Regulation Changes ‘Crucial to Ensuring SMEs Can Access Financial Support’

The UK’s SMEs have been given more certainty when borrowing thanks to regulation changes being introduced by the Prudential Regulation Authority (PRA), preventing lenders from increasing the cost of credit.

The PRA’s new rules also mean that banks and building societies will have to maintain sufficient capital against risks, such as loans not being repaid, to protect people and businesses from the fallout from a 2008-style financial crash.

They also include a number of changes from its initial proposals that will support economic growth and competitiveness, the government said. Key changes made by the PRA include:

• Lowering its proposed capital requirements for lending to small and medium-sized businesses (SMEs). This will mean lending to SMEs continues to be supported, helping to deliver the government’s ambition to make the UK the best place in the world to start and grow a business.
• Lowering its proposed capital requirements for infrastructure projects, ensuring no increase on current requirements and supporting the UK’s transition to net zero.
• Streamlining the approach banks can take to mortgage lending, by simplifying the approach to valuing residential property.

In a statement, the government said: “The PRA’s new rules will come into force on 1 January 2026, providing the banking sector with the certainty it needs to prepare for the new requirements. 

“The PRA published proposals for a simpler regime for smaller firms alongside its near-final Basel 3.1 rules. This regime will make it easier for smaller banks and building societies to lend by minimising the number of calculations they are required to make and introducing a single capital buffer.”

Gavin Sharpe, associate director at RSM UK said: “The introduction of the SME lending adjustment is a vital step towards ensuring the continued growth and stability of SMEs in the UK. SMEs play a vital role in the UK’s economy, employing millions and contributing significantly to UK GDP. The PRA’s decision to reduce the capital impact of the removal of the supporting factor is crucial to ensuring SMEs can now access the financial support needed to thrive. It also enables the Treasury to deliver on its broader goal of maintaining financial stability while supporting economic growth.”

He added: “There are 5.5m SMEs in the UK, representing over 99% of the business population and supporting 39% of UK jobs. The removal of the SME supporting factor, as initially proposed under Basel 3.1, was intended to ensure lending costs were more closely aligned to the underlying risk of default. This would have increased the cost of small business lending, further depressing lending activity in an  already challenging economic environment, with high interest rates and reduced affordability.”

Sharpe added that SMEs typically rely heavily on external finance for their operations, investments and cash flow management. “Without the lending adjustment, it’s likely banks would have been less inclined to lend to SMEs, exacerbating the financial strain on these businesses. The capital requirement offset helps mitigate this risk, ensuring that SMEs have continued access to the credit they need to sustain and grow their operations, without compromising the safety and soundness of financial institutions,” he added.

"The PRA’s decision to reduce the capital impact of the removal of the supporting factor is crucial to ensuring SMEs can now access the financial support needed to thrive."

Gavin Sharpe, Associate Director, RSM UK