PROPOSALS for more stringent corporate lending regulations are being met with resistance by the Treasury, Peer2Peer Finance News has learnt.
A recent report issued by the Treasury select committee of MPs called for business lending to be brought within “the regulatory perimeter” as part of an inquiry into access to finance for small- and medium-sized enterprises (SMEs).
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).
The Treasury select committee said this was “feeble” and called on the City watchdog and the Treasury to “introduce a regulatory regime that protects SMEs.”
However, a source close to the Treasury told Peer2Peer Finance News that the department is reluctant to bring commercial lending under the same regulations as consumer lending as it would be very complex and unnecessary.
Under current FCA rules, SMEs do not have the same rights to levels of transparency and redress as individuals.
The Treasury select committee’s report called for access to the Financial Ombudsman Service to be extended to SMEs and for greater regulatory protection, as “small business owners are no more financially sophisticated than everyday consumers.”
Within the realm of lending, this could mean the introduction of new rules in areas such as loan pricing and enhanced powers for the FCA to fine firms who treat customers unfairly.
The government gave an early indication of its response to the proposals – due in the coming weeks – in the November Budget, which confirmed plans to give SMEs access to the Ombudsman Service but did not address the regulation issue.
Banking trade body UK Finance has so far been non-committal on the proposals.
“UK Finance and its members continue to work closely with the government, regulators and other key stakeholders to deliver the best possible outcome for SMEs,” a spokesperson said.
“As the Treasury committee acknowledges, any changes to the current regulatory framework would require very careful assessment and justification in line with the key principles set out in the better regulation framework.”
Currently, sole traders have the right to go the Ombudsman but small companies cannot do so. Lenders do not have to provide as much detailed information on pricing and fees for business borrowers as they do for consumers.
Small, unincorporated firms borrowing under £25,000 get access to consumer credit regulations, which includes the right to a cooling-off period and pricing information on their loans. This does not apply to larger companies or those borrowing above £25,000.
However, the alternative lending industry seems broadly keen on tighter regulation.
“I believe that the regulation of business lending is long overdue,” said Adam Tavener, chairman of SME finance aggregator Alternative Business Funding.
“As the committee have noted, the fact that you may run an electrical contracting business by no means implies that you are any more financially sophisticated than an ordinary retail investor, so why should you be treated differently?
“Additionally, in the majority of cases when an SME borrows there is a direct link between their personal finances and those of the business, often through personal guarantees, directors’ loans or the provision of security by virtue of a charge over the family home. These are significant financial commitments and should very much sit within the regulatory perimeter.”
Sophie Pearce, managing director of peer-to-peer business lender MoneyThing, said the recommended changes are sensible and in everyone’s interests.
“Raising industry standards for everyone will only improve trust and give more SMEs confidence to apply for the funding they need,” she said.
John Mould, chief executive of ThinCats, said the P2P business lender welcomed more controls on business lending.
“It is really important that companies understand what they are doing when they borrow and it is up to the lenders to also make sure that their clients understand the benefits and risks,” he added.
“Finance has been dogged by mis-selling. Giving loans to people who do not understand the risks or can not afford them is mis-selling- it is as simple as that. It does not matter if it is a consumer loan or an SME loan.”
The Treasury declined to comment.