In 2015, the Treasury Select Committee published a report into Conduct and competition in the SME lending market. This led Andrew Tyrie MP, the chair of the committee, to write to HM Treasury to request an assessment of adjusting the perimeter of regulation with respect to business lending.
Replying to Mr Tyrie, Harriett Baldwin MP, Economic Secretary to HM Treasury, acknowledged that "business lending in the UK is unregulated", but concluded:
"The regulatory perimeter of business lending is an issue that the Treasury has considered in detail. Our position is that to go further than the current status quo and regulate business lending would result in a higher cost of lending to businesses. This would be at odds with this Government’s commitment to improve access to finance for SMEs."
This is extremely shortsighted in our view. As soon as a business moves from operating as a sole trader (where lending is covered by the Consumer Credit Act) to a Limited company, business owners are no longer protected by regulation. This means that simple protections, such as the requirement for finance products to carry an Annual Percentage Rate (APR) no longer apply.
One of the fundamental challenges in business finance is a lack of price transparency - a factor that has an adverse effect on competition, as highlighted by the recent Competition and Markets Authority (CMA) investigation into the supply of SME banking services. It is hard to see how a price comparison website, one of the possible remedies proposed by the CMA, will work without a standard price metric, i.e. an APR.
Most SME finance is bespoke, in effect requiring companies to negotiate with a provider to get the best deal, rather than choosing a standard off-the-shelf product. Businesses are ill-positioned to get the best deal, as they have little information and limited bargaining power when dealing with banks.
We are campaigning for APR to be mandatory across all forms of SME finance under the #APR4SMEs banner. If this government is committed to avoiding high SME finance costs, and wants to improve competition and access, some more regulation is needed. Making APR mandatory is the best place to start.
Please sign the APR4SMEs petition we have started to show support for the campaign, and please encourage others to do so as well. If you want to see how badly businesses are being treated, we have created this free APR comparison tool for businesses to estimate and compare the costs of popular commercial finance products.