Context - March 2014
Budget 2014 in the UK announced that the government would consult on whether and if so, how, to take legislative action to help match small and medium sized enterprises (SMEs) that have been rejected for loans with challenger banks and alternative finance providers who are looking to offer finance. The government believed that positive action in this area would be an important step to improve access to finance, and would encourage a more competitive banking sector. The government undertook a consultation which complemented proposals, announced by the government at Autumn Statement 2013, to require banks to share information on their SME customers with other lenders through Credit Reference Agencies.
At present the largest four banks in the UK account for over 80% of UK SMEs’ main banking relationships. Many SMEs only approach the largest banks when seeking finance. Although a large number of these applications are rejected - in the case of first time SME borrowers the rejection rate is around 50% - a proportion of these are viable and are rejected simply because they don’t meet the risk profiles of the largest banks. There are often challenger banks and alternative finance providers with different business models that may be willing to lend to these SMEs.
Although the largest banks will sometimes refer these SMEs on (e.g. to brokers), in many cases challenger banks and other providers of finance are unable to offer finance as they are not aware of their existence and the SMEs are not aware of the existence of these alternative sources of finance. This is a market failure, of imperfect information, resulting in SMEs that are viable loan propositions not receiving the finance they need.
Some attempts have been made to address this market failure, but they are limited in scope and have been slow in achieving results. The UK government is committed to helping small businesses access finance, and believes that more can and should be done. The subject of their consultation was whether or not to address this market failure through a much more ambitious government intervention that would increase the amount of information that is available to challenger banks and other providers of finance about businesses seeking finance, but which are rejected for finance by the major banks. The consultation asked whether this government intervention is needed and, if so, for views on how the government should deliver this, including via a preferred option of referral to private sector platforms.
Detail of outcome - December 2014
The UK government welcomed the widespread support for its proposals to improve access to finance for SMEs through a mandatory process whereby lenders are required to share details of SMEs they reject for finance, so those businesses can be approached by alternative lenders.
In light of this support, the UK government decided to proceed with legislation through the Small Business, Enterprise and Employment Bill. The legislation will require the largest UK SME lenders to forward on details of SMEs they reject for finance (where SMEs give their consent) to platforms that will help them be linked up with alternative lending opportunities. Private sector platforms will be designated to receive this information by the government on the basis of their meeting clear minimum standards that focus on ensuring that SMEs are in control and properly protected throughout the process.
The government published draft regulations to assist Parliament’s scrutiny of the powers in the Small Business, Enterprise and Employment Bill. These are not in final form and further changes may be made before the regulations are made.
The government intends to institute further requirements for ‘online platforms’ that wish to be designated under these regulations; these will be set out non-legislatively in due course.