Lord Sharkey
To ask His Majesty’s Government what steps they are taking to improve access to banking and finance for small businesses.
Lord Sharkey (LD)
My Lords, according to the Commons Library, in 2024 there were 5.5 million small and medium-sized businesses in the UK, which was 97% of the total business population. These companies accounted for 60% of all UK jobs and 48% of all business turnover. These small businesses are the engines of job creation. Large businesses are net destroyers of jobs. These small businesses are engines of creativity. Large businesses often are less creative and frequently try to make up for this by buying smaller companies. The health of our economy and the prospects for growth are directly affected by the health of our SMEs.
The Government are well aware of this, as were previous Administrations. Over the last 20 years, there have been many studies of the SME universe, and we are not short on facts. In March, the Government launched a new consultation on small business access to finance. The call for evidence notes that, in the fourth quarter of 2023, only 3% of SMEs applied for new or renewed funding and only 1.5% applied for bank loans. This compares with 20% of SMEs in the euro area for a similar period. It was noted that, even if the approval rates doubled to over 90%—similar to those obtained before the great financial crash—the overall proportion of SMEs successfully applying for finances would only move from 1% to 2%.
The consultation closes one week from today. I hope that the Minister will consider the suggestions and observations that are made in our debate today alongside the responses to the consultation. This debate is about both banking and financing for SMEs. To take banking first, there is a growing concern about the accelerating closure of bank branches and uncertainty about whether replacement banking hubs will be able or willing to provide the services that an SME might need. The former APPG on the Future of Financial Services, which I co-chaired, conducted a short inquiry into the issues involved and will publish its final report in a week or so. I can give some sense of its likely key findings and recommendations.
The banking hub model is proving generally successful but needs accelerating. Local communities should be able specifically to request a banking hub before the formal procedures start. We also recommended that the Post Office, a critical partner, should be given the power to pro-actively recommend new hubs to LINK. As an aside, I was very pleased to hear yesterday’s announcement of the Post Office’s continued provision of basic banking services. The FCA has regulatory power in terms of access to cash, but not in terms of access to banking services. This should be remedied.
Regulation in general needs some appraisal. We strongly believe that the current FSCS limit of £85,000, dating back to 2010, is much too low. This could be artificially pushing SMEs into holding deposits with larger incumbent banks despite challenger banks offering higher interest rates and better service. I am glad to see that the PRA is consulting on raising this to £110,000 with effect from December 2025. We also believe that the thresholds that trigger increased capital requirements for lenders are set too low and are way below equivalent EU and US thresholds. We would like to see a significant increase in these thresholds as soon as possible.
There is also the issue of debanking. A significant number of businesses are debanked every year. Leaving aside the Farage farrago, this debanking merits more serious consideration. Does the Minister believe that, in general, banks are behaving rationally, reasonably and proportionately when it comes to debanking? Can he say what evidence there is to suggest that debanking is being properly justified and properly communicated?
There is a more general concern about financial stability. As traditional bank lending to SMEs is replaced by other funding sources, as it is being, what does this say about the regulator’s ability to maintain stability in the system? The former Economic Secretary to the Treasury, Bim Afolami, recently gave evidence on this point to your Lordships’ Financial Services Regulation Committee. He suggested that the growth in the proportion of credit supply to SMEs by non-bank lenders was problematic from the perspective of systemic risk and financial stability, due to these sources receiving less regulatory scrutiny in comparison to the banks. He also highlighted that this was hotter money that could flow out of the UK more quickly by comparison. Does the Minister share Mr Afolami’s concerns? What conversations have taken place between His Majesty’s Treasury and the PRA about the implications for systemic stability, as non-bank lending continues to replace more of bank lending?
Lending to SMEs overall has now fallen back to 2012 levels, according to Allica, a challenger bank. This means, according to Allica, that lending is up to £90 billion below where historic trend lines suggest that it should be. Responsible Finance, the industry body for community lenders, also notes that, for smaller businesses looking for £150,000 or less, this equates to around £11 billion of unmet financing needs each year. Both Responsible Finance member CDFIs and Allica Bank are deeply involved in SME financing. Allica is, as I mentioned, a challenger bank specialised in SME lending. Responsible Finance speaks for our CDFIs—community development finance initiatives.
