Coronavirus: FCA sets out expectations for banks lending to SMEs

In the ‘dear CEO’ letter (3 page / 80KB PDF) from interim chief executive Christopher Woolard, the FCA said it expected banks to have appointed a senior manager or managers with clear responsibility for lending to small businesses  and to ensure that those managers are discharging their responsibilities under the Senior Managers and Certification Regime (SMCR) suitably during the Covid-19 crisis.

The FCA added that it would look for evidence that the bank’s board is collecting information on its treatment of SMEs and, if appropriate, challenging the senior manager.

“Our objective will be to ensure that there is not a repeat of the well documented historic issues in the treatment of SMEs. As we consider the move from initial crisis response to a medium-term model, it is critical that we learn the lessons from those events and we cannot see those mistakes repeated,” the letter said.

Financial services regulation expert Andrew Barber of Pinsent Masons, the law firm behind Out-Law, said the FCA’s focus on its expectations for senior managers was key for banks to consider.

“A large portion of SME lending by banks is outside the FCA’s regulatory perimeter. The FCA’s SMCR for banks differs from the regime for solo-regulated firms in that banks’ senior managers’ responsibilities and attendant accountability is not limited to regulated activities. Banks' senior managers need to be mindful that all of their firm's activities connected with SME lending will be caught by SMCR,” Barber said.

“The FCA has now recognised the Lending Standards Board’s Standards of Lending Practice for Business Customers as an industry code. So it will keep this yardstick in mind when assessing behaviours of firms’ senior managers and relevant staff as they action a firm’s Covid-19 lending response lending SMEs. Relevant staff need to be aware of the FCA’s expectations here,” Barber said.

“For boards there is a reminder about specific aspects of their oversight role from the FCA, notably the importance of information gathering and potentially challenging management responsible for the firm’s Covid-19 SME lending,” Barber said.

“Firms are now on notice about the FCA’s expectations and must ensure relevant processes are in place – and demonstrable. Staff must be clear about the importance of supporting SMEs at this time with the regulator confirming it will be sensitive to the likelihood of firms making different judgements and having a different tolerance of risk in their lending in response to Covid-19 than ordinarily would be the case,” Barber said.

The FCA has set up a new small business unit to coordinate FCA activities across small business issues, to ensure that firms are supported through the crisis. The unit will gather intelligence about the treatment of SMEs by financial services firms and ensure a coordinate response to any issues.