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The UK Financial Conduct Authority (FCA) is currently inviting views on a Discussion Paper on its approach to small and medium-sized enterprises (SMEs) as users of financial services.

Behind the review is criticism of the effectiveness of regulation of the SME finance market.

This follows widely reported problems with a range of products:

• interest-rate hedging products sold to SMEs;

• factoring and discounting solutions; and

• loans backed by the UK government’s Enterprise Finance Guarantee, together with RBS’s treatment of firms in financial difficulty.

Most recently a high-profile campaign to force lenders to show annual percentage rates on all small business lending has won the support of the Institute of Chartered Accountants and the Forum of Private Businesses, the London Times reported last week.

In its measured and well-informed Discussion Paper, the FCA assesses the effectiveness of its existing approach to SMEs.

Common misconception

A common misconception is that the FCA only regulates SME finance that is within the consumer credit regime, i.e. loans to unincorporated businesses. Actually the FCA already regulates all SME finance provided by regulated firms i.e. almost all lenders.

As the Discussion Paper notes, the application of the FCA’s rules is very complicated, but the FCA’s high-level conduct of business principles - including the need to conduct business with integrity - already apply to all SMEs, regardless of whether or not they are regulated businesses under the consumer credit rules.

The consumer credit rules capture unincorporated businesses, but around 70% of SMEs are now companies. Probably 95% of businesses using asset finance are companies and therefore unregulated except for those in a couple of sectors.

Many farmers remain unincorporated and there are also many small unincorporated partnerships in the professions such as architects and photographers.

Asset finance firms dealing with any regulated customers must be FCA authorized and meet all of the FCA’s high-level conduct rules.

The Discussion Paper isn’t about the ‘regulatory perimeter’ so it doesn't consider whether it’s right that some businesses are part of the consumer credit regime. That’s not something the FCA has any say over. The government is planning to review it next year although given the existing concerns about SME finance it seems most unlikely there will be any change for now.

High-level conduct rules

Instead the FCA is considering how its high-level conduct rules apply when authorized firms deal with SMEs.

It’s clear the FCA wants to ‘harmonize’ the treatment of all SMEs, both those that are consumer credit regulated and the majority that aren’t. ‘Harmonizing’ even appears in the title of one of the chapters of the Discussion Paper, so the principle doesn’t seem open for debate.

It also seems unlikely that this will result in no change. The FCA is under pressure from Parliament - in the face of strong grassroots campaigning - to act to protect SMEs. The regulator has also proven it can act strongly and act fast when it wants to, having more or less closed down the payday lending industry in the past couple of years.

The Discussion Paper does consider whether voluntary codes of conduct are a route to promoting good practices in the treatment of SMEs. Such Codes have been around for decades, of course, and the FCA is bound to question whether they can be relied on if they didn’t prevent some of the reported problems with SME finance in other sectors.

A likely outcome is more guidance to firms in different parts of the market on how the existing high-level conduct rules apply to all of their dealings with SME clients. For most firms in sectors such as asset finance that are working well for businesses, and for which the FCA and the Financial Ombudsman Service receive relatively few complaints, such guidance is very unlikely to present any new difficulties. It could even help firms by reducing regulatory uncertainty and risk.

Possible changes ahead

If the firm-wide FCA regulation can be shown to protect SMEs this could also pave the way to a removal of unincorporated businesses from the specific consumer credit rules in the longer term.

It all points to a strong case for the industry to cooperate with the FCA and respond positively to this important consultation.

Julian Rose is director of consultancy Asset Finance Policy Limited ( and runs the Asset Finance 500 directory of asset finance brokers (