The Financial Conduct Authority (FCA) has advised banks to ensure environmental, social, and governance (ESG) considerations do not prevent them from providing financial services to defence companies. The regulator recently communicated this guidance to financial firms serving small and medium-sized enterprises (SMEs) amid concerns that some banks’ approach to defence sector clients has not kept pace with evolving security and government policy landscapes.

Following an FCA review, the regulator acknowledged that defence companies often face delays and obstacles when seeking banking services, despite not being formally excluded from funding. The investigation found that some financial institutions were applying ESG criteria in ways that hindered defence SMEs’ access to accounts and capital, even though no FCA sustainability regulations prohibit banks from supporting this sector.

In a statement to the House of Lords, Treasury Minister Lord Pitt-Watson emphasized that “no legitimate company should be excluded from financial services solely because it operates in the defence sector.” He further clarified that the FCA has confirmed there are no regulatory barriers tied to sustainability requirements that restrict banks or financial institutions from backing defence businesses.

The issue gained parliamentary attention after Lord Sharpe of Epsom highlighted a case involving a firm developing counter-drone technology, which was reportedly at risk of losing a £700,000 Innovate UK grant due to difficulties in accessing banking services. Banks had expressed reluctance to open accounts for the company, citing concerns related to the nature of its operations.

An FCA spokesperson underscored the critical role defence firms play in the United Kingdom’s economic growth and national resilience. The regulator urged banks to apply “proportionate, risk-based decisions” when evaluating defence sector clients and to act swiftly to resolve issues that cause “unnecessary friction and delay.” The FCA also noted that financial institutions share responsibility with the government and defence regulators in supporting the nation’s defence capabilities.

This guidance arrives amid heightened geopolitical tensions and a government emphasis on strengthening the UK’s defence industry. The FCA’s efforts seek to ensure that the financial sector’s approach aligns with national strategic priorities while maintaining appropriate risk management practices.