The Financial Conduct Authority has urged banks to improve their handling of small and medium-sized defence suppliers after finding that account-opening procedures can be unnecessarily slow and complex. Its review concludes that delays and administrative friction are more common than outright exclusion, but warns that poorly differentiated risk controls can obstruct otherwise viable companies in a strategically important industrial sector.
The regulator examined the experience of defence SMEs through discussions with banks, businesses, trade bodies and government stakeholders. Most banks participating in the exercise said they were prepared to serve the sector, and some had already developed specialist relationship teams or staff training. Nevertheless, additional approval layers, extensive due diligence and referrals for specialist assessment can extend the time needed to establish everyday banking relationships. The FCA has written to banks serving SMEs and expects them to review the relevant processes promptly.
The problem is not confined to obtaining an account. A company making military components may need reliable payment arrangements to enter government procurement processes, pay specialist suppliers, receive contract proceeds and meet payroll. Delays can be consequential even when an application is eventually accepted. Young businesses may have limited cash buffers while they establish the trading history and commercial documentation that a bank wishes to examine. The FCA noted that incomplete information from applicants can also contribute to delays, making preparation an important part of the process.
The review stresses that lawful defence activities are not subject to a general regulatory prohibition on banking services. Financial institutions still have responsibilities concerning financial crime, sanctions, beneficial ownership and international supply chains, and they remain entitled to decide which activities fit their commercial risk appetite. The regulator’s concern is that some institutions do not distinguish adequately between customers with very different products, destinations and end uses. A business manufacturing dual-use electronics presents a different profile from a business handling restricted equipment for overseas customers.
Environmental, social and governance considerations, reputational issues and supply chain risks can form part of those assessments, but the FCA says decisions must be reasonable, consistent, proportionate and supported by proper consideration of the individual customer. Where specific risks can be managed with tailored checks, blanket restrictions are difficult to justify. The review does not set new obligations: it explains how existing standards should operate in a sector where commercial and public-policy priorities increasingly intersect.
Banks are being asked to improve their management information so senior leaders can see what happens to defence applicants, including how long cases take and the reasons applications are declined or escalated. Better information could reveal whether practices differ between teams or branches, or whether long-running cases have become a routine feature of onboarding. Training employees to recognise different parts of the defence supply chain could reduce unnecessary referrals without weakening scrutiny.
A further complication is the breadth of activities described as defence supply. Research laboratories, electronics specialists, maintenance contractors and component manufacturers can have little in common operationally beyond the customer sectors they serve. Applying one undifferentiated categorisation may obscure relevant differences in trade destinations, ownership and products. The FCA expects banks to review those classifications periodically, particularly as customers’ business models develop. Defence SMEs in turn can support an informed assessment by identifying counterparties, explaining legitimate end uses and providing timely evidence. Neither side is being asked to ignore compliance risk: the focus is on matching controls to the actual risk presented.
There are limits to the conclusions. The FCA concentrated on access to transaction banking and related services, not the availability or pricing of loans, venture investment or other growth capital. It did not find evidence that defence companies as a group are routinely denied accounts. Nor does the review promise that every application should succeed. The regulator will monitor responses through supervision and says similar lessons may apply to other SME industries facing unusually detailed compliance checks.
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