FCA Finds Regulation Not a Major Barrier to SME Finance, Outlines Three Next Steps

Key Takeaways

• An FCA review found no evidence that its regulation is a major barrier to SME access to finance.
• It identified market, information, and capability challenges instead, especially for microbusinesses.
• The FCA will focus on Consumer Credit Act reform, open finance (with SME lending prioritized), and monitoring digital verification, so firms in SME lending and customer due diligence should prepare for upcoming consultations.

Deep Dive

An FCA review found no evidence that its regulation is a major barrier to SME access to finance. It identified market, information, and capability challenges instead, especially for microbusinesses. The FCA will focus on Consumer Credit Act reform, open finance (with SME lending prioritized), and monitoring digital verification, so firms in SME lending and customer due diligence should prepare for upcoming consultations.

Three workstreams will shape future obligations. First, the Treasury is reforming the Consumer Credit Act toward a more modern, outcomes-based regime while retaining key protections. Once legislation is passed, the FCA will consult on the future regulatory framework, aiming to address the cost and complexity of some regulated SME lending. Second, the FCA has published its open finance roadmap and will issue a discussion paper outlining options for the first open finance scheme, with SME lending one of two prioritized use cases. Further engagement, infrastructure testing, and TechSprints will follow. Third, the FCA is monitoring a UK Finance-supported voluntary digital verification service that could reduce duplicated customer checks, while stressing that effective financial crime controls must be maintained.

No firm deadlines were given. The timing depends on the pace of Consumer Credit Act legislative reform and on the publication of the open finance discussion paper, described only as "upcoming." Compliance teams should treat these as horizon items and track them closely.

Recommended actions:

(1) Map the SME lending portfolio, especially sole trader and small partnership lending of £25,000 or less, to identify exposure to consumer credit rules and any future reform.

(2) Monitor the Treasury's Consumer Credit Act reform and prepare to respond to the FCA's consultation, using it to raise cost and complexity concerns.

(3) Watch for the open finance discussion paper and assess data-sharing, consent, and technology implications for SME lending.

(4) Review onboarding and KYC processes for duplicated checks, but do not relax financial crime controls ahead of any validated digital verification solution.

(5) Consider engaging through UK Finance and trade bodies.

Risk implications are moderate and mostly forward-looking. Opportunities include a more proportionate regime and lower onboarding friction. Risks include regulatory change uncertainty, implementation costs for open finance, and potential control gaps if verification is streamlined without adequate financial crime safeguards. Firms should also expect continued FCA scrutiny of SME customer outcomes, given the focus on microbusinesses, which make up 95.5% of SMEs.

Source: Financial Conduct Authority