Banks ought to be compelled to reveal why they debank small companies

The Treasury Committee is calling on the Financial Conduct Authority to force banks to be more transparent over decisions to debank small businesses.     

A report from the Treasury Committee’s inquiry into the effects of debanking on small businesses found some have been denied banking services based on the type of work they carry out, from firms that specialise in defence to small high street pawnbrokers.

MPs said the financial watchdog should compel firms to send the Treasury Committee the number of business accounts they’ve closed each quarter broken down by reason.

It comes as more than 140,000 small businesses have been de-banked by major lenders in the past year, often immediately and with no explanation.

The number of closures – based on figures from Barclays, HSBC, TSB, Lloyds, Santander, NatWest, Metro and Handelsbanken – has prompted scrutiny over how lenders take decisions to close accounts.

Debanking was thrust into the spotlight last summer after private bank Coutts closed Nigel Farage’s account, prompting concern it was happening to other individuals and businesses. 

An investigation by This is Money revealed that dozens of charities, choirs and residents associations – many deemed micro enterprises by the Department for Business and Trade – had their bank accounts closed suddenly and without explanation.

MPs on the Treasury Committee have condemned the unfair debanking of legitimate small businesses.

The Treasury Committee said: ‘The Committee is firmly of the belief that any small business doing legitimate work should be able to access a bank account.

‘Cross-party members condemn the debanking of legitimate businesses across various ‘undesirable’ sectors, including defence, pawnbroking and amusement machines, where MPs heard banks have closed or denied accounts based on the nature of their work.’

At least 4,214 of the 140,000 plus closures last year were attributed to ‘risk appetite’, despite this not having a clear and consistent definition within the industry.

The inquiry found that banks are not formally tracking whether the reputation of a firm or industry was taken into account when businesses were debanked, instead using ‘catch-all terms’ to define the reason for closure.

HM Treasury assured the Committee that legislative changes would be introduced to crack down on the debanking of businesses in the form of a Statutory Instrument. 

Chair of the Treasury Committee, Dame Harriett Baldwin, said: ‘There’s no hiding from the fact smaller firms have had a torrid time over the last few years.

‘Unfortunately, what we have found over the course of the inquiry is that there are some instances where banks and regulators are making a tough world for small businesses needlessly tougher.

‘Banks and regulators can’t wave a magic wand and solve all of the problems facing small businesses in this country, but they can certainly do more than they currently are. I hope banks, the regulators and the Treasury take careful note of what we’ve uncovered.’

Small business owners left in the dark over debanking

The Federation for Small Businesses said the FCA should demand more information from banks to establish the main underlying reasons for closures. 

Small business owners should also be given a three month grace period to find a new provider if their bank account is to be closed according to the Federation. 

Martin McTague, national chair of the Federation of Small Businesses, said: ‘A sudden account closure can be devastating, stopping a business in its tracks and often forcing business owners to use their own money or go into debt to pay for everything from vital supplies to rent and staff wages.

‘Small business owners have found themselves left in the dark, with no information about what’s happened – which, as you might imagine, makes it impossible to appeal, or to clear up misunderstandings. 

‘Instead they feel abandoned and cut off, with no option to talk to someone who can help.

‘Owners of business accounts which are under review should be given a chance to address any concerns. 

‘Once a bank has decided to close an account, account holders must be given a three-month grace period to find an alternative provider. 

‘The FCA should also demand more information from banks to establish the main underlying reasons for such closures, so that we can see if there is disproportionate impact on customers from particular backgrounds or types of business.

‘We’re pleased that the Treasury Committee’s report has acknowledged the power imbalance between a small business customer and its bank. 

‘FSB has proposed that FCA should shine a continuing light on the extent of de-banking, by collecting and publishing quarterly data, with defined reasons for each closure instead of using vague and overly broad categories. 

‘We therefore very much support the Committee’s recommendations around improving transparency and consistency.’