New UK lending rules boon for private debt

Earlier this week the UK’s Chancellor of the Exchequer, George Osborne, confirmed plans to compel traditional lenders to direct borrowers who they have rejected for loans to alternative sources of financing such as private debt funds.

The Treasury published the findings of its consultation period on Wednesday, having launched the paper, entitled ‘SME finance: help to match SMEs rejected for finance with alternative lenders’ in March this year.

The government’s preferred approach for such a process involves requiring lenders (such as banks) to share details of SMEs they have rejected for finance with a private sector platform that would help the prospective borrower link up with challenger banks and alternative finance providers.

“These proposals look to address a market failure of imperfect information that is impeding SME’s ability to access the finance they need to grow and compete. Currently, the largest four banks account for more than 80 percent of UK SMEs’ main banking relationships, and evidence suggests the majority only ever approach their main relationship bank for finance, giving up if rejected, the report said.

As a result of the consultation process, the government will legislate for a mandatory process in the Small Business, Enterprise and Employment Bill, whereby SMEs will be forwarded on to platforms that will help them be linked up with alternative lending opportunities.

“SMEs’ information will be forwarded to private sector platformsthat will be designated by the Government on the basis of these platforms meeting clear minimum standards that focus on ensuring that SMEs are in control and properly protected throughout the process,” the report said.

The Treasury said it welcomed the widespread report for the proposals it had received during the consultation. Respondents included RBS, HSBC, The British Bankers’ Association, Close Brothers, Lloyds Bank, and Santander.

The consultation process also suggested some other key themes. These included: the importance of ensuring SMEs had full control over the process and their information; making sure the platform is secure, and only reputable lenders are invited to begin discussions with SMEs; and making sure SMEs were not subjected to unsolicited credit checks which could damage their credit footprint.