FCA: UK defence SMEs hit by slow bank onboarding, not blanket account closures

The U.K. Financial Conduct Authority said Monday that small and medium-sized defence businesses are generally not being widely shut out of basic banking services, but are encountering lengthy delays, repeated requests for information and slow decisions.

In a blog and accompanying multi-firm review published Oct. 26, the FCA said the main issue for defence SMEs was operational friction rather than blanket denial of service. “The theme that emerged was friction and delay rather than widespread exclusion,” the regulator said in the blog and review. It added that it has written to banks serving SMEs to set out its expectations and will monitor how they respond.

The FCA, the U.K. regulator responsible for conduct in financial services, said its review covered everyday banking services such as account opening, ongoing servicing and related banking products. It did not examine wider access to lending, investment or other sources of finance.

The regulator also stressed that the exercise does not create new rules or requirements. Instead, it said firms should make risk-based, proportionate decisions based on the circumstances of individual customers.

The review, titled “Defence SMEs: access to banking services,” was published alongside a blog, “Defence SMEs need banking services that work,” by Greg Sachrajda, the FCA’s head of department for retail banking.

The FCA said firms are free to set their own commercial strategy and risk appetite, but should not treat defence as a single undifferentiated category. “There is no regulatory barrier preventing firms from supporting lawful defence businesses,” the multi-firm review said.

Among the problems identified were long onboarding processes, repeated requests for information and delays in decision-making. The FCA also found that many firms lacked sufficiently strong management information — internal data used to monitor customers and outcomes — making it harder to judge whether decisions were consistent and proportionate.

It said banks should review onboarding, governance and management information. Defence SMEs, for their part, can help by providing clear and timely information about how they manage risk.

The FCA said the issue matters beyond day-to-day administration because defence SMEs support technologies, expertise and industrial capacity linked to the U.K.’s national resilience and security. Access to functioning banking services can affect whether those businesses are able to secure contracts, invest and grow.

The findings land in a wider political and regulatory debate over “debanking,” or whether lawful customers are losing access to accounts because of how banks assess risk. A Treasury Committee report published on May 8, 2024, said lender data showed more than 140,000 business accounts were closed in 2023 and raised concerns about inconsistent use of reasons including “risk appetite” and “reputational risk.”

The FCA’s review adds a narrower conclusion to that debate. In the case of defence SMEs seeking everyday banking, the regulator said the picture is more nuanced than widespread exclusion and is better characterized by delays, duplicated information requests and slow internal processes. The issue has also taken on added significance as recent U.K. defence policy has emphasized support for domestic defence industry and smaller suppliers.

The FCA said it has already contacted firms. “We have written to firms that provide banking services to SMEs to share these findings and set out our expectations,” the multi-firm review said.

It added that follow-up will come through supervision rather than a new rulebook. “Through our supervision, we will monitor how firms are responding to the issues and expectations set out in this publication and we will intervene where necessary to ensure appropriate outcomes,” the review said.