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  • Bribery, fraud, sex parties and change to SME finance Posted on 31 January 2017

    There can be little doubt now following yesterday’s conviction of six people connected with HBOS lending to small business customers - following a string of other high profile issues concerning small business banking in recent years - that changes to SME finance are on their way.

    In Westminster, the All-Party Parliamentary Group (APPG) on Fair Business Banking together with the APPG Alternative dispute resolution Group are launching an inquiry; FCA Chief Executive Andrew Bailey has talked about work to create an "adequate complaint resolution mechanism" for small firms; and meanwhile the FCA is still considering its actions following its November 2015 discussion paper on its approach to SMEs as users of financial services that looked at how authorised firms treat unregulated small business customers.

    What might we expect?

    - Clarification from the FCA that regulated firms are expected to treat all customers fairly, not only regulated customers (oddly that is not the case today, as FCA Principle 6 concerning treating customers fairly is specific to customers entering regulated transactions).

    - New straightforward guidance on how Principle 6 ("A firm must pay due regard to the interests of its customers and treat them fairly") should apply to unregulated small business finance services and transactions: prepared at arms-length from the industry; dealing with matters specific to individual SME finance products; possibly linked to a new quality standard that firms could choose to have inspected and certificated; and endorsed by the FCA.

    - New independent complaints handling service for SME finance: A shift away from trade association complaints handling (whether independently or semi-independently overseen or not) towards an independent third-party dispute resolution service for SME finance.

    This is potentially good news for asset finance, promising:

    - Clarification of how FCA rules should be applied to both regulated and unregulated SME agreements, reducing uncertainty and risk and helping ensure a level playing field in the market.

    - A more logical and efficient complaints process for SME finance, whereby if a complainant remains unhappy at the end of a firm’s own complaints handling procedure there is one clear further option, i.e. independent complaints arbitration.

    - No extra FCA conduct regulation (it’s generally seen to be working already in helping to ensure high standards even if it's terribly over-bureaucratic for smaller firms) and no extension of the Financial Ombudsman Service into unregulated business finance.

    - For banks, a single process that applies across the SME finance industry rather than a variety of different dispute handling procedures that can cause serious systems, procedural and audit issues.

    A complication is where it leaves firms that aren't FCA authorised as they only offer only unregulated SME finance. There might prove to be no way of avoiding them needing some form of FCA authorisation, but that would require a change to the law so is likely to be some years away.

    Reading the lurid headlines of the HBOS case may not make this feel like a day to be optimistic about SME finance, but the direction of change here could turn out to be good news for providers of SME finance and their small business customers.

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