Call for major reform of Bank Referral Scheme

The Treasury is currently mulling responses to its consultation on a range of issues and proposals for changes to the Bank Referral Scheme (BRS), so as to better support SMEs’ access to appropriate and affordable finance, but initial reactions from industry bodies suggest that the options it has put forward are unlikely to address the key barriers.

The BRS is an initiative dating back to 2014, which requires major lenders (designated banks) to refer SME customers that they reject for finance, with the SMEs’ permission, to finance platforms that can match the SME with alternative finance providers, in order to improve access to finance. 

The consultation, which closed at the end of last year, asked for feedback on whether there should be amendments made in relation to various aspects of the BRS, including:

• Designations and scope of the BRS: Whether the current size of SME businesses and types of finance products in scope of the BRS are still appropriate, whether the current approach to designating finance providers as being within scope of the scheme should be changed, whether more lenders should be designated to better reflect the market, whether more products should be in scope e.g. bank accounts, and whether there are any barriers to voluntary participation. 
  The consultation also looked at whether legislation should be drafted more broadly and in a more business-model neutral way, so that it would be possible to designate a broader type of finance provider, with the proviso that “only significant firms with scale should be designated under the Scheme.”
• Improving SME participation: What improvements could be made in relation to when and how SMEs should be made aware of the scheme, whether the circumstances triggering an SME referral should be broadened in legislation, how SME’s chances of successfully accessing finance under the scheme could be improved, and how the referral and onboarding process could be streamlined.
  The consultation cited feedback from lenders suggests that only c.2%-3% of rejected SMEs are opting for a referral onto the BRS, and many businesses that do are then dropping out part way through the process. Evidence collected for the post-implementation review suggests there may be several factors that contribute to this, including limited awareness of the Scheme and frictions in the customer journey.
• Monitoring performance: Whether the current data collected by the British Business Bank and published in relation to the scheme should be expanded, and whether respondents have any reflections on the interaction between the BRS and open finance initiatives.

UK Finance, which represents over 300 financial services firms, is advocating for a comprehensive reform of the current system, arguing it no longer effectively meets the needs of today’s dynamic market.

In a statement made after submitting its response, UK Finance said: “Our position is clear: the existing model is outdated and no longer fit for purpose in today’s fast-evolving market. It fails to provide timely, proactive support for SMEs, often leaving them ill-prepared after a rejection and disillusioned with the process.”

UK Finance’s proposal is to replace this scheme with a modern, government-led Access to Finance Hub offering tailored education, financial readiness assessments, and guidance. It says this would encourage greater financial literacy and early engagement and so “create a more effective ecosystem for businesses”.

The lobby group said: “This revamped platform could serve as a comprehensive one-stop centre of financial expertise and valuable resource, offering continuous support and guidance throughout the entire business and financial lifecycle, rather than just a reactive referral process.”

This call for a smarter, more proactive approach is echoed in the response to the consultation from the NACFB, which is warning that a scheme designed for a 2014/15 market dynamic no longer “moves the dial” in today’s landscape, where challenger and specialist banks account for the majority of gross SME lending and brokers function as core finance infrastructure.

The Association argues the current model intervenes too late – routing many non-ready SMEs through a narrow matching funnel that can lead to double rejection and disengagement.

Instead, the NACFB is urging Treasury to convene designated lenders, challengers, non-banks, platforms, brokers, CDFIs and relevant trade bodies into an industry-wide working group to co-design a rebuilt, market-reflective access to finance hub centred on earlier triage.

Kieran Jones, head of communications and advocacy at the NACFB, said: “If the system only engages at the point of decline, it’s designed around failure. We need upfront triage that routes SMEs to the right pathway – transactional lending, broker-led advisory support, or impartial readiness support – and places verified brokers at the heart of turning viable enquiries into lender-ready cases.”

To find out more about the crisis in SME lending, register for the upcoming Finance Connect webinar SME Finance: what needs to change to create better outcomes for SMEs, brokers and lenders?  on Friday 13 February at 1pm. Find out more and register here.