UK Banks Now Required To Refer SMEs To Alt-Lenders

The U.K.’s bank referral scheme has officially kicked off.

Reports by Financial Times on Tuesday (Nov. 1) said the program that requires traditional banks to refer small businesses to alternative lenders if they’re rejected for a loan has begun.

“A refusal from a big bank should not be the end of the line for a small business and, thanks to the finance platforms being launched today, now it won’t be,” said Chancellor Philip Hammond in a statement.

The initiative was first proposed in 2014 as a way to make up for the nearly $4.9 billion in loans that SMEs cannot access each year because they are rejected for traditional bank financing. According to the U.K. Treasury, last year, 26 percent of the 324,000 SMEs that applied for a bank loan saw their initial applications turned down. Just 3 percent of those denied said they turned to alternative options to access the finance.

Further, according to reports, 80 percent of small business loans are provided by the Big Four banks — RBS, Lloyds, Barclays and HSBC.

The bank referral scheme was developed to inject competition into the SME lending market and to fill the gap of billions of dollars that small businesses cannot access via traditional lending methods. But the initiative isn’t without its criticism.

Reports said some critics are warning that banks could send SMEs through lengthy and complicated processes to access an alternative finance provider. Others argue that the program doesn’t inject any competition into the market at all, as traditional banks partner and acquire marketplace lenders and will simply refer rejected SMEs to their own alternative lending options.

According to Funding Options Chief Executive Conrad Ford, there are rumors that traditional lenders may add extra paperwork and other steps to the referral process. But, he added, his company has been made aware of government efforts to prevent this.

“The government has made it clear that it will be monitoring the volumes of referrals coming from each bank and checking to make sure it is commensurate with their market share,” he told the publication. “No banking executive wants to be hauled up in front of senior ministers for slowing down the process.”

Funding Options is one of three marketplace lending platforms that will run the referral scheme by accepting SMEs’ information from the banks and then connecting those businesses to other alternative lenders.