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Treating Customers Fairly: FCA and PRA guidance on treating customers fairly – Impact on commercial lending market

Commercial lending mostly sits outside the FCA and PRA’s scope for regulation. However, though lending to business customers is generally not a regulated activity in the UK, due to the impact of the Covid-19 pandemic on businesses and particularly on SMEs, the FCA and PRA are collecting data, monitoring and publishing updated guidance in relation to their supervision of commercial lending.

“Treating customers fairly” is one of the FCA’s fundamental principles for businesses and guides much of the FCA’s approach to the regulation of financial services firms. The FCA has stated that it is working with firms to understand the impact of Covid-19 and has made it clear that firms must treat customers fairly and consider the needs of those affected.

The FCA’s regulatory approach has previously focussed on ensuring financial services firms treat consumers, individual customers and retail investors fairly. The FCA’s focus appears to be broadening. In the regulator’s “Dear CEO” letter dated 15 April 2020, the FCA expressly states that banks must treat SMEs fairly when dealing with applications for business loans. The FCA and PRA will be monitoring the level of lending to firms to ensure that the benefit of the UK government’s package of measures to support business during the Covid-19 pandemic is passed through promptly.

The FCA’s Senior Managers and Certification Regime (SMCR) (which replaced the FCA’s Approved Person’s regime for firms regulated by the FCA only in December 2019) sets out the responsibilities and accountability of senior managers in banks. The SMCR applies to all the activities conducted by senior managers whether or not such activity is regulated by the FCA. The FCA will consider the conduct of senior managers (and the boards which supervise them) under the SMCR and is focussed on ensuring that SMEs are treated fairly.

The impact of this guidance on commercial lending is increased monitoring of small business lending. The Dear CEO letter of 15 April puts the CEOs of banks on notice that their approach to small business lending is being monitored by the FCA and PRA to ensure SMEs are treated fairly.

In general, the FCA has taken a holistic approach to determining whether customers are being treated fairly and has not defined what would constitute “fair treatment”. Though this may generate some uncertainty, senior managers and the boards of banks will need to consider their approach to small businesses in the round when assessing applications for coronavirus business interruption loans to ensure such businesses are treated fairly.

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