My noble friend Lady Kramer will expand on the role of CDFIs in a moment, but I want to register some points made by Responsible Finance. It quotes the Government’s own estimate that around 850,000 small businesses see access to finance as a major obstacle to growth. It notes that the financing gap is particularly acute in areas of high deprivation and that businesses with ethnic minority leaders face very high barriers to finance. These people face a decline rate two and a half times higher than the average for all SMEs. Does the Minister agree that this needs urgent investigation?
In general, acceptance rates by lenders are too low. Only 47% of SMEs applying for bank finance got the funding they wanted, and the chief reason for refusal was given as current business performance, which at least has the merit of sounding rational. But 21% of applicants said that no reason was given for refusal. Alarmingly, of the businesses whose proposals were declined, few were offered the opportunity to have their application referred to an online platform. This clearly suggests that the signposting scheme is not working. This is surely something that the Government could address quickly. Can the Minister tell us what steps he might take to make signposting the helpful option it was created to be?
It is perhaps not surprising that, when it comes to service, many of our large and established banks rate well behind challenger banks. CDFIs are generally seen as quick, responsive and efficient. Service access, generally online, is seen as slick and efficient, especially if you are a start-up or a micro small business. CDFIs generate some feedback concerns that the offered product range can often be limited, particularly for larger and more-established businesses. I note that, when it comes to CDFIs, the Government deserve congratulations on the new funding vehicle launched by the British Business Bank. This new Community ENABLE funding programme will provide a much-needed £150 million in initial funding to expand CDFI lending and, handled properly, should also be an attractive vehicle for institutional investors.
I conclude by rehearsing some of the barriers to SME lending and by noting some of the suggestions for improvement made to me, chiefly by challenger banks. The CEO of Allica Bank, Richard Davies, highlighted that lending for SME housebuilding carries an RWA treatment at 150% of loan value. He suggests that this could be reduced if a domestic bank’s lending to housebuilders is, for example, no more that 10% of its balance sheet. Given the Government’s very ambitious housing target, this surely should be seriously considered. I would argue that there is no serious prospect of building 300,000 homes a year using only the few remaining large-scale builders. Does the Minister agree with that?
Last year, the Treasury Select Committee’s report into SME finance identified several key factors limiting SMEs’ access to capital. Three seemed particularly important: thresholds created by capital requirements on SME lending determined using RWA; disproportionate use of personal guarantees; and a lack of awareness of the services provided by the British Business Bank. I would add the failure of the signposting system and the urgent need to turbocharge the growth in the CDFI ecosystem.
I realise that the Minister might not have time to address all these barriers and the other questions that I have raised, so I would be very happy if he could answer as time permits and write to us about the rest.
The Lord Bishop of St Albans
My Lords, I thank the noble Lord, Lord Sharkey, not only for securing this debate but for an interesting and informative introduction setting out a number of important matters. I declare my interests: until two weeks ago, I was president of the Rural Coalition, which is relevant to this speech; I am also a vice-president of the Local Government Association.
I will focus my remarks specifically on the challenges for small businesses in rural areas. They hold significant potential for economic growth and are critical for our economy, but they face distinct challenges around access to banking and financial services compared to urban areas. There are over 500,000 businesses registered in rural areas, and the rural economy employs around 3.8 million people, so it is important that this economy and the small businesses that make up part of it have access to the services that they need to thrive and to contribute to the Government’s growth mission.
Some Members of your Lordships’ Committee may recall that I have, in the past, referred to the Rural Coalition’s report entitled Reigniting Rural Futures. It highlights the underperformance of the rural economy. Although the rural economy already contributes over £315 billion a year to England, with the proper investment and policy framework it could be contributing an additional tax revenue for the Exchequer of at least £19 billion. I do not know whether the Minister is aware of this report—if not, I would be glad to give him a copy or a link to it—but I would be very interested to see whether he and his officials have made any assessment of it, as I believe it is a really important contribution to this debate.
