LSB to close leaving critical gap in protections for SMEs

The Lending Standards Board (LSB), the UK’s non-statutory regulator for the UK’s financial services sector, has announced that it will begin an orderly, solvent wind-down of its operations, with closure scheduled for 31 October 2025.

The closure of the LSB – which oversees the Standards of Lending Practice for business customers, the only independently monitored and FCA-recognised lending protections for many SMEs – reopens a clear and significant gap in the UK’s regulatory framework, leaving SMEs more exposed to risks at a time of mounting economic pressure.

The LSB’s decision to close follows the withdrawal from registration by the UK’s largest high street banks, who said that the FCA’s Consumer Duty provided sufficient protection across all customer types, including SMEs. However, the Consumer Duty was neither designed nor intended to cover SME lending, much of which lies outside the FCA’s regulatory perimeter. It provides no tailored protections for SMEs or independent oversight of a firm’s conduct in this area.

The LSB’s business Standards were the only independent framework specifically designed to protect SME borrowers and hold their lenders to account. While SME-focused lenders continued to adopt these Standards in 2024 and 2025, the withdrawal of the largest high street banks ultimately left the LSB with no alternative but to wind-down its operations.

“Without the LSB’s business Standards – the only independently overseen protections of their kind – many SMEs now face greater risk and are left without bespoke protections or independent oversight.”

Ken Scott, Chair of the LSB’s Board, says: “The withdrawal of the large high street banks has had three critical consequences. It has removed independent oversight for thousands of SME customers, increasing the risk of harm in areas not covered by statutory regulation. It has placed pressure on other firms that recognised the value of registration but found it harder to justify engagement without the continued participation of major high street lenders. And it has ultimately undermined the commercial viability of the LSB’s Standards and Codes – affecting not only the customers of those who withdrew, but also those served by firms that remained committed to independent oversight.”

Tackling gaps in oversight and inclusion for SME customers

In 2024, the LSB’s review of the business Standards’ implementation identified 102 areas of non-compliance across registered firms, potentially exposing SMEs to material risks. Key issues included the treatment of customers in financial difficulty or vulnerable circumstances, and firms’ governance. More than two-thirds of these findings have so far been addressed. But without the business Standards these risks would likely have gone unnoticed and unresolved.

Protections for ethnic minority-led SMEs now paused

In 2025, the LSB’s work on ethnic minority-led businesses – with strong support from business groups and policy makers – exposed systemic barriers to accessing financial services. This was evidenced by independent research revealing: just 19% of UK ethnic minority-led businesses applying for lending products in the last 12 months had their application accepted for the full amount, compared to 58% of white British-led SMEs; 90% of ethnic minority-led businesses said they experienced challenges when applying for lending, compared to 69% of white British-led SMEs; and 44% of ethnic minority-led businesses have made a complaint about their lender in the last 12 months, more than double the 19% of white British-led SMEs.

These findings built positive momentum among key stakeholders for the development of a new voluntary Code focused on inclusion and growth for ethnic minority-led businesses – which are among the UK’s most ambitious enterprises. But with the LSB’s closure – and despite a growing number of commitments from firms keen to sign up to the Code – progress on this important work is now paused and a credible framework for driving change risks being lost.

Lovell concludes: “Our experience shows that responsible oversight and sustainable growth go hand in hand, a view shared by the firms that have chosen to remain registered with us. Trust and confidence are essential ingredients for long-term success and there is a real risk that the hard-won lessons of the past are being overlooked.

“Since our establishment in the wake of the financial crisis, the LSB has played a pivotal role in helping the financial services sector grow responsibly – setting and overseeing best practice, raising standards and delivering meaningful improvements in outcomes across SME lending, personal lending, financial inclusion and fraud prevention. The LSB was formed to make sure people were protected from financial risk in areas not covered by statutory regulation. Any observer of our rapidly changing financial sector can see that such protections are still needed.

“We are grateful to all those who have supported our mission over the years, whether through registration, collaboration or a shared commitment to better outcomes for consumers and businesses. While the LSB’s operations will cease later this year, the principles we championed – fairness, transparency and independent assurance – remain as important as ever. Our legacy will endure in the standards we set, the firms we worked with and the outcomes we delivered.”

The LSB will continue operating until 31 October 2025, supporting registered firms through the transition and providing guidance as needed. Each firm will receive a final oversight summary by the closure date, along with practical information to help manage the process.

A decade of impact and innovation

Over the past decade-and-a-half, the LSB has pioneered voluntary protections that often pre-dated and shaped formal regulation – including the outcomes-based Standards of Lending Practice for personal customers (2016-2025), which directly anticipated the FCA’s Consumer Duty. Its oversight of the FCA’s Credit Card Market Study remedies helped reduce interest and penalty charges for thousands of customers and improved understanding of complex product terms.

The LSB’s Contingent Reimbursement Model Code for Authorised Push Payment (APP) fraud (2019-24) protected over 90% of APP scam victims, raised reimbursement rates to 73% (compared to just 28% outside the Code) and restricted average losses to a level almost four-times lower than seen in cases outside the Code. Unlike the Payment Systems Regulator’s scheme for mandatory reimbursement, introduced in late 2024, the Code also covered prevention and detection. By 2024, APP fraud cases had begun to fall for the first time. The LSB also drove sector-wide improvements in accessibility and vulnerability, including catalysing adoption of deaf-access tools across the industry following its 2023 research report.