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A Second Chance?

Is the new bank referrals scheme a helping hand or another way to rip off UK SMEs? James Sherwin-Smith asks the question


A new government scheme went live on 1 November to help businesses access finance when they have been turned down by a bank.

The regulations require designated banks to pass on the details of small businesses they have rejected for finance to three designated online platforms – Funding Options, Funding Exchange and Business Finance Compared. These platforms will then share the application details with alternative finance providers to see if they can accept what the banks have rejected.

Any measure that raises awareness of non-bank business finance and promotes greater competition should be welcomed. However, it’s unclear what protections are in place to help businesses get the best deal from the proposed alternative finance providers.

Are the designated platforms required to support all alternative finance providers, so businesses can see the whole market?

Given that designated platforms are paid commission by the finance providers, does this mean firms will be steered towards high cost finance providers that either pay the most commission or are the most likely to say yes?

If the designated platforms are competing with each other for each referral opportunity, will businesses be encouraged to make a quick decision, which could mean that key terms and conditions are glossed over?

Businesses should be vigilant, as this new system does not necessarily mean that firms will get the best deal available, and could potentially create incentives for finance to be mis-sold, with firms possibly being rushed into selecting a provider based on headline terms to generate the highest commission for the platform concerned.

Thankfully, there is more help on the way. The business banking sector was recently investigated by the Competition and Markets Authority (CMA), which decided that several remedies are needed to correct for the adverse effects on competition that they identified.

For example, the CMA has ruled that all lenders must disclose an Annual Percentage Rate for unsecured business lending for amounts up to £25,000. This will help firms compare prices, and hopefully avoid nasty surprises in the fine print of lenders’ terms and conditions. The CMA has also suggested that a price comparison website should be created for SMEs, and the hope is that will cover the whole market and be independent; that is devoid of any incentives to steer businesses towards a lucrative result for the platform ahead of their customers’ needs.

  • James Sherwin-Smith is CEO of alternative business banking provider Growth Street

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