High-street banks to be forced to recommend alternative finance to small business

Britain’s largest high-street banks will be forced to help small and medium-sized firms find alternative sources of finance if they have turned them down for loans, under new legislation unveiled by the Treasury today.

The proposed new rules, which follow a consultation paper introduced by the government on the topic, will require high-street banks to offer to connect small and medium-sized firms with platforms directing them to the UK’s new wave of challenger banks and alternative finance providers if they have been turned down for loans.

The proposals are expected to be unveiled by the Chancellor George Osborne this afternoon, ahead of legislation due to be introduced into Parliament in the autumn.

If the measures go through, it will represent another significant boost for the UK’s burgeoning alternative finance industry, which broke the £1bn barrier in December 2013 boosted by the success of crowdfunding and peer-to-peer lending platforms and challenger banks.

The proposed legislation follows a report by the Competitions and Markets Authority in July which found a lack of “effective competition” in small business lending, with 80% of finance still provided by the four largest high street banks in the UK – RBS, Lloyds, HSBC and Barclays.

Official Bank of England data from May 2014 revealed that lending to small and medium-sized firms by high-street banks fell by £723m in the first half of this year, and it is hoped the legislation will allow alternative finance providers to act as an increasingly mainstream alternative to bank lending..

The rules mean these banks will be obliged to ask small firms rejected for loans whether they would like their details shared with certain websites, which would then put them in touch with appropriate alternative finance providers.

Osborne will unveil the plans as part of a raft of new measures designed to help small business at a financial technology conference held in London today.

The proposals have been largely welcomed by small businesses and companies in alternative finance.

Adam Tavener is the chairman of pensionledfunding.com and one of the founders of the Alternative Business Funding (ABF) network, an initiative designed to signpost alternative sources of finance to small firms. Tavener said: “The ABF platform welcomes today’s announcement from The Treasury that legislation will be introduced so that banks match SMEs that have been rejected for loans, with alternative finance providers.

“From the outset the principle behind our collaboration was to provide a simple and safe journey for businesses to access quality alternative funders if they were not able to, or did not wish to obtain finance from a main bank.

“The confirmation from The Treasury that our initiative will, indeed, pass into legislation is both sensible and pragmatic.

“This is a very positive move for the economy and ABF are proud to have played such a significant part in this and look forward to continuing our close work with The Treasury to ensure that what is finally delivered is simple, fair, transparent, but most of all gets real results.”

Max Chmyshuk, founder of alternative lending platform Fleximize, commented: “Today’s announcement by the Chancellor George Osborne is great news for UK businesses and could not have come at a better time as official figures reveal that net lending to SMEs by high street banks fell by further £723 million in the first quarter of this year.

“In contrast, alternative lenders are picking up the pace having extended over £150 million to SMEs in the same quarter. Empowering finance providers with data would be like pressing the turbo button on the alternative lending market for SMEs – the growth could be explosive.”

Business secretary Vince Cable welcomed the move last night. He said: “Forcing banks to refer businesses to alternative lenders is something I’ve been determined to make happen.

“Big banks still dominate and small businesses often give up if they’re turned down for finance by their bank.”