Banks to be forced to refer rejected businesses to alternative funders

Under the new rules businesses will be referred towards challenger banks and alternative funders such as crowdfunders, P2P lenders and invoice financiers.

Osborne said: “It’s only by harnessing innovations in finance, alongside our existing world class knowledge and skills in financial services, that we’ll ensure Britain’s financial sector continues to meet the diverse needs of businesses and consumers here and around the globe, and create the jobs and growth we all want to see in the future.”

The news follows a consultation, launched in April, which sought to establish how such a referral process would work.

Vince Cable, the business secretary, said: “Forcing banks to refer businesses to alternative lenders is something I’ve been determined to make happen.

“It’s good that more SMEs are making use of alternative finance but the big banks still dominate and small businesses often give up if they’re turned down for finance by their bank.”

Competing groups of finance providers, including the Alternative Business Funding (ABF) portal have vied to be a part of the process.

The Treasury is now expected to form a working group to establish exactly how the process will work and which platforms will be included.

Adam Tavener, chairman of Pensionledfunding.com and catalyst for the ABF portal, said: “What we are seeing is the first steps of a journey which will, ultimately and permanently change the way small business owner’s access finance for growth going forward.

“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.”

Banks were thought to have opposed the move, but today Irene Graham, executive director at the British Bankers Association, said: “The banking industry fully supports efforts to help match businesses rejected for finance with other lenders. In fact many of the banks already run programmes that refer businesses unsuited to bank finance to a range of alternative providers.

“We are also keen that any new process should give customers as many options as possible so that they can get the right finance for their business. It is equally important that the customer’s consent and choice is kept at the centre of any future scheme.”

The news follows the announcement last month of a privately agreed referral agreement between high street bank Santander and P2P lending platform Funding Circle (which is also part of ABF).

Funding Circle CEO and co-founder Samir Desai, said: “We applaud the Government for again showing its commitment to supporting greater diversity and competition in the small business lending market. The success of this scheme will depend on simplicity and ease of use for business owners.”

The alternative funding industry is estimated to have almost doubled in size to £1bn in 2013, and projected to grow to £1.6bn this year.

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