On 15 April 2020, the Financial Conduct Authority (FCA) wrote to the CEOs of banks regarding lending practices to SMEs in the context of Covid-19 (Letter).
The Letter (1) emphasises the importance of continued lending to SMEs (including through the Coronavirus Business Interruption Loan Scheme) and (2) reassures banks that the FCA will take into account the fact that banks may now be adopting a different risk tolerance in supporting SMEs than they would prior to the Covid-19 pandemic. This is consistent with the FCA’s objective of ensuring the provision of credit to firms.
The Letter also provides the following framework for the FCA’s supervision of firms in this context:
· Senior Managers and Certification Regime: the FCA acknowledges that the activity of lending to SMEs sits mostly outside the FCA’s scope of supervision. However, the Senior Managers and Certification Regime (SMCR) defines the responsibilities and accountability of senior managers in a way which applies to all activities they conduct, whether they are regulated or not. Therefore, the FCA expects that each bank lending to SMEs will have a Senior Manager with clear responsibility for that activity, and that they discharge their responsibilities suitably.
· Standards of Lending Practice for Business Customers: The FCA also recently recognised as an industry code the Lending Standards Board’s Standards of Lending Practice for Business Customers, which the FCA will take into consideration when determining how Senior Managers and other relevant employees under the SMCR should discharge their duties.
· Board role: The FCA will also look for evidence that, in discharging its oversight role, the board of each bank is collecting information on the bank’s treatment of SMEs and, where appropriate, challenging the Senior Manager.
Whilst not explicit in the Letter, we would expect that the FCA’s position set out above to also apply to Senior Managers in other firms the FCA supervises (eg insurers and alternative investment fund managers), so those firms should bear these considerations in mind for their own SME lending and investments.
This Letter compliments the approach taken by the FCA (and the PRA) in relation to mortgages, consumer loans and credit cards during the Covid-19 pandemic, that we have considered in the context of specialty lending and ABS investment in the following article.
A copy of the Letter can be found here.