Planned rule changes for SME lending a ‘dramatic backward step’, challenger banks warn
SME lenders have warned MPs that proposed regulatory changes would be a “dramatic backward step” and impose significant constraints on the growth of SME-focused banks.
Under proposals being considered by the Prudential Regulation Authority (PRA) as part of the Basel 3.1 regulations, favourable treatment for SME lending will be removed.
Removing the preferential treatment, known as the SME Supporting Factor, will force SME lenders to hold a higher level of capital against loans to the sector.
Richard Davies, chief executive of SME-focused challenger bank Allica, told City A.M. that the changes would be a “dramatic backward step”.
Recent research, commissioned by Allica, found that the proposed changes could result in a £44bn drop in SME lending.
“The changes are far more burdensome for SME lending than the international rules and particularly so versus the EU’s position,” Davies continued.
Innovate Finance pointed out that the rules penalise secured lending by forcing banks to hold a higher capital level than against unsecured loans. “This is illogical and deviates inexplicably from the international rules,” their submission said.
Paul Goodman, chair of the National Association of Commercial Finance Brokers (NACFB), warned that the rules risked “unintentionally quashing” SME financing at a “critical juncture”.
He pointed out that the PRA’s approach to the rules conflicted with its new mandate to pursue international competitiveness.
“This framework risks rendering the UK lending sector less competitive than our European peers, who appear more lenient in its adoption. There’s an undeniable friction between prudential regulation and the desire to seize post-Brexit growth potentials,” he said.
While the PRA’s proposed regulations risk putting a brake on the growth of SME lenders, many lenders recommended that regulators raise the threshold on deposit insurance specifically for SMEs.
Many businesses hold larger balances than the current FSCS threshold of £85,000. Raising the threshold would enable challenger banks to be the primary account for SMEs who might be concerned that a smaller player is more risky than an established high street bank.
Increasing the threshold would help stimulate competition in the market and encourage banks to offer higher rates, lenders argued.
“This would properly recognise the higher balances typically held by even the smallest businesses and signal the industry’s support for this vital part of the UK economy,” Paul Schooley, chief commercial officer at Cashplus Bank, said.
The submissions come as the Treasury Committee begins an investigation into the state of SME financing in the UK.