Accountants Say UK Bank Referral Scheme A ‘Waste Of Money’

U.K. Treasury

The U.K.’s Bank Referral Scheme, part of the government’s array of initiatives to expand access to capital for small businesses, has been marred by controversy and criticism since it first came into effect in late 2016. But the scheme faced some of its harshest attacks yet at the hands of the Corporate Finance Network, a U.K. accountancy group specializing in providing advisory services to small and medium-sized businesses (SMBs).

Reports in Accountancy Daily on Monday (April 29) said the Corporate Finance Network is calling on U.K. policymakers to shut down the Bank Referral Scheme entirely, slamming the effort as “a harmful policy that generates so much cost and bureaucracy.”

The scheme requires traditional lenders to refer small businesses to an alternative finance provider should they be rejected for a bank loan. The online lending marketplaces participating including Funding Options, Funding Xchange, Business Finance Compared and Alternative Business Funding.

Yet in the first 20 months of the Bank Referral Scheme, despite 19,000 small businesses being referred by their banks, only 900 actually obtained financing.

Data released by the Treasury last November noted that in total, less than $20 million in capital has been provided to SMBs under the scheme. In a statement at the time, Treasury Economic Secretary John Glen described these figures as a success.

“From breweries to beauticians, more than 900 British businesses have been matched with the funding they need to grow since we introduced our scheme,” he said. “Small businesses are the backbone of Britain, yet many give up on their plans to expand if they can’t get a loan from their bank. now, however, thanks to our matchmaking scheme, they have another shot.”

But reports in Financial Times Adviser at the time noted that criticism was brewing as a result of the Treasury’s most recent statistics.

“The scheme is a good idea in principle, because banks aren’t the only place to get funding, and there are a lot of specialist lenders that are not on the high street,” said IFS Wealth and Pensions Director and Financial Planner Alan Chan. “As with any loan, it’s important to fully understand the repayment terms and real the small print.”

He said small businesses should take care when working with alternative lenders to avoid a “costly mistake.”

Now, the Corporate Finance Network is ramping up criticism against the Bank Referral Scheme, pointing to the administrative costs of its operation as managed by the British Business Bank, a concern raised in 2016 before the scheme came into effect.

During that time, Funding Options Chief Executive Conrad Ford quelled concerns that the BRS would add an extra administrative burden for bankers.

“The government has made it clear that it will be monitoring the volumes or referrals coming from each bank and checking to make sure it is commensurate with their market share,” he said in 2016.

The CFN reportedly requested information from the Treasury on details and costs related to the scheme’s administrative burden, but it was denied, reports said.

The Network also raised concerns about the potential high-costs of obtaining capital from an alternative finance provider.

“This whole policy seems immoral. It sounds good in theory that businesses who are rejected for funding by the banks should be offered other options,” said Corporate Finance Network Chair Kirsty McGregor in a statement. “But the reality is by this stage such businesses have generally spend four to six months in the funding process and are getting desperate for finance.”

Similar concerns were raised back in 2015 by the alternative finance community, which reportedly expressed worries that banks were going to refer small businesses too late in the application process, and only connect them with alternatives after a taxing experience with their bank.

“If they are offered high-cost finance from another lender, they will, not surprisingly, be very tempted to take it to tackle short-term need while building up even bigger problems in the future,” McGregor continued. “Instead, most need support and advice to address their rising costs and to implement some type of restructuring of their business so they have lower costs that match our difficult and uncertain economic times.”

McGregor added that the government’s Bank Referral Scheme policy does not require that banks or other financial services players provide advisory services to SMBs that are referred to alternative lenders, and emphasized the role of the accountant in guiding their small business clients through this process.