FCA: regulation not a barrier to SME finance access

SMEs face considerable challenges in accessing the finance they need to grow, but there is no evidence that regulation plays a part in their difficulties according to a review by the Financial Conduct Authority (FCA), which found many of the issues identified relate to wider market, information and capability challenges. 

The FCA report, Supporting SME access to finance, notes there has been prolonged low investment into UK SMEs. Currently, only 21% of the total value of UK business loans go to SMEs and 54% of SMEs are not using external finance in any capacity.

The review found that the challenges are often greatest for microbusinesses, which make up 95.5% of all SMEs and are less likely to use external finance.  The work focused on business lending of £25,000 or less to sole traders and small partnerships (but not to limited companies), because this activity falls within the FCA’s consumer credit regulatory perimeter.

Limited awareness of finance options, complex application processes, duplicated checks, and difficulties accessing products suited to businesses with limited collateral or largely intangible assets were all highlighted as issues.

The report states: “We found no evidence that FCA regulation is a major barrier to SME access to finance. Nonetheless, SMEs face challenges accessing finance on both the demand-side and supply-side.”

 These include:

• SME preparedness for accessing finance and issues with navigating the market.
• Challenges in assessing risk and accessing suitable products.
• Regulatory frictions relating to duplication in customer checks and Consumer Credit Act requirements.
• Other issues relating to commission-based incentives steering micro-SMEs to parts of the alternative lending market, and personal guarantee requirements potentially discouraging some applications.

Perceived barriers

Review responses identified limited awareness of financing options as a key barrier for some SMEs, particularly micro-SMEs. They said some firms have limited awareness of providers beyond their existing bank and find the increasingly diverse range of lenders and products difficult to navigate and compare.

Stakeholders highlighted low confidence, perceived complexity and limited financial capability as barriers to preparing a financial application to secure finance. They said this can affect whether firms seek finance, when they do so, and the quality of their applications. Some stakeholders also identified insufficient support for firms preparing for equity raises.

SME representatives said that some SMEs perceive debt finance as expensive and the application process as overly complex and time-consuming. These demands can be particularly burdensome for microbusinesses without dedicated financial staff.

Representatives attributed this to the amount of financial and supporting information required, repeated requests for information and differing documentation requirements across lenders and products.

SME representatives also reported that lenders often provide limited or non-specific reasons for declining finance applications. They said this can make it difficult for firms to understand the reasons for rejection and improve future applications, potentially contributing to repeated declines and discouraging future applications.

Respondents linked this to increased automation in credit assessment and reduced relationship banking. Lenders noted that applications may be declined for lender-specific reasons, such as sector appetite, which may not indicate a weakness in the firm’s application or prospects of obtaining finance elsewhere.

In addition, stakeholders said that referral and signposting arrangements following declined applications do not always provide an effective route to alternative sources of finance.

Next steps

The FCA says it will be focusing next steps on three areas of its work, some of which is underway, which could help reduce regulatory frictions and some of the other challenges identified and promote economic growth, namely:

• Supporting a more proportionate regulatory regime through Consumer Credit Act reform.
• Helping unlock the benefits of open finance, including prioritising SME lending as a key use case.
• Monitoring industry work to explore whether digital verification could reduce duplication in customer checks, while maintaining effective financial crime controls.

“Our regulation is not a major obstacle – that does not mean the system works as well as it could. We’re focusing on where we can make a practical difference by reducing unnecessary friction, supporting a more proportionate regulatory framework and helping unlock the benefits of open finance.”