Banks to be forced to increase competition in SME lending

Britain's biggest banks are to be forced to increase competition in the SME loans market in a bid to ensure further growth in a key part of the economy.

Under new legislation being drawn up by the Treasury, banks will be instructed to help small and medium sized companies find new sources of finance if they have turned them down for loans.

George Osborne, the Chancellor, is today expected to outline the new rules, ahead of legislation due to be introduced in the Autumn.

The announcement comes just three weeks after the Competitions and Markets Authority recommended a full inquiry into the main high street banks after it found a lack of “effective competition” in both SME lending and current account services.

The CMA’s study found that 80pc of small business lending flows from the big four banks - Lloyds Banking Group, the Royal Bank of Scotland, HSBC and Barclays.

The SME sector is seen as being vital to continued UK economic growth as it employs some 24.3m people - almost half the country’s population - across 4.9m businesses.

Under the new rules, banks who reject SMEs for finance will be required to ask these firms whether they want their details to be shared with websites, who will then refer companies to challenger banks and alternative lenders.

The measures will include:
- a detailed look at the UK’s digital infrastructure to assess whether it meets business needs;
- a £100m extension of the British Business Bank’s investment programme;
- and a push from UKTI to promote UK companies in the financial technology sector overseas.

Vince Cable, Business Secretary, a long term advocate of increased SME lending, last night welcomed the move: “Forcing banks to refer businesses to alternative lenders is something I’ve been determined to make happen.

“Big banks still dominate and small businesses often give up if they’re turned down for finance by their bank.

Despite the Government's efforts, recent research has shown that only a third of Britain’s small businesses have turned to their banks for financing in the past quarter, the lowest level on record.

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