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What to make of the FCA's collections and recoveries review

On 12 July, the FCA published findings from its review assessing how retail banks treat their SME customers who are in collections and recoveries. Like any FCA review, it finds both good practices and areas for improvement - that's what a good regulator does. No doubt there will be changes needed across the lending market, but there are two fundamental points about the FCA's approach that deserve to be carefully considered.

  1. The FCA's first key finding is that 'good practice' is to extend regulated credit agreement protections to all SME customers. In the 'Dear Chair' letter to firms, the FCA writes: "We commend the approach of extending these protections to SME borrowers with unregulated credit agreements". But if policy makers had intended all SME lending to be treated the same way, that's what the law would say. Doing this would very clearly reduce choice and competition in the SME lending market, increasing prices and reducing availability of finance. This is not remotely about cutting corners in SME finance or behaving at all unfairly. It is about having relevant and fair policies and procedures given the user is a business, and often incorporated so - of course - a separate legal entity to the directors.

  2. In setting out good practices for forbearance, the FCA provides only one example, which is to achieve the survival of the SME business, only taking recovery action as a last resort. But this misses the fact that every year, around 10% of UK businesses close (fortunately, even more new businesses open). Is the FCA saying that banks now need to ignore this very basic fact, and in so doing, presumably accept higher LGDs? Losses that surviving and new SMEs would then have to pay for through higher rates?

On a day when the prospective future leaders of the Conservative Party are calling for a reduction in regulation, this report appears - on the surface - to significantly extend existing regulation in ways that risk making it (even) harder for UK SMEs to raise finance. Further debate is needed, while firms also study the findings carefully to identify and action specific improvements they can take in the short to medium-term.

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