The Financial Conduct Authority has set out a programme of reforms intended to reduce friction in small-business finance after concluding that regulation itself is not a major barrier to companies obtaining funding.
The regulator’s review found that difficulties are instead spread across application processes, access to information, duplicated checks, product availability, and the ability of businesses with limited physical collateral or predominantly intangible assets to find suitable finance.
Those constraints are particularly pronounced for microbusinesses, which account for 95.5% of UK SMEs and are less likely than larger companies to use external funding. Limited awareness of available products and complicated application journeys can compound the problem for smaller operators with less financial capacity or specialist support.
Graeme Reynolds, the FCA’s director of competition, said: “Our regulation is not a major obstacle – that does not mean the system works as well as it could.”
The regulator plans to focus on three areas. The first is reform of the Consumer Credit Act, where the Treasury is working towards a more proportionate regulatory framework. The FCA expects to consult on the regime that will replace relevant parts of the existing system following legislative change.
The second is open finance. SME lending has been selected as a priority use case for the FCA’s first proposed open finance scheme, which could allow businesses to use financial data held across different providers to support applications, affordability assessments, and product selection.
A third strand concerns duplicated verification. UK Finance is supporting industry work on a voluntary digital-verification service that could reduce repeated customer checks. The FCA said it would monitor that work while maintaining effective financial-crime controls.
The review puts some scale around the financing challenge. SMEs account for about 60% of employment and 51% of turnover in the UK private sector, yet only 21% of the total value of UK business loans is provided to them. More than half of SMEs — 54% — do not use external finance at all.
Those figures do not mean every company without borrowing wants it. Businesses can choose to finance expansion from retained earnings, avoid leverage, or delay investment. The FCA’s findings instead point to a market in which demand, confidence, information, product suitability, and transaction costs interact with the supply of capital.
The regulatory perimeter is also important. The review concentrated on areas where FCA rules have the clearest direct effect, including certain business lending to sole traders and small partnerships. Significant parts of SME finance, including many loans to limited companies and sections of the alternative-finance market, sit outside that perimeter.
Regulatory reform can therefore address only part of the problem. Lender risk appetite, collateral requirements, pricing, business confidence, and the availability of growth capital remain dependent on banks, specialist lenders, institutional investors, and government-backed programmes.
Capital supply has continued to develop alongside the review. In August, Funding Circle secured a commitment of up to £500m from investment manager Castlelake for lending to UK SMEs, while regional British Business Bank programmes have also been expanding debt and equity provision outside London.
The FCA’s intervention concentrates on the process between a business deciding it needs finance and reaching an appropriate provider. Open finance could become particularly relevant where lenders need a fuller picture of company cash flow but an applicant lacks conventional physical assets against which to borrow.
Digital verification could similarly reduce repeated compliance work where the same organisation submits comparable information to several prospective providers. Any reduction in duplication will still have to sit alongside anti-money-laundering obligations and lenders’ responsibility to understand their customers.
The regulator is expected to continue the work alongside Treasury reforms and industry initiatives. An FCA discussion paper is due to set out options for the first open finance scheme, with SME lending among the priority applications under consideration.
The review leaves the next phase focused on practical outcomes: whether application journeys become shorter, whether viable businesses can compare and reach suitable providers more easily, and whether data-sharing can improve lending decisions without weakening credit or financial-crime controls.
You must be logged in to post a comment.