2020: Mr. Woolard, It’s Time to Tighten Business Lending Regulation

A liberal approach has created a vast business lending ecosystem in the UK. Now is the time to set standards for transparency and customer care, says Niels Turfboer, co-founder and managing director of business lender Spotcap.   

Dear Mr. Woolard,

First and foremost, congratulations on your new role. The economic outlook may be a bit shaky but nonetheless it is an exciting time for the Financial Conduct Authority. We will rely on you to guide the nation during a critical period with high stakes. One of the areas in need of your attention is business lending.  

The number of business lenders in the UK has exploded since 2008. Today there is a wide range of options available: working capital, asset finance, invoice finance, trade finance, property finance, merchant finance and more. 

For small and medium sized business owners having all this choice is a privilege. But there is an elephant in the room that is rarely discussed—unlike consumer lending, business lending is largely unregulated. For sole traders, there is no regulation in place for amounts over £25k and for limited companies, all lending is unregulated, regardless of amount.

As a result, in the UK today, businesses may end up with finance products that are more expensive than they initially thought or have conditions attached that they may not understand. What’s more, if they have a grievance with their lender, they have limited options of where to turn. 

To date, UK regulators and government have focused on making sure small and medium sized businesses have good access to financing options, but that is not what they need. They need access to responsible financing options. Financing from lenders with a strong grasp of customer care and credit control. These lenders will ensure that the borrower understands the cost, the terms, and isn’t sold a product they can’t afford. Unfortunately, there are plenty of lenders out there that don’t do proper affordability checks and choose to compensate for the high default risk by raising the financing cost with high interest rates and fees. 

Outside the UK there are different approaches to protecting business owners. Belgium has a specific legal framework in place that applies when granting credit to SMEs. The Netherlands is more light-touch—a government backed accreditation programme was launched by an SME foundation that holds affiliated lenders accountable to best practices, such as a maximum annual percentage rate (APR) of 20 per cent. To avoid a situation where too little is done too late, more is needed in the UK.

Specifically, we need a clear and consistent display of the full cost of borrowing upfront, affordability checks, a max APR rate, and best practices when a business encounters difficulty repaying. These are all issues that the FCA addressed when it took on responsibility for consumer credit in 2014, but have been left untouched for businesses.

Better business lending standards would not only improve trust but also give the UK’s 5.9 million small and medium sized businesses more confidence to apply for the funding they need. 

An added wrinkle is the expectation that the UK economy will be facing significant challenges as it prepares to leave the EU. The National Institute of Economic and Social Research (NIESR) estimates that Brexit could shave up to 3.5% from the size of the economy by the end of the 2020s. A slowing economy will increase pressure on you to help ensure continued access to financing for UK businesses. Against this backdrop, you will need to stand firm on putting measures in place that will protect business owners and create a stable and sustainable capital market. 

Before your predecessor, Andrew Bailey, announced his move to the Bank of England he opened up to the possibility of change. “There is a strong case for making small business lending a regulated activity,” he said in an interview with the Times in October. 

In my book, and I hope yours, that time is now. 

Niels Turfboer is the co-founder and managing director of business lender Spotcap. The views and opinions expressed are not necessarily those of AltFi.