How Is Debanking Affecting SMEs And Startups In The UK?

Many small businesses in the UK struggle due to unfavourable banking practices. According to the Treasury Committee’s recent report, over 140,000 small services, were removed from banking services last year, usually without enough notice.

Dame Harriett Baldwin, Chair of the Treasury Committee, commented on the severity of these issues, stating, “There’s no hiding from the fact smaller firms have had a torrid time over the last few years. Unfortunately, what we have found over the course of the inquiry is that there are some instances where banks and regulators are making a tough world for small businesses needlessly tougher.”


What Exactly Does Debanking Involve?


Debanking is where banks stop services to customers, often without clear reasoning or notice. As of late, this issue has more and more so affected small businesses across the UK, with the Financial Ombudsman Service seeing a 69% increase in complaints related to debanking from the 2020/21 year to the 2023/24 year. The most recent data shows a major 44% increase in such complaints over the last year.

The process often leaves businesses without essential financial services, severely disrupting their operations and growth. Factors leading to debanking can range from the bank’s risk management policies to regulatory requirements. However, many cases have shown that decisions are sometimes made based on the sector in which a business operates, with industries like defense, pawnbroking, and amusement perceived as ‘undesirable’ by some banks.


What Can Be Done About Debanking?


Calls for Transparency and Fairness


The Treasury Committee, led by Dame Harriett Baldwin, has suggested measures for more transparency in the banking sector. “When we set out on our inquiry into financing for small and medium-sized businesses, we weren’t necessarily expecting debanking to emerge as a key issue. But as they say, you must go where the evidence takes you – and it’s clear there is evidence that some legally operating businesses are being unfairly de-banked,” Baldwin stated. She discussed the need for banks to support small businesses rather than compounding their difficulties with sudden account closures.

The Treasury intends to introduce measures that will bring more openness and fairness in how banks interact with SMEs, including a proposed overhaul of the system for resolving disputes to replace the ineffective Business Banking Resolution Service.



Legislative Changes and Oversight


In response to these issues, HM Treasury has introduced tougher regulations to ensure banks uphold their legal duties, including the protection of freedom of speech, which some banks had infringed by closing accounts based on customers’ political views.

These new rules, set to be enacted following a public consultation, aim to make the banks’ decision-making process more transparent, requiring them to provide clear reasons for account closures and extending the notice period from two months to 90 days.

The Treasury Committee’s report advises that the Prudential Regulation Authority reassess its stance on Basel 3.1 standards to avoid disadvantaging UK SMEs. It also recommends that the Financial Ombudsman Service be given the authority to deal with issues concerning personal guarantees for smaller firms, addressing a current oversight.


Do Regulations Affect Small Businesses?


With these regulatory modifications, there are more obstacles. The contemplated elimination of the SME supporting factor in the Basel 3.1 standards could notably increase borrowing costs, possibly placing British SMEs at a disadvantage compared to their American and European peers.


Likelihood of Higher Expenses


The Treasury Committee expressed worries that the Basel 3.1 reforms might make it harder for British SMEs to compete globally, as banks could impose stricter lending conditions that elevate borrowing expenses for these businesses.


Need For More Openness


The committee has urged for more openness in banking decisions. It calls on the Financial Conduct Authority to mandate that banks provide detailed reasons for the closure of small business accounts, aiming to make the process more open and to prevent unjust account closures.