The pandemic accelerated the movement away from cash. With the banking industry keen to reduce operating costs, the way that many start-up businesses and small charities use banking services no longer fits with the business drivers of today’s banking industry. The transition to online banking is happening very fast and, in some cases, too fast for small charities and businesses in rural areas, with little thought or support to aid that transition.
Many are now operating in areas where local bank branches have disappeared. The withdrawal of banks and large financial services from rural communities is worrying but also damaging for the rural economy. Post offices play an important role in offering these services where local bank branches have closed. Recent research from Citizens Advice showed that those in rural areas are more dependent on post offices for essential banking services than those who live and operate in urban areas are, yet many local post offices have also been closing in rural communities.
The closure of bank branches and the transition to online banking hit small rural businesses particularly hard. On the one hand, this is because of the digital divide, where a lack of reliable and fast broadband inhibits easy access to online services; on the other hand, it is because, for many small business owners, access to face-to-face, in-person financial advice is crucial to giving them the confidence they need to start or expand their businesses. Many business owners are forced to travel longer distances to deposit cash and to carry out their banking, leading to reduced opening hours. For people who run small businesses in rural areas, having to drive five, 10 or, in some cases, 20 miles to another town as there is no other branch represents a hugely disproportionate burden.
I welcome His Majesty’s Government’s commitment to rolling out 350 banking hubs by the end of this Parliament. They are a great solution to some of these problems. However, 350 hubs are not nearly enough to replace the services that have already been lost. Also, the rollout is extremely slow, with it taking around 12 months to open a new hub. On top of that, the criteria by which Link qualifies an area as needing a hub are relatively strict, meaning that many small rural areas do not qualify despite their desperate need for access to banking services.
Of course, for some of those small villages and towns that do not qualify for a banking hub, post offices can—and, in some cases, do—offer a viable solution as a place where SMEs can carry out their basic banking. Can the Minister provide an assurance that this will be taken into account in the Government’s upcoming Green Paper on Post Office reform? Will they continue to mandate geographical access to post offices, including those in rural areas where they are often an absolute lifeline for businesses and communities?
Finally, I want to touch on the rural England prosperity fund. I welcome His Majesty’s Government’s announcement of £33 million for 2025-26, as well as the additional £5 million that will go towards the rural community assets fund. Yet, from 2023 to 2025, the rural England prosperity fund was £110 million. So it is no use pretending that this is not, in fact, a substantial cut in annual funding. We urgently need targeted investment, services and support for entrepreneurs and businesses in rural areas so that the rural economy can play its part in this country’s growth mission. There is a great deal of untapped potential here, but we need to remove the additional barriers and challenges that our rural SMEs are facing. I urge His Majesty’s Government once more to ensure that our rural communities are not neglected and left behind.
Baroness Kramer (LD)
My Lords, let me begin by saying that I totally sign up to all that my noble friend Lord Sharkey said and by adding to the words of the right reverend Prelate the Bishop of St Albans. I listened with real interest to his discussion of post offices and banking hubs but, of course, his whole speech was significant.
I, too, recognise that the Government are sincere in trying to improve access to finance for SMEs and to encourage their take-up of financing opportunities. We do business start-up well in the UK. Although equity capital is harder to come by here than in the US, start-up capital and even growth capital are not, I suggest, our primary problem. Most small businesses are wary of outside equity as it dilutes control. They know that most outside equity intends to sell off the business sooner or later. I would argue that our biggest problem is the lack of availability of debt finance for SMEs, whether that is just to acquire a second van or for a major scale-up. Scale-ups hoping to grow speak of a valley of death as loan opportunities, particularly for unsecured debt, seem to disappear just as they are needed.
In their consultation document, the Government identify the many new challenger banks and alternative finance providers that have come into and now dominate the SME debt finance market. However, I am clear from conversations with groups such as Responsible Finance, but also the British Business Bank, that these new players are essentially offsetting the sharp drop in debt financing offered by the high street banks. The total pool of lending to SMEs has not grown. In addition, the bank referral scheme, to which my noble friend Lord Sharkey referred, for those SMEs that are turned down by banks, is turning, quite frankly, into a bit of a dud at the moment. The British Business Bank has also made significant efforts to fill in this gap, especially with programmes such as its growth guarantee scheme.
