As mentioned briefly before, UK banks have been so hopeless in referring businesses they can't finance to alternative lenders that the government has decided to create a mandatory referral process.
Currently, the largest four banks account for over 80% of UK SMEs’ main banking relationships. Most SMEs only approach their main bank for finance, with around 40% giving up their search if they are unsuccessful. A proportion of those rejected are viable businesses who simply don't satisfy the risk appetite of the largest banks. The result is that other providers of finance aren't able to help because they are not seeing the need among SMEs, and the SMEs are unaware of the alternatives to their bank.
So the government will use the Small Business, Enterprise and Employment Bill to require the larger UK business lenders to refer any SME whose finance application is rejected (with the SME's consent) to certain designated private sector platforms. Those platforms will then connect willing SMEs with participating alternative providers of finance (ranging from finance companies, to invoice discounting providers to peer-to-peer lending platforms to challenger banks).
The platforms will need to comply with minimum standards to help ensure that SMEs are in control and properly protected throughout the process. All types of credit products offered by large banks to SMEs will be covered by the referral requirement, although there will be a low threshold below which it would be too costly to refer the funding application. Some businesses may also be excluded for various reasons that would include where the initial funding application was rejected for suspected money laundering. The proposals are also designed to complement and work in conjunction with the government policy to improve access to SME credit data, a process that is happening separately, but in parallel.
In summary, the SME funding referral programme should work as follows:
- SMEs must consent to be referred, and will have their details anonymised. Alternative lenders will only be able to see key information that would allow them to make an initial assessment of whether an SME may be a potential lending opportunity.
- If a lender wishes to explore a lending opportunity with a business, it would need to make contact through the platform and request consent to see that business’s contact details and begin a direct dialogue. Where a lender wishes to make a more detailed credit assessment, it will be able to obtain credit data from the business’s main bank via designated Credit Reference Agencies.
- Platforms will be able to exercise discretion over whether they grant financial and business advisers and other intermediaries access, but the platform must clearly notify SMEs when it is an intermediary that wishes to contact them, and not a lender.
The minimum standards for the referral platforms will be stipulated by the Treasury on advice of the British Business Bank. Standards will include:
- data protection – to avoid excessive or misleading approaches or credit checks without consent;
- fair access to all SME lenders that agree to terms and conditions regarding appropriate treatment of SMEs contacted through the platform; and
- accountability for alternative lenders who fail to comply with the terms and conditions they sign up to when joining the platform.
The Treasury will be able to de-designate platforms that fail to adhere to the standards. The FCA will oversee the obligation on banks to share information with platforms, and the platforms’ requirement to give fair access to lenders. Sole traders and micro businesses will be able to complain about platforms to the Financial Ombudsman Service when dealing with designated platforms.
Further detailed regulation, including the designation criteria that potential platforms must meet, will be set out in secondary legislation following the passage of the Bill.