The banking reforms outlined this week by the Independent Commission on Banking appear prudent and sensible. Let us not forget that these findings have come about as a result of a widespread investigation into the banking collapse of 2008-9 that has already caused one recession and the ripple effects of which threaten to cause another. Quite simply, something had to be done.

Not only did something have to be done, the individuals assigned the task of making recommendations are more than appropriately qualified to do so. Their knowledge and experience of financial markets is vast and they understand better than most the importance of the financial sector to this country’s economy.

It is therefore pleasing to see such widespread political support for the Commission’s findings. With press speculation before the announcement as to whether he would, the Chancellor took the wise step of not only trusting in the work of these independent experts, but also following the mood of the public. Commendably, the other parties did the same.

However, although the Chancellor made the right decision to back the reforms, he does find himself in a difficult position. On the one hand, the fact that he’s peering over the edge of a recession makes it very difficult to heap extra regulatory burden on a fragile banking sector. On the other, he must be seen to be doing something by a public that wants a change in the way banks operate.

His get-out clause seems to be allowing the changes to occur over time. Sensible enough. However there are certain reforms which would help garner more public support with which he could force through more tricky reforms. The introduction of a switching system for personal and small business accounts could be completed as soon as possible. A crucial part of the government’s battle to raise economic growth must be ensuring that small business lending increases; the improved choice that could come from easier switching could help.

Banking reform won’t be easy. It will require significant changes, some of which will be bitter pills to swallow for many large financial institutions. But by fast-tracking popular changes that will benefit individuals and small businesses, he will build the public support he needs to help force the banks to swallow the other medicine they so desperately want to avoid.

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This is a guest post by Joe Carstairs (@JWCWords), who provides his own commentary on accounting and finance industry issues; Joe was formerly a market reporter for EuroWeek, and currently blogs for a number of leading finance and small business publications.

I’ve just finished reading the excellent submission by Will Hutton and Paul Nightingale to the Independent Commission on Banking (ICB) on behalf of the Work Foundation. Anyone interested in small business lending should read this concise report, which contains the most coherent and factual argument for bank ‘ringfencing’ I’ve read (for example, I was fascinated to read that specialist SME bank Handelsbanken operates profitably in the UK with a 17% capital ratio, and that doubling capital ratios would be expected to increase bank funding costs by just 0.1%~0.4%, both of which cast doubt on claims that ‘ringfencing’ will make small business lending prohibitive).

Also interesting is the overview of current bank risk management practices for small business loans, where the report notes that “because SMEs are so different, the risk associated with SME lending is less easily turned into mathematical models” yet “expensive upfront investment in relationship building and detailed credit assessment is also problematic” as small firms are “too small to merit the investment in time and effort”; more controversial is the claim that “when the mathematical models underpinning lending to SMEs broke down in the recessions, banks lacked the ability to analyse individual firms and resorted to absolute rationing.”

The Work Foundation’s report is – by its own admission – “tentative”, having been prepared to meet the deadlines for the ICB recommendations earlier this month, and a more detailed report is being prepared by the end of this year, which I’ll certainly be reading. One area I’d like to see covered in more detail is the challenge created by the quality of some small business loan requests (for example, the recent SME Finance Monitor reported that just 1 in 5 SMEs sought external advice before applying for a bank loan, and less than 1 in 3 have a written business plan), which undoubtedly hinders some small firms’ access to finance. This is something that we at FundingOptions – and we hope government and industry leaders – will be trying to tackle.

It is encouraging therefore that the Coalition government is trying to improve the situation by signalling its intention to cut business red tape. The cynics will say that generating ‘soundbites’ about cutting red tape is about as much as this government can do at present. However, whether you believe this or not, it is a generally accepted that cutting red tape does help businesses to prosper. It enables existing businesses to save time and money so they can become more efficient and more profitable, while also encouraging entrepreneurs to start up new ventures.

This is not to say that every policy aimed at cutting red tape should be commended and waved through unchallenged. One proposal that has been suggested involves removing the requirement for the smallest companies to file annual accounts at Companies House. While some business owners would gladly rid themselves of this, the full implications of such a move should be examined. Firstly, we should not forget that the economic downturn we are experiencing at the moment is a direct result of uncertainty about economic risk. Do we really want less information to base our judgements on? Also, at a more micro level, the importance of financial information to any business should not be forgotten. As well as helping owners, managers, directors and shareholders to make decisions, it is a vital part of successful applications for small business loans.

Bringing this back to where I began, the task of setting the correct regulatory environment in which business can succeed is an unenviable one. Cutting red tape is one of the few weapons the government has in its arsenal and it would be wrong to imply it shouldn’t use it. However, before it declares all out war on the area of financial reporting, it would do well to step back and consider the collateral damage such a campaign could cause.

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This is a guest post by Joe Carstairs (@JWCWords), who provides his own commentary on accounting and finance industry issues; Joe was formerly a market reporter for EuroWeek, and currently blogs for a number of leading finance and small business publications.