I am delighted with the recognition that the British Business Bank has now given to the capabilities of CDFIs—community development financial institutions. These are typically not-for-profits in deprived areas or areas of modest income, whose only purpose is to serve the local community and its banking needs. The BBB’s community enable fund will support £150 million in lending to SMEs via CDFIs over the next two years, with money from the Department for Business and Trade, but the scheme is then intended to grow as private partners join the fund. Challenger banks such as Unity Trust and Triodos have also invested in CDFIs, as have, more recently, Lloyds, NatWest and JP Morgan Chase, but the problem is scale. That is why I propose that the Government should look again at their CDFI policy and at the template of the United States.
In the US, community development financial institutions—primarily community banks, but also credit unions—are the backbone of the economy. As we speak, they have outstanding $304 billion in loans, primarily to small businesses. They have been the instrument through which the US Government have supported small businesses during financial crises and recessions, avoiding the pitfalls of the random financing that the UK was really forced to offer through its loan schemes during Covid. That is because CDFIs know all their customers, so the same level of fraud is nowhere near experienced in the United States. Their role in cushioning the US economy continues, and it plays a crucial role in the resilience and growth of small businesses, which then go on to feed larger businesses. US CDFIs are usually not-for-profit but, despite lending to many customers who could not qualify for loans from mainstream banks, they typically have lower default rates than the mainstream banks.
It was not always thus. The use of CDFIs to fund small businesses was a result of the Community Reinvestment Act 1977. It was a civil rights measure to counter the decision by mainstream banks to redline deprived and ethnic minority areas and to refuse to lend within those boundaries. These mainstream banks were, in effect, required by the regulators to lend to all communities or put funds into an entity that would—hence the CDFIs. By 1997, there were roughly 200 CDFIs in the United States. The Clinton Administration decided to back their growth with a federal fund, and today the number is 1,400, typically in areas of deprivation or middle-income areas across the country. They have the mission and the staff to connect with their communities. I have visited CDFIs and met the civic societies that they use to enable small businesses to understand business plans, accounting and marketing—in other words, to become bankable and a success. Mainstream bank officers at the highest level vie for places on the boards of CDFIs, such is the prestige. Indeed, mainstream banks now look to CDFIs to develop their future customers. Angel investors engage regularly with CDFIs for exactly that same reason.
Responsible Finance has been arguing for years that we need a UK community reinvestment Act. It is right. We are simply missing a layer of community banking from which the high street banks have withdrawn, leaving a space that no one else has properly filled. The British Business Bank funds 41 CDFIs—yes, 41—versus 1,400 in the United States. That is woefully inadequate. The collective CDFI loan book in the UK is approximately £100 million. That may sound respectable until you look at, again, $304 billion in the United States, as I mentioned earlier.
This tells us in volumes that there is huge scope in the UK to grow the existing CDFIs and add to their numbers. There is potential to look for opportunities to combine CDFIs with banking hubs, which at present, as the right reverend Prelate described, provide limited banking services—mainly access to cash—in areas without a bank branch. Those hubs are now contemplating their medium-term and long-term futures, so they are very open to new ideas and new possibilities.
The British Business Bank could use the ENABLE fund—that mix of government and private funding. Beginning to push forward such a programme would require enhanced and greater funding, but it seems to me that it is a viable strategy. I also see no reason why mainstream banks should not be required to contribute, as they do in the United States. It could be required as part of the price for closing branches.
We have tried pretty much everything: challenger banks, alternate banks, open banking, bank referral schemes and support from the British Business Bank. Nothing has reached the scale required. Community banking is a necessary pillar for communities; it keeps alive high streets, is the beginning point for entrepreneurs and is absolutely key to oil the engine of growth.
So if growth is the Government’s agenda—they are very firm that it is, and it is certainly our agenda—the growth of small businesses is absolutely vital. A layer of organisations to provide the necessary debt financing is simply missing. It is time to seize the day, as the United States once did.
Lord Altrincham (Con)
My Lords, I thank the noble Lord, Lord Sharkey, for bringing forward this debate and for his continued focus on, and interest in, banking services in this country. I also thank the Minister for hosting this debate and for his dedication in doing so in the last slot in Grand Committee just before the holiday weekend. I welcome the opportunity to contribute to this debate today, because this is an important and pressing issue relating directly to the wider challenge of growing the economy.
