The Treasury Committee has condemned what it describes as the "unfair debanking" of legitimate businesses and "substandard processes" for resolving disputes between SMEs and banks.

In a new report, the Committee warns that small businesses are being put off from innovation and growth due to "damaging" regulations and inadequate support from banks.

It said that during its inquiry, MPs received evidence that more than 140,000 small businesses had been debanked in the past year, often with little to no notice.

According to MPs, at least 4,214 of the closures were attributed to 'risk appetite' without a clear and consistent definition within the industry.

They say that many banks do not formally track whether the reputation of a firm or industry has been considered when a business has been debanked.

The Committee also said that it has heard that banks have shut down or denied accounts to legitimate businesses across various "undesirable" sectors, including defence, pawnbroking, and amusement machines, simply based on the nature of their work.

“There’s no hiding from the fact smaller firms have had a torrid time over the last few years," said chair of the Treasury Committee, Dame Harriett Baldwin. "Unfortunately, what we have found over the course of the inquiry is that there are some instances where banks and regulators are making a tough world for small businesses needlessly tougher."

MPs called on the Prudential Regulation Authority not to go ahead with plans to scrap the SME supporting factor in the new Basel 3.1 standards because it could lead to small businesses in Britain "falling behind" their European and American competitors.

Additionally, the Committee says in its report that the Business Banking Resolution Service (BBRS), which was set up by commercial banks, has "failed" due to a perceived lack of independence and poorly formed eligibility criteria.

After only settled 58 cases while costing over £40 million to operate, the Committee is calling for the service to be closed down.

MPs are urging the Financial Conduct Authority (FCA) to force banks to be more transparent about why decisions to debank businesses are taken. Members believe the regulator should compel firms to send them the number of business accounts they’ve closed each quarter split by reason.

It has also suggested that the regulator gives the Financial Ombudsman Service the powers to address personal guarantees for smaller firms who are "not receiving the same support as consumers".

HM Treasury assured the Committee that legislative changes would be introduced to crack down on the debanking of businesses in the form of a Statutory Instrument.

The Committee has asked the Treasury to replace the BBRS with a new, independent system which "meets the needs of those small businesses treated unfairly by their bank but which are not served by the FOS, MPs conclude".

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