Bank Referral Scheme - a ticking time bomb?
The Bank Referral Scheme helps businesses which can’t get funding from the major banks to find other sources of finance.
In 2015, the government introduced legislation which requires banks to offer to refer their unsuccessful applicants to designated finance platforms. These platforms will then help the referred business find another source of business finance.
A business may be unsuccessful with a major bank for several reasons. The bank may not be offering enough funding, or the business may not agree to the bank’s terms. Whatever the reason, the bank should then offer the business a referral to a government-designated finance platform.
According to government statistics most firms spend under two hours researching funding options. Two-thirds of these only approach one business finance provider. Trusted advisors are needed to inform these businesses about the diverse range of alternative options open to them.
A lack of awareness around alternative sources of funding is costing the UK economy dear. A recent report by Cambridge University’s Centre for Alternative Finance and GLI found that £20 billion is lost to the economy each year because small and medium sized businesses do not know where, other than major banks, they can source funding.
The Bank Referral Scheme launched on 1 November 2016 when HM Treasury decided to allow "the private sector to develop multiple competing platforms – allowing for competition to drive up the standards and quality of the service". The Small Business, Enterprise & Employment Act 2015 and associated regulations ensure parity between designated finance platforms and protects SMEs using the scheme.
Basically, designated banks must offer SMEs declined for business finance a referral to designated finance platforms. At the same time, SMEs must give their permission for the referral to take place.
Designated finance platforms are specialist business finance versions of Compare the Market. There are currently three designated finance platforms – Funding Options, business funding compared.com and Funding Exchange. The British Business Bank has opened a second round of assessments that could lead to further platforms being included in 2017.
Demand for the Bank Referral Scheme is low at present. According to the British Bankers’ Association (BBA) just over 40 per cent of SMEs say they would take advantage of it. However, volumes could be substantial if the process is easy for the businesses involved. Given that compliance with the Bank Referral Scheme is a legal requirement designated banks may wish to demonstrate referral volumes proportionate to their overall market share.
Regulatory concerns could be preventing collaboration between high street banks and alternative finance providers. There is a perception that the Financial Conduct Authority (FCA) will hold banks accountable for adverse outcomes for the SME being referred. There is also a fear that the bank may unwittingly undertake regulated credit broking activities.
Designated platforms refer businesses seeking finance to a range of funding providers but they can’t charge the businesses using the referral scheme. Currently the pricing of debt finance is attractive because lenders have funds to put to work and more options are becoming available.
The problem arises when lenders apply expensive rates and onerous terms and conditions to their offerings.
Call Richard Olsen at Pegasus Funding 0203 327 0567 for independent advice on what alternative funding options are available to you and your business and how to access them.