Pause on Bank Referral Scheme reform

The government is to drop plans for legislative changes to the Bank Referral Scheme (BRS) and is instead calling on organisations across the commercial sector to come together and deliver alternative proposals to support referrals and SME finances, after identifying demands for a “fundamental” rethink of the scheme.

Last year’s consultation on a raft of possible changes to the BRS found more than half of respondents advocated for a fundamental shift away from the current design of the BRS, on the basis that the scheme is not currently delivering adequately (roughly 5% of referred SMEs go on to obtain alternative finance successfully).

Most respondents, drawn from finance platforms, finance providers, trade bodies and other commercial operations, argued that the BRS was not working well and failing to tackle underlying problems with SME applications and readiness for finance.

Industry proposals

The government’s response to the consultation findings conceded that “in light of those underlying concerns, the government considers it preferable at this stage to focus on developing non-statutory solutions.”

It is now asking the private sector to deliver proposals for how to improve bank referrals and support SME finance by the end of this year (Friday 18th December). The government’s “strong preference” is for the sector to organise itself on a representative basis and deliver a single set of suggestions with broad support, which may involve voluntary sector led action and/or proposals for policy/legislative changes.

Improvement options

From the original consultation, which ran from October to December last year, the government has identified some common themes, notably that SMEs needed further help in order to understand and improve their readiness for credit.

Responses were also positive about potential future interactions and opportunities for the BRS from Open Finance. Generally, it was thought that Open Finance will enable better, higher quality data sharing and, with that, opportunities to improve customer journeys by supporting SMEs to understand their finance readiness, reducing duplicative asks for information, and enabling more efficient matching with lenders.

Questions for the sector going forward include:

• How to improve the volume/quality of referrals where credit is rejected, and what commitments the financial services sector would be willing to make in this area.
• How to improve SME awareness and information around securing alternative credit and advice, specifically improving and standardising information that is given to SMEs at the point a loan application is made.
• What type of explanation could be given to an SME declined for credit and how, balancing the need for this to be useful for the SME with operational challenges in giving detailed explanations.
• What level of transparency the banking sector would be willing to deliver about the number of credit applications received, those referred to finance platforms and/or other referral bodies, such as CDFIs – in the form of usable and publishable data.
• Whether a more strategic solution is needed to improve SME readiness for finance and better help the individual SME overcome the difficulties with its application, or wider credit provision.

“The NACFB looks forward to contributing meaningfully to the next steps and helping shape a solution that better reflects the role of brokers, lenders, CDFIs, platforms and advice-led support in improving outcomes for SMEs.”

Finance Connect’s UK summer conference on 4 June will include sessions covering a range of SME lending challenges, including the impact of government intervention, the role for specialist lenders and the SME customer journey.

Details of the conference can be found here.  Register here.