FCA Targets SME Lending Hurdles for UK’s 5.5 Million Small Businesses

Britain’s financial watchdog wants to make it easier for small businesses to borrow money. The Financial Conduct Authority just laid out a package of reforms targeting what it calls unnecessary friction in the SME lending market — and the scope of the problem is bigger than most people realize.

Microbusinesses make up 95.5% of all SMEs in the UK. That’s an enormous chunk of the economy, and these businesses are the ones hitting the hardest walls when they try to access finance. Limited awareness of what’s even available, application processes that feel designed for large corporates, and products that basically don’t work for businesses without hard collateral — those are the core complaints the FCA kept hearing.

The review found that FCA regulations aren’t actually the main barrier.

That’s worth sitting with for a second. The watchdog looked at its own rulebook and concluded: we’re not the biggest problem here. The market itself is complicated, fragmented, and full of duplicated checks that make life harder for small firms than it needs to be. So the FCA’s response isn’t just about loosening its own rules — it’s about reshaping the whole environment around SME lending.

Three Areas the FCA Plans to Fix

The plan breaks down into three broad tracks. First, reforming the Consumer Credit Act to build a more proportionate regulatory regime. The current framework wasn’t built with modern small business lending in mind, and the Treasury is already working on updates to bring it closer to what a 21st-century financial system actually needs. Second, pushing open finance forward with SME lending as one of two priority use cases. The FCA has already published its open finance roadmap and is now building out proposals for the first open finance scheme. A discussion paper is coming that will lay out options and what the FCA is actually considering. Third, exploring digital verification — cutting the redundancy in customer checks while keeping financial crime controls tight.

That last piece is probably the most immediately practical. Right now, businesses jumping between lenders face the same identity and compliance checks over and over. It’s slow, it’s annoying, and it doesn’t add much safety value the second or third time around. UK Finance is involved in developing a voluntary digital verification service that could fix this. The FCA is watching that project closely to see whether it actually moves the needle for small firms.

What’s Inside — and Outside — the FCA’s Reach

The FCA’s direct regulatory scope here is narrower than people might assume. It covers business loans of £25,000 or less to sole traders and small partnerships — the segment that falls under consumer credit regulation. Loans to limited companies, anything above £25,000, and much of the alternative lending market sit outside the FCA’s perimeter. So the watchdog can’t just wave a wand and fix everything.

Related: FCA Acts to Insure 21 Million Unprotected UK Adults, Focusing on Renters and Gig Workers

For those out-of-scope areas, the FCA is leaning on collaboration. It’s working with relevant government departments to tackle the alternative lending challenges it can’t touch directly. That’s probably the right call, but it also means progress in those areas is going to depend on how well different parts of government actually coordinate. Not always a given.

The review involved extensive engagement — SME representative organizations, lenders, trade associations, government departments, public bodies. And it wasn’t just domestic: the FCA benchmarked UK SME lending against global counterparts to get a sense of where Britain actually stands. Academic research fed into that comparison too.

Open Finance as the Bigger Bet

The open finance piece is where the FCA seems to be placing its longer-term chips. SME lending is one of the two priority use cases for the first open finance scheme, which is still being developed. The FCA plans further infrastructure testing — including TechSprints — to push this forward. A TechSprint, for the uninitiated, is basically a rapid-development event where technologists and financial firms work together on specific problems. It’s not a magic solution, but it can move things faster than the usual regulatory consultation cycle.

The idea behind open finance in SME lending is pretty straightforward: if lenders can access richer, more standardized data about a business’s financial position — with the business’s consent — they can make faster, more accurate lending decisions. That’s especially useful for firms with intangible assets, which traditional credit models have always struggled to value. A software company or a consultancy doesn’t have machinery to put up as collateral. Open finance could help lenders get comfortable with that kind of business anyway.

Read also: FCA Joins Forces in Major London Crackdown on Illegal Peer-to-Peer Crypto Trading

The FCA is clear it can’t do all of this alone. Pending legislative reforms — particularly the Consumer Credit Act updates the Treasury is handling — the FCA will consult on what the future regulatory framework for SME lending should look like. The sequencing matters: the FCA is essentially saying, once Parliament moves on the legislation, we’ll be ready with our own consultation.

There’s no hard timeline attached to most of this. The discussion paper on open finance options is “upcoming” — no date given. The digital verification service is still being developed by industry. Legislative reform moves at whatever pace Westminster decides. So the ambition is real, but small businesses probably shouldn’t expect overnight change.

The FCA’s review found that 95.5% of SMEs are microbusinesses struggling with duplicated checks and products that don’t fit businesses with limited collateral. Loans of £25,000 or less to sole traders and small partnerships sit under FCA consumer credit rules.