small portion of the overall SME finance market, and it is likely that potential for further growth still exists.
“The government must not rest on its laurels; further work will be required to ensure the UK’s alternative finance sector fully realises its potential while maintaining appropriate standards of protection for consumers.”
The report also highlighted the potential of Open Banking, the data-sharing initiative that mandates high street banks to share anonymised customer data with approved third parties.
It urged the Treasury to take “a more ambitious stance” on the initiative as it could bring “significant benefits for SMEs seeking finance”.
The MPs also highlighted “a lack of competition in SME banking” which it said “remains a key area of concern”.
In particular, they recognised the “significant task faced by challenger banks seeking to break the stranglehold of the large incumbents” and said government bodies should do more to educate SMEs on the finance options available.
John Mould, chief executive of peer-to-peer SME lender ThinCats, welcomed the report’s findings.
“There are a growing number of competitors, mainly online, but the incumbency factor weighs heavily, and the majority of these businesses still put up with a bad, out of date service from their bank,” he said.
“Businesses therefore end up with inappropriate products or being rejected outright. Again, in whose interest does this serve?
“The remedy is to open up the RBS Alternative Remedies Package [a £775m fund to boost competition in SME finance] to a broader market. If businesses don’t ultimately trust the banks, nor the means for redress if things go wrong, then how can we realistically see reform more broadly or encourage innovation.”