New ‘challenger’ banks will find it easier to check credit worthiness of potential business customers making it easier to provide finance, under new proposals published by the government.
The government is consulting on new rules for sharing small and medium enterprise (SME) credit data. If these draft proposals are implemented, it will be easier for challenger banks and alternative finance providers to enter the market and provide credit to SMEs. Banks will be required to share their SME’s credit data through credit reference agencies.
A number of bodies, including the Office of Fair Trading and the Competition Commission, have all highlighted how a lack of information about the creditworthiness of SMEs has limited the number of providers of SME finance.
As a result the big four high street banks control 85% of SME lending. Improved access to SME credit data, through greater competition and innovation in SME lending, should improve the cost and quality of services offered.
SMEs are a vital to the UK economy accounting for over half of private sector employment and nearly half of all private sector turnover. The ability of SMEs to access finance is important for funding business investment, ensuring businesses reach their growth potential, and for facilitating new business start-ups.
Financial Secretary to the Treasury, Sajid Javid, said:
The government is determined to build a banking system that supports Britain’s economy and its small and medium sized businesses.
The best way to deliver this is to increase competition in the sector and remove the barriers to new sources of finance for SMEs. Requiring banks to share data is an important part of creating a more level playing field that will enable more providers to enter the market.
The consultation will invite views from stakeholders and the industry on the policy proposals and will run until 17 February 2014. The government then intends to bring forward legislation in the next session of Parliament.
The consultation follows an announcement by the government at Budget 2013 that it would “investigate options for improving access to SME credit data to make it easier for newer lenders to assess applications for loans to smaller businesses”.
Since then HM Treasury has been working with the Bank of England, the Office of Fair Trading, the Financial Conduct Authority, the Department for Business, Innovation and Skills, and industry to investigate proposals to improve access to SME credit data to increase competition and level the playing field for challenger banks and alternative finance providers.
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