Small businesses are the backbone of the British economy. The DBT reports that 61% of people employed in the private sector work for small businesses. The Federation of Small Businesses reports that small businesses contributed a turnover of £1.8 trillion at the start of 2024. These organisations matter deeply.
Given this, we are proud of the steps taken by the previous Government to support small businesses, such as the formation in 2014 of the British Business Bank—which continues to be supported by the CBI and the BCC—as well as small business rates relief, the start-up loans scheme, and of course the Coronavirus Business Interruption Loan Scheme and Bounce Back Loan Scheme, which protected small businesses during Covid. Small businesses were also affected by the debanking issue, which has been partly addressed by the FCA, as was raised by the noble Lord, Lord Sharkey. Maybe we could also ask the Minister for his observations and the progress on that.
However, despite these welcome steps, it is evident that small businesses are operating in increasingly difficult economic conditions. Noble Lords across the Committee are well aware of the challenge inflicted on small businesses by the Government’s decision to increase national insurance, alongside minimum wage changes. The Institute of Directors said that this will cause small businesses “precious little” other than pain, and Hospitality UK has said that the policy will be a “brake on growth”. Can the Minister assure us that this Government will keep this area and impact carefully under review?
As we have heard in the discussion so far, small businesses struggle to access banking and financial services. This is an issue that noble Lords have touched on before. I note the welcome debate initiated by the right reverend Prelate the Bishop of Newcastle on bank closures to rural communities—issues picked up again by the right reverend Prelate the Bishop of St Albans today. Points were also very well made about the importance of banking hubs.
Several factors led to the present state. Small businesses are a perennial problem for banks, partly because many of these businesses are very small and may fail after a few years. The sector has never been profitable for banks. Small businesses tend to start by using retail accounts, before moving to business accounts, and lending would normally be in the form of a one-year revolving credit facility and, less commonly, five-year loans. However, both have very high defaults, hence the reluctance by banks to lend.
Banks are very familiar with this problem. Noble Lords may have seen the letter sent by the bank bosses to the Chancellor over the weekend that highlights some of the challenges the banking sector faces in supporting small businesses, among other banking services. Does the Minister recognise the position outlined by the executives in that letter? In practical terms, bank capital regulations mean that traditional lenders are deterred from lending to small businesses. The higher collateral threshold mean that banks prefer low-risk property-backed loans. These criteria do not match up with the needs of modern, service-orientated small businesses with limited tangible assets.
The other effect of the regulatory framework is the burden that it places on banks in compliance costs. This again deters banks from operating in low-margin geographies where small, local branches may not justify the capital cost. As we know, 63% of branches that were open at the start of 2015 have since shut. The numbers are headed below 1,000 and many people will have very limited access to any kind of branch. It is important to mention that access to branches is not just access to credit but access to advice. It is someone to talk to and understand what financial services can provide to your business.
Allica Bank, as mentioned by the noble Lord, Lord Sharkey, estimated this week that there remains a substantial SME credit gap of up to £65 billion. Clearly, it is just an estimate from one source, but this kind of credit opportunity is enormous in terms of the importance to SMEs in this country and an opportunity in the loan market for small businesses. Technology may offer a partial solution. There has been a rise in non-traditional lending, making up some of this shortfall. However, these non-traditional lenders come with their own risks, meaning that they are not always appropriate sources of capital. These lenders are often riskier, with lower due diligence standards, and several challenger banks are not yet profitable.
Given this credit problem and the importance of small businesses for employment and growth, this situation needs addressing. The Government announced a financial services growth and competitiveness strategy at the end of last year, although it has not yet produced any report or strategy. Can the Minister update the Committee on when a strategy will be forthcoming? The swift publication of the Government’s strategy would be a welcome signal to this community that its needs are being considered, with possibly regulatory adjustments to maximise their capacity to grow their businesses and grow our economy.
