Defence SMEs and the banking friction problem: the FCA reframes a political fight
The FCA has concluded that defence SMEs are not being systematically excluded from banking, but are facing friction and delay that firms can and should fix. For bank boards, the finding shifts the question from risk appetite to process proportionality, with reputational and policy consequences attached.
The FCA has drawn a line under one of the most politically charged questions in UK retail banking: whether defence SMEs are being frozen out of the financial system. The regulator's answer, published on 26 October 2026 by Greg Sachrajda, Head of Department for retail banking, is that the problem is real but mischaracterised. The issue is friction and delay, not exclusion (FCA).
A deliberate reframing
Sachrajda's blog is careful. He acknowledges the political backdrop, noting that recent debate has suggested defence businesses are routinely excluded from financial services, then dismantles that premise. The firms the FCA engaged with can and do serve defence SMEs, with some investing in specialist expertise, dedicated teams and governance processes (FCA). What they are not doing consistently is moving quickly or proportionately. That reframing matters because it changes who owns the problem. If the issue were exclusion, the fix would be rules compelling access. Because the issue is process, the fix sits inside each firm's operations, and so does the accountability.
Proportionality is the new test
The FCA is explicit that there is no regulatory barrier preventing firms from supporting lawful defence businesses, and that firms are entitled to make commercial decisions and determine their own risk appetite (FCA). That is a meaningful concession to industry. But it comes with a condition: the approach must be proportionate to the specific risks. Sachrajda stresses that defence is not one-size-fits-all, spanning software, logistics, maintenance, engineering, manufacturing and consulting, each with distinct risk profiles. The implication is that blanket caution dressed up as financial crime diligence will not survive scrutiny. Firms that cannot show their onboarding differentiates between a cyber security contractor and a munitions exporter are exposed.
The political economy around the decision
The timing is not accidental. HM Treasury and the Department of Finance Canada jointly reaffirmed on 25 October 2026 their commitment to strengthening defence financing through the Multilateral Defence Mechanism and the Defence, Security and Resilience Bank (HM Treasury). Government capital is flowing toward defence industrial capacity at the same moment the FCA is signalling that private sector banks should not be the chokepoint. Bank chairs and CEOs should read the two statements together. The direction of travel is that defence SMEs are a strategic priority, and friction in commercial banking will increasingly be treated as a public interest problem, not just a customer service one.
What boards should do now
Three moves are sensible. First, commission an internal review of defence sector onboarding timelines and decline rates, segmented by sub-sector. Second, test whether financial crime policies treat defence as a monolithic high-risk category by default, and if so, revise them. Third, prepare a defensible narrative for supervisors and, potentially, parliamentary committees. The FCA has handed the industry a relatively generous settlement by refusing to mandate access. The quid pro quo is visible, measurable improvement in how firms handle a sector the government has decided matters.
Sources
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