Challenger Banks Express Alarm Over Regulatory Proposals Impacting SME Lending
In a concerning development for small and medium-sized enterprise (SME) lending, challenger banks have issued a stark warning to Members of Parliament (MPs) regarding proposed regulatory changes. These changes, currently under consideration by the Prudential Regulation Authority (PRA) as part of the Basel 3.1 regulations, have raised significant concerns within the SME-focused banking sector.
Removal of Preferential Treatment for SME Lending
Under the proposed regulatory alterations, the preferential treatment, known as the SME Supporting Factor, is slated for removal. This move will compel SME lenders to maintain a higher level of capital against loans extended to the SME sector.
Challenger Banks Raise Their Voices
Richard Davies, the CEO of SME-focused challenger bank Allica, minced no words, characterizing these changes as a “dramatic backward step.” Recent research commissioned by Allica indicates that the proposed modifications could result in a staggering £44 billion reduction in SME lending.
Davies went on to highlight that these changes place a far greater burden on SME lending than the international standards, particularly in comparison to the European Union’s stance on the matter.
Critics Argue Against Illogical Regulations
Innovate Finance, a leading industry advocate pointed out that the proposed rules unfairly penalize secured lending. They compel banks to hold higher capital levels for secured loans compared to unsecured ones, a move that they deem illogical and a departure from international norms.
Concerns Over Stifling SME Financing
Paul Goodman, Chair of the National Association of Commercial Finance Brokers (NACFB), expressed deep reservations about the potential consequences of these rules. He cautioned that they could “unintentionally quash” SME financing at a “critical juncture.” Goodman also highlighted the inconsistency between the PRA’s approach to the rules and its mandate to pursue international competitiveness.
Calls for Raising Deposit Insurance Threshold
Amid these regulatory concerns, many lenders have recommended increasing the threshold for deposit insurance specifically tailored for SMEs. Given that numerous businesses maintain balances exceeding the current Financial Services Compensation Scheme (FSCS) threshold of £85,000, raising this limit could encourage SMEs to consider challenger banks as their primary accounts, boosting competition in the market.
Potential for Stimulating Market Competition
Increasing the deposit insurance threshold could not only stimulate competition but also incentivize banks to offer higher rates, thereby benefiting SMEs. Paul Schooley, Chief Commercial Officer at Cashplus Bank, emphasized that this change would properly acknowledge the higher balances typically held by even the smallest businesses and signal the industry’s support for this crucial segment of the UK economy.
Awaiting the Treasury Committee’s Investigation
These submissions come against the backdrop of the Treasury Committee’s initiation of an investigation into the state of SME financing in the UK. The outcome of this inquiry will be closely watched, as it could have far-reaching implications for SME lending in the country.