Defence SMEs: access to banking services

Firms decide which customers they serve, and set their own commercial strategy and risk appetite. Some defence-related activities may fall outside an individual firm’s risk appetite. Firms and stakeholders told us that reputational and sustainability-related considerations can sometimes influence decisions affecting defence SMEs, alongside wider commercial and risk-management considerations. Where a firm decides to reject an application, restrict services or close a business current account, it can have significant negative consequences for the affected customer.  

If firms decide to do this, they must make sure that their decisions are made on reasonable, properly considered grounds and demonstrate that they’re proportionate, risk-based and consistently applied.

The firms we spoke to generally described themselves as open to serving defence SMEs and we saw firms taking steps to understand and service the sector better. This included investing in specialist relationship managers, dedicated teams, training and governance processes.

Firms tend to regard defence SMEs as higher-risk applicants due to financial crime risks and wider risk management considerations, such as reputational risk, environmental, social and governance (ESG), sustainability, supply chain, end-use, commercial strategy, and risk appetite considerations.

Banks can have more extensive due diligence, governance and onboarding processes for defence SMEs. In their risk assessments, banks should reflect the specific customer, relationship and other risk factors.

The effect of these additional processes is often not exclusion, but an increased risk of friction and delay. Enhanced due diligence, specialist review and additional governance can extend onboarding and decision-making times, particularly where applications require multiple approval stages or further assessment. These delays can have wider commercial consequences. SMEs' timely access to banking services can be important for government procurement, making and receiving payments, onboarding suppliers, securing contracts and meeting contractual obligations. It can also help them manage working capital and, in turn, invest in technology, machinery and other capabilities.

Defence SMEs and other stakeholders also told us that firms weren’t always explaining the rationale behind their decisions, even where there has been a long onboarding process where they have had to provide a lot of information.

Firms should seek to reduce unnecessary friction by completing compliance checks efficiently, avoiding duplication and delay, while maintaining appropriate controls and meeting their legal and regulatory obligations.

This includes considering whether their information requests, review stages and escalation arrangements remain targeted and proportionate to the risks that the applicant presents. If additional checks are necessary, firms should keep applicants informed about progress and likely decision timescales, where legally permissible and appropriate.

The defence sector includes many different activities. These range from software, logistics and maintenance to consulting, dual-use technology (equipment that has both military and civilian use, like drones) and weapons production.

Risks can vary depending on the business, its activities, the countries in which it operates, the products and services it provides, the nature of its supply chain, and the intended use of its products.

Our work suggests that firms do not always distinguish sufficiently between different types of defence businesses when designing and applying their onboarding and servicing arrangements.

Firms should adopt approaches to offering and servicing accounts that reflect the specific circumstances and risks associated with individual defence businesses. They should periodically review whether their categorisations remain justified. If they apply broad onboarding exclusions, they should be able to say why.

Financial crime and wider risk-management considerations can influence how firms assess defence SME customers. Although it’s important that they take steps to identify, assess and mitigate financial crime risks, firms’ checks and controls should reflect the nature, scale and complexity of those risks. Firms should not apply blanket restrictions if they’re able to take a more tailored approach, while complying with legal requirements.

Defence SMEs and stakeholders told us that perceptions of the sector have not always kept pace with changes in government policy and the geopolitical environment. They feel the sector is sometimes viewed negatively or associated with reputational, ethical, or illicit activity concerns.

Some firms and stakeholders referred to ESG-related considerations in decisions affecting defence SMEs.

We have no sustainability rules that prevent firms from serving defence customers. Firms are entitled to determine their own commercial strategy and risk appetite. Where reputational risk or similar considerations influence onboarding, ongoing servicing, access to products or account closure, firms should be able to demonstrate that they have clearly defined these considerations, applied them consistently and supported them by appropriate governance. They should ensure decisions are based on an assessment of the relevant risks and circumstances.

Broad or unclear references to reputational risk can make it difficult for a firm to demonstrate that its decisions are reasonable, properly considered and aligned with its risk appetite.

Defence businesses can sit within wider technology, engineering, manufacturing and service supply chains. Existing classifications, including Standard Industrial Classification (SIC) codes (numerical classifications used to identify a business's primary economic activity or business sector), do not always capture these activities accurately.

This can make it harder for firms to identify defence SMEs in their customer base, understand how they are being treated, and whether their processes are working as intended.

Firms should consider whether they can identify and monitor their defence SME customers with enough accuracy to support effective oversight. They should do more to understand direct defence businesses, wider supply chains and dual-use activity.

Without this visibility, firms may find it harder to assess whether their policies are operating as intended and whether they are treating their customers fairly.

Some firms have little management information about the outcomes experienced by defence SMEs throughout the customer lifecycle, from account applications and opening, to ongoing servicing and account closures.

Firms should have enough information to understand how defence SME customers are being treated, and whether their decisions are being applied consistently and in line with the firm's risk appetite, governance processes and risk controls. Firms should review this information regularly.

If there are differences in treatment, such as longer onboarding times or higher levels of escalation, firms should consider whether they reflect the specific risks presented by individual SMEs or whether they result from processes, governance arrangements, escalation requirements or customer-identification challenges within the firm's control.