Lord in Waiting/Government Whip (Lord Wilson of Sedgefield) (Lab)
My Lords, I am grateful to the noble Lord, Lord Sharkey, for securing this debate and for his thoughtful and comprehensive contribution on the future of the SME sector. I am also grateful to the right reverend Prelate for his contribution. I look forward to receiving a copy of the report that he mentioned. I also thank the noble Baroness, Lady Kramer, and the noble Lord, Lord Altrincham, for their contributions. As everyone agrees, the SME sector is of critical importance to the UK economy. I am also grateful to have received interest from beyond this Room from Allica Bank and Creative UK.
SMEs account for the vast majority of all businesses and the majority of overall business turnover and employment. SMEs remain the backbone of our economy and the key to our prosperity. They drive the UK’s growth and employment. The Government are committed to supporting their access to the finance and services that they need. This is why provision was made in the Autumn Budget to support the British Business Bank to invest over £1 billion across 2024-25 and 2025-26, to enhance access to finance for small businesses. This includes over £250 million each year for small business loan programmes, including start-up loans and the growth guarantee scheme.
The Government also announced in December last year a new business growth service to make it easier and quicker for SMEs to find government advice and support, all under one roof. Last month, we published a call for evidence on SME finance. This work will feed into the small business strategy, which is due to be published later this year.
I should add that the Government’s call for evidence on SME finance also highlights the important issue of the underserved, including the role of community development finance initiatives in the UK in helping minority groups to access finance. It would be good to understand more clearly what sits behind the headlines and what is driving the financing gap for the underserved.
The Government are also taking steps, however. The British Business Bank’s Community ENABLE fund, which has already been mentioned and was launched in November, aims to increase the availability of funding to social impact sector lenders and the smaller businesses they serve in local communities across the UK. The initiative is expected to provide a significant boost to the sector, supporting up to £150 million of lending over the next two years.
The noble Lord, Lord Sharkey, highlighted in detail the lack of demand from SMEs for credit, as outlined in the Government’s recent call for evidence on SME finance. This underscores the importance of government efforts beyond the vital schemes of the British Business Bank. The Government’s planned business growth service to strengthen SME advice and support is an important intervention in this space. It complements other schemes such as Help to Grow: Management, which provides SMEs with the skills needed to manage finances and innovate effectively.
The noble Lord, Lord Sharkey, also raised the issue of signposting a business declined for credit to an online platform to help match them with alternative credit. This refers to a 2016 government initiative known as the bank referral scheme. We recognise that the scheme is not working quite as intended; that is why the Government will consult on the scheme later this year.
Stepping back from the detail of individual policies, I recognise the acute macroeconomic uncertainties currently facing businesses across the UK and globally. This uncertainty has intensified in recent weeks as a result of global tariff policies, causing anxiety for small businesses around whether they can continue to access the finance they need. The Government have taken decisive action here by unveiling significant measures, including increasing UK Export Finance’s ability to provide financing support to British exporters by £20 billion.
The Government recognise the value of the British Business Bank and the vital work that it carries out to support SMEs. The growth guarantee scheme supports smaller businesses as they invest and grow by providing a government guarantee of 70% to lenders for loans of up to £2 million. The guarantee reduces the risk to the lender, making financing more accessible where credit would either be declined or available at a prohibitive cost. It supports a wide range of finance including term loans, overdrafts, asset finance, invoice financing and asset-based lending. The future shape of the growth guarantee scheme will be determined at the spending review, which is due to conclude in late June.
Recognising the critical importance of access to banking services and concerns around debanking, the Government laid a statutory instrument earlier this week to strengthen how customers, including SMEs, are treated when a bank decides to close a customer’s account. The FCA has undertaken research looking at the drivers and rationale for debanking; it found no evidence of this being politically motivated.
The Treasury’s call for evidence on this topic revealed that there were still a number of deficiencies in the current rules. This includes customers not having enough time to make alternative banking provision in cases of bank account closure or not understanding the reasons for their provider’s decision. The new rules will give customers more time to challenge decisions they disagree with and find a new bank if their account is closed. Specifically, the new rules extend the minimum notice period before bank accounts can be closed to 90 days, which is higher than the protections in other jurisdictions—including in the EU. Additionally, we have mandated that providers offer a sufficient explanation for account closures and outline the process for lodging complaints.
