New bill would hold banks accountable for supporting SMEs

A bill has been put forward by a group of senior Labour backbenchers that would see banks required to up their lending offerings for small businesses, and be held accountable for their impact. 

The legislation, if passed, would push banks to give more backing to credit unions and community development finance institutions (CDFIs), which are often the organisations that SMEs approach if mainstream lenders can’t help them. 

The MPs also want banks to be responsible for reporting on their impact, including measures to improve access to business finance and reduce financial exclusion. The move is a bid to make finance more accessible for more businesses – many of which have struggled since financial turbulence has made lenders more risk-adverse. 

What prompted the bill?

The 10-minute rule bill, known as the Fair Banking Act, was tabled by former business minister Gareth Thomas. Commenting on LabourList, he wrote: 

“Thousands of small and medium-sized businesses are currently locked out of the finance they need to grow. Entrepreneurs without long track records or significant assets often find the door to mainstream banking closed. Too many are left without advice, support or a fair chance to turn good ideas into thriving businesses. This is particularly true for businesses led by women, people of colour and disabled people and for those based in the most economically deprived parts of the UK.” 

Thomas added that more than half of small firms say credit is unaffordable, that business finance in the UK is more expensive than in other countries, and that businesses with trading incomes of less than £10m cannot access personalised advice.

This means that early-stage entrepreneurs and businesses with smaller turnovers cannot get funding, nor advice on how to grow. “Access to affordable finance can unlock the potential of businesses across the UK, helping them grow and thrive,” argues Thomas.

What would the Fair Banking Act do?

Mirroring the US Community Reinvestment Act, the Fair Banking Act would give the Financial Conduct Authority the power “to assess how well banks of different sizes are serving individuals, small businesses and underserved communities”. 

This data would then be published as a ratings system to show exactly what banks are doing to meet their criteria. “Banks would be able to improve their ratings by expanding their own affordable lending, and by partnering with credit unions and community development finance institutions (CDFIs),” says Thomas. 

He adds that there wouldn’t be punishments for banks that fall short but there would be “accountability, transparency and incentives to do better”.

The bill has won the backing of business and trade committee chair Liam Byrne, work and pensions committee chair Sarah Owen, as well as former shadow chancellors Anneliese Dodds and John McDonnell.

Does the bill go far enough?

The legislation will face scrutiny, but it has been widely praised for its ambition. However, as George Holmes, managing director of Aurora Capital, told UKTN, there are concerns that it could become a “box-ticking exercise”. 

He explained: “If ministers want this to resonate with business owners, they should pair accountability with practical delivery, faster schemes, simpler access, and consequences for banks that continue to shut SMEs out.”

Businesses struggling to raise finance in the current jittery climate will be hoping that this bill could make an impact. However, it does serve as recognition that the current lending system is leaving many business owners out in the cold, unable to grow their venture. Supporting them will benefit the economy as a whole.