Financial Services and Markets Bill

Lord Sharkey Excerpts

Committee stage
Monday 30th January 2023 Grand Committee

Moved by

[Lord Sharkey]

40: After Clause 23, insert the following new Clause—
“Regulation of commercial lending to SMEs
(1) The Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (S.I. 2001/544) is amended in accordance with subsections (2) to (4).(2) In article 60C, in paragraph (3), at the end of sub-paragraph (b) insert “, and(c) the borrower is not an SME.”(3) In article 60D, at the end insert—“(6) This article does not apply to an agreement if the borrower is an SME.”(4) In article 60L(1)—(a) at the appropriate place insert—““SME” means a small or medium-sized enterprise, being any person who is not an individual which—(a) carries on business of any kind which employs fewer than 250 persons, and(b) has either an annual turnover not exceeding £40,000,000 or an annual balance sheet total not exceeding £36,000,000.”;(b) in the definition of “relevant recipient of credit”—(i) omit the “or” at the end of paragraph (a), and(ii) at the end of paragraph (b) insert “, or“(c) an SME;”.”(5) Article 3(1) of the Financial Services and Markets Act 2000 (Rights of Action) Regulations 2001 (S.I. 2001/2256) is amended in accordance with subsections (6) to (8).(6) In sub-paragraph (a), for “any individual, unless he” substitute “any individual or SME, unless he or it”.(7) In sub-paragraph (b), after “individual” insert “or SME”.(8) At the end insert—“(c) “SME” means a small or medium-sized enterprise, being any person who is not an individual which carries on business of any kind which employs fewer than 250 persons; and has either an annual turnover not exceeding £40,000,000 or an annual balance sheet total not exceeding £36,000,000.””Member’s explanatory statement
This would bring lending to SMEs within the perimeter of the FCA.

[Lord Sharkey (LD)]

My Lords, Amendment 40 is in my name and that of the noble Baroness, Lady Bennett of Manor Castle, whose support I am grateful for. The amendment would bring lending to SMEs within the FCA’s perimeter and would allow a private right of action to enable SMEs to sue lenders for breaches of regulatory protection, as I believe would Amendment 219 in the name of the noble Lord, Lord Holmes of Richmond.

However, there appears to be some uncertainty about the definition of an SME. The government website, which I checked this morning, says that it encompasses all businesses with no more than 250 employees and a turnover or balance sheet of no more than €50 million—the qualification is still given in euros—but it seems that Liz Truss might have changed all this. In an article in the Telegraph of 3 October last year, she raised the employee limit from 250 to 500. I cannot find this on any government website and I do not know whether the turnover and balance sheet requirements were also raised. If this is still government policy—perhaps the Minister can tell us whether it is—that is a good thing, bringing with it a significant relaxation in reporting rules and red tape to an important part of our commercial base. In fact, any encouragement or support for SMEs is a good thing.

As Rishi Sunak said in the policy booklet he wrote in 2017 for the Centre for Policy Studies:

“We have a world-beating record when it comes to creating entrepreneurial start-ups. Some 21% of UK firms are less than two years old, a higher figure than even the US … Yet when it comes to growing those businesses—the stage at which access to capital is most crucial—Britain’s record is dismal. In a ranking of 14 OECD countries, the UK comes a lowly 13th in terms of the proportion of start-up businesses that grow to having 10 or more employees within three years.”


He also noted that

“UK companies are far too reliant on banks for their credit financing needs”,

a reliance that has increased post pandemic. This reliance has been extremely problematic. Mistreatment of SMEs by banks is a truly serious problem, not just because it causes immense damage to companies and individuals but because the means of redress are cumbersome, full of long delays and generally unsatisfactory.

Commercial lending to SMEs is not regulated. It sits outside the FCA’s regulatory perimeter. In its annual perimeter report published last year, the FCA said:

“SME lending is a longstanding perimeter issue, as business lending is generally only a regulated activity where both the loan is up to £25,000, and the borrower is either a sole trader or a ‘relevant recipient of credit’”.


That excludes most of the SME sector by value. That sector operates without FCA regulation and has suffered some of the most appalling mistreatments at the hands of banks. Some examples of this have already been quoted this afternoon by my noble friend Lady Bowles.

There was the scandal of the mis-selling of interest rate hedging products, about 90% of which were subsequently found to have been mis-sold. There was also the treatment of SMEs by the Royal Bank of Scotland’s global restructuring group; the Tomlinson report on the scandal suggested that there were occasions where RBS had engineered businesses into default to move them out of local management and into the clutches of the GRG. The FCA later found that there was a systemic and widespread mistreatment of SME customers between 2008 and 2013. Andrew Bailey said

“GRG clearly fell short of the high standards its clients expected but it was largely unregulated and so”

the FCA’s

“powers to take action in such circumstances, even where the mistreatment of customers has been identified and accepted, are very limited.”

Then there was the HBOS Reading fraud in the early 2000s. A group of bankers was found by a court to have run

“an ‘utterly corrupt scheme’ that left hundreds of small business owners ‘cheated, defeated and penniless’”.

Those are just three of the major scandals affecting SMEs. There are others: mis-selling of loans under the Government’s enterprise finance guarantee scheme; mis-selling of tailored business loans by Clydesdale plc; allegations of misconduct involving business support units at other banks and mistreatment of small business borrowers when they are in arrears. There is clearly widespread, long-standing mistreatment of SMEs by financial services organisations. The case for regulation is particularly compelling because SMEs rarely have the practical ability to enforce whatever legal rights they may have against the banks. It would be exceptional for an SME to have the financial resource to take a bank to court.

--- Later in debate ---

[Baroness Penn (Con)]

I will write to the Committee with that information, where it is available. I will also write to the Committee on the point about the proposal to change SME definitions.

Those were all the points—

[Lord Sharkey (LD)]

The Minister mentioned the BBRS as part of this panoply of organisations that are spending their entire time defending SMEs. How many cases has the BBRS handled since its inception?

[Baroness Penn (Con)]

I do not have the figure to hand. I note that it started in 2021, so is a relatively new organisation. Perhaps I could also—

--- Later in debate ---

[Lord Sharkey (LD)]

I thank the Minister for her response but this all seems astoundingly Panglossian. It is as though there is nothing wrong with all this and the SMEs are protected, happy and profitable. That is not the case. If it were the case, why has there been this succession of appalling scandals and appalling mistreatment, causing so much damage to our small businesses? We cannot both be right here. If the system is working, why do all these things continue to happen?

I beg leave to withdraw the amendment and give notice that we will return to this issue on Report.

Amendment 40 withdrawn.