FCA rules not a barrier

The Financial Conduct Authority has found “no evidence” that its own regulation is a major barrier to small and medium-sized businesses raising money, in a review published yesterday that instead pointed to low awareness of funding options, complex products and commission-driven incentives in the unregulated end of the lending market.

“We found no evidence that FCA regulation is a major barrier to SME access to finance. Nonetheless, SMEs face challenges accessing finance on both the demand-side and supply-side,” the review said.

The regulator launched the review in March into why UK small and medium-sized enterprises were taking out fewer loans than businesses in other countries, and whether its own rules were contributing to the problem.

It drew on evidence from small businesses, lenders and representative organisations, and found that many entrepreneurs were unaware of the different types of finance available. Others struggled to compare alternative providers or found the process too complicated. The FCA said the challenges were most acute for microbusinesses, which it said account for 95.5 per cent of all SMEs.

Commercial finance brokers play a large role in Britain’s small business lending market, connecting companies with banks and alternative lenders. But the FCA found that, in unregulated parts of the alternative lending market, commission-based incentives for brokers could steer very small businesses towards high-cost, short-term loans that were ill-suited to their needs. “This lending generally falls outside our perimeter,” the FCA said.

The findings echoed some of the issues identified in an investigation by The Times this week, which found that opaque commission arrangements and limited regulation were giving some brokers an incentive to sell expensive debt without disclosing their fees. The Times Entrepreneurs Network reported that one business, Pixapro, had taken about £1.4m of high-interest debt across 15 funding facilities, with average annual percentage rates of about 20 per cent.

Personal guarantees, which lenders routinely ask for, could also deter business owners who were reluctant to put their personal assets at risk, the watchdog said. Under some loan agreements, owners could become personally liable if their company defaulted, putting their homes at risk.

The review found that “underserved founders”, including female, disabled and ethnic minority entrepreneurs, and businesses outside London and the southeast, “face disproportionate difficulties securing credit and accessing investor networks”. Separate analysis published this month found that outstanding high street bank lending to smaller companies across Great Britain fell by £26.8bn between 2022 and 2025.

Most commercial lending falls outside consumer protection rules and beyond the FCA’s powers. The regulator set out its next steps aimed at cutting some of the barriers it identified.

It said it would deliver a “proportionate” regulatory regime as part of the Treasury’s reform of the Consumer Credit Act. Some small businesses are covered by consumer credit rules.

The FCA will publish a paper early next year outlining a regulatory framework for the first open finance scheme, which will prioritise SME lending. “Open finance presents a real opportunity to address challenges in SME lending, particularly where limited financial information or credit histories make it difficult for lenders to assess risk,” the report said.

“We’re focusing on where we can make a practical difference by reducing unnecessary friction,” said Graeme Reynolds, the FCA’s director of competition.

Aysha Fernandes, director of commercial finance at UK Finance, which represents more than 300 companies, welcomed the findings. “The report identifies a number of practical areas where further progress can be made, including Consumer Credit Act reform, digital verification and the development of open finance,” she said.

The trade body is developing a voluntary digital verification service alongside banks and building societies to reduce duplication in applications for SMEs and lenders.

Responsible Finance, the trade body for community development financial institutions, is among those calling for tighter regulation of the alternative lending market.

Ministers were due to meet senior bank executives over small business lending in May 2025 amid concerns about access to credit and account closures. In October 2025 the Bank of England said its financial policy committee was identifying barriers that prevented high-growth businesses from accessing finance, and a review by the Department for Business said the cost of money was “prohibitively high” for many businesses.

About the author

Amy Ingham

Amy Ingham is a reporter at Business Matters, covering UK business news with a focus on breaking news, business policy, late payments and insolvency. She joined the magazine in 2026 after completing the NCTJ Diploma in Journalism at Harlow College’s journalism school. Her recent reporting includes British Steel’s nationalisation and its impact on SME suppliers, the decline in late payments by large firms, and Insolvency Service director disqualifications. Reach her at aingham@cbmeg.co.uk.

Advertisement