The FCA falls short on small-business lending

RBS accepts that it treated small businesses unfairly

The Financial Conduct Authority lacks the power to police small-business lending

The results of the Financial Conduct Authority’s investigation into the treatment of small businesses by Royal Bank of Scotland (RBS) have sparked widespread anger. But while there is fury over the City regulator’s refusal to admonish RBS bosses, whose actions the bank itself now accepts were unfair, much of the criticism is misplaced.

For victims of the RBS affair, the injustice is keenly felt, but the bigger issue at stake here is whether such a scandal could happen again. Small-business lending is still not within the FCA’s remit. So if you run a small or medium-sized enterprise (SME) and feel you have been mistreated by your bank, your ability to seek redress is limited.

It’s not all bad news, however. In April, the government extended the reach of the Financial Ombudsman Service (FOS), which considers complaints from individuals about financial services, including bank lending, and issues rulings with which companies must comply. The scheme was previously closed to all but the smallest businesses, but it has now been broadened to include firms with fewer than 50 employees, annual revenues of less than £6.5m and a balance sheet worth less than £5m.

In addition, the FCA points out that its senior managers’ regime, introduced in 2016, gives it greater powers to hold the executives of financial-services firms responsible for their actions. This isn’t quite the same as full-scale regulation of business lending, but does allow the regulator to police the sector more closely. Still, the support from regulators remains limited. The maximum compensation the FOS can order has been increased to £350,000, from £150,000 previously, but that may not be enough for some.

In the absence of a regulator or ombudsman to turn to SMEs do have the option of suing their bank. But many will fear the odds are stacked against them given the legal resources available to the banking industry. Moreover, firms that go bust face a set-up that means even this option may be off-limits to them. When a company goes under, it is the administrator who must decide whether or not to launch legal action. Sceptics fear that the large firms that dominate the administrator sector are reluctant to take on the banks, from which they receive referrals.

The Supreme Court is considering changing the law in this area to allow small businesses to take action for themselves in such circumstances. However, the government has already rejected the notion that there should be a new tribunal established to consider small businesses’ complaints about their banks.