Empowering Small and Medium-Sized Enterprises (SME)  by permitting rights of action for breaches of Financial Conduct Authority (FCA) handbook and improving SME access to funding by promoting regional mutual banks (arguing for the Bank of Dave)

Yesterday (30 January 2023) was the second day of Committee Stage for the Financial Services and Markets Bill in the House of Lords. I put forward an amendment which aims to improve rights for SMEs and address the power imbalance that can occur between SMEs and financial institutions. I also spoke in support of Lord Sharkey’s amendment which aims, by different means, to achieve the same ends.

Lord Holmes of Richmond, House of Lords, January 30 2023

Text of video:

“The government talk, rightly, about the need for growth of the UK economy. That growth will largely come from SMEs. Will my noble friend the Minister agree that they deserve our support, in a very simple acceptance, of either of these amendments or indeed a government amendment at report stage. It would enable commercial lending for loans over £25K to be brought within the perimeter and give SMEs, not only the protection, but alongside that the support that they should have from the regulator, through that from the government to enable that growth to come through, which we all need for UK economy, UK society and for all of us.”

The full text of my proposed amendment is:

Insert the following new Clause—

“SME rights of action for breaches of FCA handbook

(1) The Secretary of State must by regulations make provision to allow small and medium-sized enterprises rights of action for breaches of the FCA handbook.

(2) Regulations under subsection (1) are subject to the affirmative procedure.

(3) The Secretary of State must lay draft regulations before each House of Parliament for the purposes of subsection (1) within the period of three months beginning with the day on which this Act is passed.”

Amendment 219, Lord Holmes of Richmond, Committee Stage Day 2, Financial Services and Markets Bill, House of Lords 30 January 2023

The purpose of this amendment is to attempt to bring clarity and greater consistency to this whole area.

As things currently stand, these rights of action are only allowed to individuals. SMEs, partnerships and corporates are all excluded. The effective (and unfortunate) outcome of these exclusions is that SME commercial lending is not being regulated above £25,000.

If an SME is mistreated by a bank, for example, its ability to go to court relies purely on the letter of the contract or agreement it signed with that bank. Sadly, we do know that there have been significant instances of banks’ activity in this area being – shall we say – sub optimal:

  • LIBOR manipulation,
  • swaps ‘use’,
  • the RBS Global Restructuring Group SME activities
  • the Lloyds HBOS Reading activities.

In such situations, it is more than difficult for SMEs to challenge the banks in any significant way, first, because it is almost impossible to take a bank to court due to the costs involved, and secondly, because when they get to court they only have the letter of the agreement to assist them.

This amendment seeks to alter this imbalance.  It would provide greater clarity and  consistency across the rules of the FCA.  Crucially, it would provide support and appropriate protection to our SMEs: the beating heart of our economy. 

I have another amendment that should be up for consideration tomorrow (1st February 2023) Day 3 of Committee Stage. This amendment, too, seeks to support SMEs in particular by addressing the lack of funding (including sufficient credit facilities) to our SME community.

The full text of the amendment is: 

Insert the following new Clause…

“Regional mutual banks

(1) The Secretary of State must report to Parliament, within 3 months of the date of the passing of this Act, on existing barriers to the establishment of regional mutual banks in the United Kingdom.

(2) The report must consider—

(a) current capital adequacy requirements,

(b) other limiting features of the current regime,

(c) regional mutual bank structures in jurisdictions outside the United Kingdom and the adoption and adaptation to the United Kingdom of best practice, and

(d) the use of dormant assets as seed capital for the establishment of such regional mutual banks.”

The clear intention of the amendment is threefold. To:

  • dramatically increase financial inclusion for our superb SME businesses
  • develop an effective ‘patient’ capital ecosystem across the UK
  • reignite the positive reality of ‘friendly societies’ and mutuals

The amendment would force the consideration of current capital adequacy requirements. Are they fit for what we want, across all potential financial services models? 

It is also essential that such potential sources of regional finance are seen very much against the backdrop of the digital transformation. Such banks, I believe, need a physical presence in all our communities, with business bankers ready to support customers at each growth stage.  The benefits must also encompass full digital functionality alongside the physical.  If got right such banks could bring to bear another element of the financial and digital inclusion story with the financial inclusion potentially driving the digital.

None of this is about a lowering of thresholds for SME finance – not at all.  If we support SMEs by increasing the range and number of regional mutual banks then the banks will do what they do best and SMEs will thrive, as will the communities, the cities in which they are based.  Through this single intervention, one of the fundamental planks on which levelling up will come will have been effectively laid.

As we build our way out of Covid, there could barely be a better moment to consider the benefits of regional mutual banks.  Built in our great communities and cities, with close customer connection, and crucially, with an interest and a stake in all those future economic, social, individual, and organisational (as yet unwritten) stories of success.

We need regional flows of finance to enable and empower more – and more regionally diverse – SMEs. I firmly believe regional mutual banks can be an essential part of delivering this.

Whether best described as the backbone, or the beating heart, what is clear is that SMEs are essential to the UK economy and to the livelihoods and lives of so many. As the government considers what they have called a “once-in-a-generation opportunity” to shape financial regulation post-Brexit I hope that they will ensure we extend those opportunities to include these SME supporting amendments to the Bill.

CityAM, Presenting the case for regional mutual banks

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