FCA puts open finance at the centre of SME lending reform

The Financial Conduct Authority (FCA) has concluded that its regulation is not a major barrier to small-business finance. It says the bigger problems are the economics of lending, gaps in information and limited borrower capability. In feedback statement FS26/2, published on 17 September 2026, the regulator sets out its response. It will develop open finance, which would let businesses share wider financial data with lenders by consent, as a prospective way to reduce application and assessment friction. SME lending is one of two prioritised use cases, alongside consumer mortgages.

The statement affects UK small and medium-sized enterprises (SMEs), and above all the smallest ones. The FCA defines an SME for this review as a business with fewer than 250 employees and annual turnover below £44m. It also affects the banks, building societies, alternative lenders and credit brokers that serve them. The timing matters because the FCA plans an early-2027 discussion paper on the first open-finance scheme. It intends to work with HM Treasury on options for a regulatory framework by the end of 2027.

Nothing in FS26/2 is a new lending rule. Nothing has been launched yet, and no SME open-finance scheme has been designed. The statement is a diagnosis plus a work programme.

What the review found

The FCA launched the review in March 2026 with a call for input. It found no evidence that its regulation is a major barrier to SME finance. It said many demand-side and supply-side problems reflect the economics of lending.

That is the regulator's conclusion, not proof that regulation creates no friction. FS26/2 identifies four broad groups of friction:

• borrower preparedness and market navigation;
• risk assessment and the availability of suitable products;
• regulatory frictions;
• issues involving alternative lending and personal guarantees.

On cost drivers, some lenders told the FCA that capital requirements impede SME lending. Bank of England research and the FCA's own retail-bank analysis found they are unlikely to be the main constraint, judging higher operating and impairment costs more important. Lenders also said Consumer Credit Act requirements and sanctions can add cost and complexity, but the FCA treats the Act as a narrower friction rather than the main explanation.

The backdrop is not one of a well-served market. As reported in FS26/2, published on 17 September 2026, SMEs receive 21% of the total value of UK business loans and 54% use no external finance. Those figures measure different things and should not be combined into a single access-to-finance rate.

The review covers only part of the market

The review focused on business lending of £25,000 or less to sole traders and small partnerships. That lending generally falls within the FCA's consumer credit perimeter, the boundary of activity it regulates under consumer credit rules. The same loan to a limited company would generally fall outside it, as would business lending above £25,000. The review is therefore not a full assessment of UK SME finance.

Why microbusinesses face the most friction

Micro and start-up SMEs, which have fewer than 10 employees, make up 95.5% of all UK SMEs in the FCA's analysis, using data current to December 2025. This group is also the least likely to use external finance.

The FCA links the friction to several features of small firms, drawing on stakeholder feedback and literature rather than a controlled causal study:

• Thin records. Microbusinesses may have limited trading histories and financial records.
• Little collateral. They are less likely to have tangible assets to pledge.
• No finance team. They often lack dedicated financial staff to handle long applications.
• Loan economics. Smaller or complex loans can carry comparatively high underwriting and support costs for lenders, which can make them commercially unattractive.

SME representatives described applications as complex and time-consuming. They cited repeated information requests and different documentation requirements across lenders. The FCA said SMEs can be asked to submit similar information to brokers and several lenders, which raises time and cost and sometimes discourages them from finishing an application.

Stakeholders also said conventional underwriting based on historic performance and annual accounts suits data-rich, asset-light or intangible-led businesses poorly. They suggested that open-finance data, commercial credit data and relevant government-held information could improve risk assessment.

What open finance would add to open banking

Open banking lets customers consent to share payment-account data with authorised third parties. Open finance would extend consent-based sharing to wider financial data. Datasets discussed for the first SME use case include accounting, credit, commercial-credit and government-held data, though none is confirmed.

The FCA says open finance could help at three points:

1. Before an application: better cash-flow forecasting and product identification.
2. During an application: lower cost, duplication and friction.
3. At the decision: better information for lenders, which could help assess SMEs with thin credit histories or limited conventional records.

The FCA's illustrative SME case study shows consent-based access to transaction, credit and wider finance data giving a more current cash-flow picture and pre-populating a loan application. The FCA labels it illustrative, not evidence of achieved approval outcomes. The roadmap's same-day approval example is likewise only a scenario. Nothing in the sources shows that live open-finance deployments currently produce same-day SME approvals or better approval rates.

Cutting repeated checks

Two mechanisms are in play. The first is portable, permissioned data, so a business need not resubmit the same figures to each lender or broker. The second is digital verification. UK Finance is supporting a voluntary digital-verification service intended to reduce repeated requests for identity documents. The FCA is monitoring that work. As at 17 September 2026, the service's design, practical use and coverage, including its relevance to SME finance, were still being developed.

The FCA said any such service must preserve effective financial-crime controls and let firms meet their legal and regulatory obligations. Open finance likewise does not remove a lender's responsibility for creditworthiness, affordability where applicable, data protection or financial-crime controls.

Evidence so far, and what is unresolved

The evidence is early. The FCA's SME Finance TechSprint had seven participating firms testing proofs of concept with synthetic data. It was part of a wider programme, published on 16 April 2026, that involved 17 firms and generated more than 92,000 data calls between November 2025 and February 2026. The findings stressed common infrastructure, interoperable and reusable data, consent, identity, verification, governance and explainability rather than data access alone. The tests were simulated, so they show implementation issues rather than live-market results.

The FCA did not quantify how far open finance or digital verification would cut application time, underwriting cost, repeat checks, rejection rates or borrowing prices. It also did not establish that better data would raise overall approval rates. Richer data could equally reveal risks and support a decline. Lender risk appetite and loan economics still matter.

The following points remain open:

• whether participation will be mandatory for data holders or voluntary at first;
• how consent will last and be revoked;
• who is liable for inaccurate data;
• what protects against discriminatory automated decisions;
• what arrangements will serve SMEs with low digital capability.

For borrowers, the usual cautions apply. Open finance does not guarantee that an SME will obtain finance or receive cheaper terms. Borrowing costs interest, and the FCA's review lists personal guarantees among the issues it examined. Credit applications can also affect a borrower's credit standing.

The third strand: Consumer Credit Act reform

The FCA's third priority response is to deliver a proportionate regime through Consumer Credit Act reform. HM Treasury's policy statement of 3 May 2026 aims to replace prescriptive requirements with a more flexible, outcomes-based regime while retaining or recasting borrower protections. The FCA then expects to consult on relevant Handbook rules. The final rules, transitional arrangements and effective dates had not been settled in the material reviewed.

Timeline and what to watch

The roadmap is not a binding implementation timetable, and no launch date exists for an SME scheme. The early-2027 discussion paper should show which datasets, participants, governance, liability and pricing arrangements the FCA is considering. It should also show whether SME eligibility will reach beyond the £25,000 sole-trader segment the review examined. Readers wanting the detail can find FS26/2, the open-finance roadmap and HM Treasury's Consumer Credit Act policy statement on the FCA and gov.uk websites.