NACFB warns government of ‘unintended consequences’ of Basel III and Consumer Duty on SME lending

In an open letter to City Minister Andrew Griffith and Kevin Hollinrake MP for Thirsk and Malton, NACFB chair Paul Goodman, said the regulation could “impede capital provision, raise funding costs, and cause a divergence in regulatory approaches through a lack of clarity”.

Basel III will ‘increase borrowing costs and reduce market competition’

He explained that Basel III, which is the latest regulatory framework that sets international standards for bank adequacy, stress testing and liquidity, could “increase borrowing costs and reduce market competition”.

Goodman said that under current proposals there will be a 100 per cent floor to the risk weight on property secured loans and the SME support factor, which offers around 24 per cent reduction on capital requirements, would be removed.

He said this would increase challenger bank capital requirements for SME lending by around a third.

“The constraints expose a clear tension between prudential regulation and the desire to embrace post-Brexit growth opportunities,” Goodman explained.

Goodman said lending generated by challenger and specialist banks had reached a “record share” and these institutions could now be met with “punitive measures”.

He called on the government, the Bank of England and the Prudential Regulatory Authority to “show their workings” by releasing data that “justifies their continued approach ahead of its implementation”.

Consumer Duty April deadline could lead intermediary-driven finance to ‘grind to a halt’

Goodman said that in order to be “compliant” with Financial Conduct Authority (FCA) Consumer Duty measures commercial intermediaries and lenders will need “greater clarity” on the “working definitions” of each cohort and expectations placed on them.

He continued that the “current definitions leave too much room for differing interpretations, muddying the waters during the implementation phase”.

By April, commercial brokers should be in a position to share with SME clients product information from lenders so they can be compliant with Consumer Duty.

Goodman said there was “too high a degree of ambiguity” ahead of this deadline for “any party within the funding distribution chain to operate with confidence, live transactions will stall, and the intermediary-led finance route could quickly grind to a halt”.

He called on the HM Treasury to ensure the FCA “provides urgent clarity” to whether Consumer Duty applies to regulated products or it encompasses regulated activities supporting non-regulated products.

“The trade body strongly believes both measures as they currently stand will reduce access to finance for the UK’s small business borrowers in the immediate term.

“Representatives from the trade body and its membership would be happy to provide further detail on either of the concerns raised and wishes to stress the very real short-term impacts any inaction will bring,” Goodman concluded.