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The Bank Referral Scheme & Designated Finance Platforms

Introduction

It was announced in the 2014 Budget that the government intended to match businesses rejected for bank finance with alternative finance providers.

This was subsequently passed into law as part of the Small Business, Enterprise & Employment Act 2015[1], and latterly as part of The Small and Medium Sized Business (Finance Platforms) Regulations. This is known as the Bank Referral Scheme.

In the 2016 Spring Budget[2], the government announced its intention to designate three online finance platforms to help to match SMEs rejected for finance with alternative lenders. Funding Options is one of these designated finance platforms, and the scheme officially began on 1st November 2016.

This page aims to answer some of the frequently asked questions that Funding Options receives regarding the Bank Referral Scheme, and will be updated as implementation develops.

FAQs

The Bank Referral Scheme helps businesses who’ve been unsuccessful with the major banks find finance elsewhere.

The Government passed a law* in 2015 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. Funding Options is one of these Government-designated finance platforms.

How it works:

If you’re unsuccessful with the bank (which might mean they don’t offer you enough or you don’t like their terms), they have to offer you a referral to a government designated finance platform like us.

You don’t have to accept a referral — it’s completely up to you — and there’s no obligation to take any of your options or offers if you do accept a referral.

Once you’re referred to us, we’ll ask a few simple questions about your business like how much money you need and what it’s for. Then we’ll match you with the lenders most suitable for your situation and requirements, and if you like what you see, we’ll help you through the application process with them.

* Small Business, Enterprise & Employment Act 2015

Each year, hundreds of thousands of UK SMEs don’t fit mainstream bank lending criteria. Government statistics show that most firms spend less than two hours researching funding options, and two-thirds only approach one business finance provider — meaning that trusted gateways are required to help them navigate the diverse range of alternative options available.

There is a large economic prize at stake for the UK economy, with a recent report by Cambridge University’s Centre for Alternative Finance and GLI finding £20bn lost to the economy each year through lack of alternative business funding awareness.

Yes, the scheme launched on 1st November 2016. After an extensive assessment process, three finance platforms were designated (Funding Options, Bizfitech and Funding Xchange).[3]

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"[4]. The Small Business, Enterprise & Employment Act 2015[1] and associated finance platform regulations ensure a level playing field between designated finance platforms, whilst protecting SMEs using the Bank Referral Scheme.

As with any regulation, the detail matters, but broadly speaking designated banks must offer SMEs declined for business finance a referral to designated finance platforms, and equally SMEs must give their permission for the referral to take place; designated finance platforms must protect the anonymity of SMEs until requested otherwise.

Designated finance platforms are probably best described as specialist business finance comparison sites. Traditional mainstream price comparison websites have been unable to develop mature services for SME loan comparison because the technical problem to solve is not primarily one of price, but one of availability. More details on the business finance comparison market can be found in the Funding Options response to the Competition & Markets Authority’s 2016 paper on SME comparison sites, on the Cabinet Office website.

There are currently three designated finance platforms.[3] The British Business Bank has opened up a second round of the assessment process, which may lead to including further platforms in 2017.

Information from businesses that request a referral will go to all designated finance platforms. However, there is no obligation to use every platform and the referred business decides which platform(s) should act on its behalf.

There is undoubtedly demand for the Bank Referral Scheme, with the British Business Bankers’ Association (BBA) reporting that more than 40% of SMEs say they would take advantage of it. As such, volumes could be significant if the process is easy for the businesses involved. Given that compliance with the Bank Referral Scheme is a legal requirement, Funding Options anticipates that designated banks will wish to demonstrate referral volumes proportionate to their overall market share.

More generally, Funding Options believes that designated banks are far more willing to collaborate with alternative lenders than is generally recognised. Indeed, regulatory concerns may currently prevent better collaboration between high street banks and alternative finance providers, particularly a perception that the Financial Conduct Authority (FCA) will hold banks accountable for adverse outcomes for the SME being referred, and also concerns that the bank may unwittingly carry out regulated Credit Broking activities.

The Bank Referral Scheme directly addresses these concerns: with the regulatory comfort of legislation, and with the thorough government assessment process on the infrastructure, proposition and compliance of designated finance platforms.

The finance platform regulations provide a specific list of information that designated banks must share about the referred SME, comprising identifying information (name, address, email), trading information (legal status, age), and finance needs (how much, for how long, what type). To support Bank Referral Scheme implementation, Funding Options has published an open source technical interpretation of required information, which is available here.

Though it is impossible to predict the demographics of SMEs using the Bank Referral Scheme, Funding Options current market experience is that over half of SMEs declined by major banks can be supported by alternative finance providers. However, most of these SMEs will choose not to proceed for a range of reasons, such as the cost of alternative finance being too high, the terms being too onerous (e.g. personal guarantees), or most commonly simply their changing business plans.

Each designated finance platform will curate and maintain its own panel of lenders, being tasked with compliantly providing a valuable range of finance options for businesses using the Bank Referral Scheme. For example, last year Funding Options referred businesses to more than fifty finance providers, from challenger banks, to niche asset specialists, to innovative online lenders, and even the designated banks themselves.

Each designated finance platform will have its own commercial model, which cannot involve charging the business using the Bank Referral Scheme.

Funding Options exists to help businesses find the right lender for their needs — so we’re very careful about who we choose to work with. Our panel of lenders is carefully curated and regularly updated, to make sure we always offer full market coverage with reputable lenders.

Market leading technology combined with an agile, intelligent, and well-informed team of account managers has allowed Funding Options to reach levels of engagement and understanding with lenders that is not usually enjoyed in the traditional broker-lender relationship. We’re proud that Funding Options has developed such good relationships with lenders, and these relationships give us a clear understanding of what each lender offers — a crucial component in our ability to provide a bespoke service for businesses on an industrial scale.

To be considered for our panel, the following criteria are crucial because they indicate substantial due diligence by a trusted third party, and will usually accelerate the on-boarding process:

  • Regulated by the FCA
  • Backed by the British Business Bank
  • Backed by EU or UK institutional investment funding

We believe there is a balance between having a broad range of lenders on our panel, and maintaining engagement and understanding with lenders. That’s why Funding Options actively adds and subtracts lenders from the panel, to constantly improve the scope of our offerings for businesses.

For more details, contact lender support.