On physical banking presence, which has been mentioned, especially for rural areas, I recognise the importance of banks, or equivalent banking services, being readily available on the high street for SMEs and the concern about the loss of relationship banking in the digital age. That is why the Government are actively supporting the rollout of banking hubs, with a commitment that at least 350 will be established by the end of this Parliament; about 140 have already been opened. These hubs will enhance access to banking services, including in underserved areas, ensuring SMEs can continue to contribute to our economy. The process for requesting a hub is an independent one, carried out by LINK, when a cash service closes or there is a community request to examine if a hub is warranted.
According to the FCA’s 2022 Financial Lives Survey, in the 12 months to May of that year, just 33% of adults with a day-to-day account carried out banking activities face to face in a branch, down from 63% in 2017. In respect to what the right reverend Prelate said about rural areas, we obviously recognise the importance of access to banking, the challenge with rural areas and the importance of the Post Office, and 99% of the UK population lives within three miles of a Post Office. I cannot say anything more about what will be happening in the spending review in relation to the Post Office, but for access to cash the FCA rules state that 95% of people must be within three miles of a cash facility in rural areas.
A number of issues were raised about whether the UK’s regulatory regime is appropriately calibrated to support the real economy and financial stability. Looking carefully at the impacts of regulation is important and consistent with both the FCA and PRA being given secondary objectives designed to ensure that the impact of regulation on the UK’s growth and competitiveness is carefully considered. We must also be careful not to overlook why regulation was strengthened in the UK and globally following the financial crisis and the importance of ensuring that banks are adequately capitalised.
To answer some of the questions from the noble Lord, Lord Altrincham, the banking sector is critical to delivering a number of priorities for economic growth. That is why the Chancellor has asked for a new approach to regulation that supports growth, instead of excessive focusing on risk, and why we are codesigning the first ever financial services growth strategy with industry. This Government’s plan for change will raise living standards across the UK, putting more money in people’s pockets.
On capital regimes, supporting UK economic growth and competitiveness was a central consideration for the PRA, part of the Bank of England, in finalising its Basel 3.1 package. Basel 3.1 is about the capital framework in the UK. The PRA’s final package included a new SME lending adjustment to ensure that capital requirements for lending to SMEs would not go up as a result of Basel 3.1. This was a material improvement to the PRA’s original proposals, which inadvertently would have increased capital requirements for banks’ SME lending. To the specific question about thresholds protecting bank deposits here in the UK and the importance of protecting SME deposit customers, noble Lords will be pleased to hear, as the noble Lord, Lord Sharkey, has already pointed out, that the Bank of England is currently consulting on raising that limit, which currently protects £85,000 of bank deposits, to £110,000.
A question was also raised about the shift in the provision of credit in the UK’s financial system away from traditional, large banks and whether this was a risk to the UK’s financial stability. I would be keen to stress the importance of competition and diversity of credit here in the UK and the value of credit being provided by smaller and specialist banks. These provide much needed finance for the real economy. Challenger and specialist banks now provide 60% of gross lending to SMEs in the UK. This increase in competition and diversity of finance offers benefits in reducing reliance on a small number of lenders. This may improve the resilience of the system to continue to support the economy in times of stress.
The FPC is very focused on the role of non-banks in the financial system and wider economy, with the sector becoming an increasing focus in its publications. The non-bank sector provides 56% of the total £1.4 trillion stock of corporate debt and has accounted for the entire increase in stock of funding to the real economy since 2007.
It would be remiss to close this debate without acknowledging past failings in the treatment of SME business customers by their banks. This includes but is not limited to historical interest rate hedging products. Understandably, these episodes affect trust and caused anger following the financial crisis. Therefore, the FOS now has jurisdiction over 99% of business banking disputes, creating a much wider safety net for businesses. This is and remains a genuinely important step in ensuring the protection of SMEs. More widely, the Treasury and FCA continue to monitor the adequacy of the regulatory perimeter for business finance. In this, we aim to balance protecting SMEs with the risk of increasing the cost of accessing finance as a result of extending regulation too widely.
This has been a really good debate, and SMEs are seen by the Government as one of the driving forces of the economy going forward.