LSB review demonstrates need for ongoing SME lending protections

A review by the LSB (Lending Standards Board) of its registered firms’ application of the Standards of Lending Practice for business customers has identified 102 areas where action has been needed to bring firms into compliance with the Standards’ requirements.

The business Standards set the best practice framework for SME lending and are the only lending protections available to many UK SMEs. Firms signed up to these Standards are committed to delivering better outcomes for their SME customers – and to independent oversight of their SME lending practices. The Standards are recognised by the Financial Conduct Authority (FCA).

The LSB’s review covered 16 UK lenders, from major High Street banks to fintechs and challenger banks. Positively, at the time of publication, 59% (60) of the findings identified by the LSB have been addressed by firms, with work ongoing to resolve the rest.

Particular attention has been required from firms regarding their treatment of customers in financial difficulty (31 findings), aspects of their governance and oversight (24), and their processes for identifying and supporting vulnerable customers (19).

Issues were most likely to be caused by firms’ processes for putting the Standards into practice (70 findings), followed by issues with how employees were adhering to requirements (15), the systems firms have for recording, monitoring and sharing information (nine), and the policies firms set for how particular parts of the customer journey should be handled (eight).

“These firms’ commitment to delivering better SME outcomes is welcome – registered firms are holding themselves up to scrutiny by signing up to the Standards and are taking SME lending protections seriously.

“But when it comes to delivering the right outcomes for SMEs, there is always room for improvement and no room for complacency. The progress made so far must be maintained.

“One of the key issues identified in this review is how firms serve customers with acute support needs, including vulnerable customers, or customers in financial difficulty. We also identified issues with how firms are monitoring their own adherence with the Standards, and poor or inconsistent record-keeping was behind several findings. For example, SMEs can struggle to self-report a vulnerability to some lenders – and where vulnerabilities are reported, this information isn’t always acted on or recorded effectively.

“This review has helped identify where those issues are and how firms are responding. We’ll continue to monitor registered firms’ progress towards ensuring all the Standards’ requirements are met.”

The LSB’s report highlights the steps firms need to take to improve their treatment of SMEs in financial difficulty, including better signposting to support mechanisms, as well as improvements to affordability assessments and the quality of customer communications.

Of the 102 findings, 35 were classed as ‘minor’ (low impact on customer outcomes), 60 were ‘moderate’ (some improvements required for consistent fair outcomes) and seven were ‘major’ (requiring urgent attention). There were no ‘severe’ findings. Findings tended to have a higher level of severity for governance and oversight issues: 79% of these findings were moderate or major. 

Emma Lovell added: “The high proportion of findings relating to firms’ governance and oversight frameworks underscores the importance of independent, external oversight of how financial services firms are treating their SME customers. As we’ve seen, not all firms have the right level of visibility of how they’re adhering to the Standards.

“A significant proportion of UK SME lending is not subject to statutory regulation and, as a result, the business Standards are the only protections available to many UK SMEs. It’s vital that SMEs check their lender is registered with the business Standards if they want to ensure there is independent oversight of how their lender treats them.”

The FCA’s regulatory perimeter prevents it from overseeing financial services firms’ lending above £25,000 to businesses, or lending to limited companies. The business Standards have a wider scope and cover registered firms’ business customers with turnovers up to £25m.

In August, the LSB published its strategic plan for 2024-27, which set out its new data and market intelligence approach to oversight. The changes are designed to allow the LSB and registered firms to better evidence the impact of Standards and Codes and be better placed to identify and address emerging lending risks.