AAT RESPONSE TO THE DEPT OF BUSINESS, INNOVATION AND SKILLS AND HM TREASURY CONSULTATION ON “SME finance: help to match SMEs rejected for finance with alternative lenders”
1.1The Association of Accounting Technicians (AAT) is pleased to respond to the Dept for Business, Innovation and Skills and HM Treasury consultation (condoc) on “SME finance: help to match SMEs rejected for finance with alternative lenders”.
1.2As an organisation AAT and its members in practice are very actively engaged through providing accountancy and finance services to SMEs and readily recognise the problems outlined in the condoc and would agree that there is “a market failure, of imperfect information” (condoc, final paragraph page 1).
1.3In the way that the current market operates many SMEs are starved of cash and need help to invest in growth dueto the fact that they may not meet one of the big four banks risk profiles.Many are also not necessarily aware of the existence of Challenger Banks or other alternative finance providers.
1.4AAT is supportive of the steps that the Government is taking to address the market failure as the benefits to SME would be palpable. To that end we accept that the making available of information regarding SMEs seeking finance to Challenger Banks and other alternative funding providers, would be a positive step in the right direction (condoc,paragraph 1 page 2).
1.5AAT notes that, whilst it is still early days, the new 7 day switching service that has recently been introduced is undoubtedly a small step down the road towards increasing competition in the provision of banking services (condoc, penultimate paragraph page 2).
1.6Based on anecdotal feedback received, AAT supports the Government’s own non-empirical findings (condoc, bottom of page 3 and top of page 4) that, in the main,SMEs currently approach the big four banks when looking to arrange finance. AAT does not have any evidence to counter the Government’s observation that over 35% of SMEs give up on sourcing funding if they have their application declined by a major bank (condoc,paragraph 1, page 4).
1.7AAT has not captured any anecdotal feedback from our membership thatsuggests that the members of British Bankers’ Associations 2010 initiative (condoc, paragraph 2 page 4) to signpost SMEs to alternative forms of funding has had any material impact on those who had been declined funding.
1.8Taking the above into account (paras1.6 - 1.7) we would therefore support the BIS/BMG research findings that “only 6% of SMEs declined... are referred to alternative funding”.
1.9Given the low referral rates of 6% (para 1.8 above) AAT welcomes the Government’s commitment “to helping small businesses access finance” (condoc, first paragraph page 2).
2AAT RESPONSEs TO CONSULTATION QUESTIONSQ1 Do you agree that the government should create a mandatory process, as outlined above, to help match SMEs that are seeking finance with credit providers who are looking to offer finance?
2.1AAT is concerned that the following extract from the condoc (condoc, paragraph 1, page 2) is far too sweeping and lacks the level of clarity and focus that would enable us to answer Q1 in detail:
“The subject of this consultation is whether or not to address this market failure through a much more ambitious government intervention that would increase the amount of information that is available to challenger banks and other providers of finance about businesses seeking finance, but which are rejected for finance by the major banks. The consultation asks whether this government intervention is needed and, if so, for views on how the government should deliver this, including via a preferred option of referral to private sector platforms.”
2.2Whilst AAT accepts that the major banks have a large part to play in helping prospective borrowers to access capital we also believe that theproviders of alternative sources of funding must play theirs too.
2.3We believe that providers of alternative sources of funding are failing to make those in need of their services aware of their existence. Taking this fact into account, as a quid pro quo to the introduction of changes that might arise out of this consultation,we would liketo see providers of alternative sources of funding being required to raise their own profile.
2.4In principle AAT is supportive of the concept of this proposal, however,we would need to see more detailed information beforebeing able to support the proposal in full.Q2 Should any requirement to share information on rejected loans apply to all SME credit providers or should there be exemptions for smaller providers and/or providers without a banking licence?
2.5Whilst AAT does not have the requisite working knowledge of the lending market to address this particular question in detailwe wouldoffer a general observation that it would be desirable for there to bea requirement imposed on lenders to share this information.We do consider however that this then gives rise to the problem as to how to ensure compliance amongst the smaller lenders and, furthermore, to do so in such away that itwould be proportionate.Q3 Do you agree that information about rejected SME loans should only be shared where an SME gives its permission?
2.6Taking into accountour earlier comment (para 2.1) that the original condoc fails to go intothe mechanics of the proposal in sufficient detail, the AAT is supportive of the concept in principle,with the provisothat itis operated on an opt-in-basis, where an SME is required to have given permission for its details to be passed on in the event of a declination by a lender.Q4 Doyou think there should be additional protections in place to secure the data about rejected SME loans and what form would they take?
2.7AAT is supportive of the need for additional protections to be in place to secure the data about rejected SME loans.
2.8We believe that a vital aspect of the proposal is that the original lender should not be compelled toforward any commercially sensitiveinformation to a credit rating agencyto avoid the scope for data supplied for purposes other than those intended by this consultation.
2.9Taking into account our comments made in paragraphs 2.7 and 2.8above, lenders need to have certainty regarding the nature of the information that they are required to provide, and to whom in respect of the rejected SME loan.
2.10AAT strongly believes that the alternative funding providers should be supplied with the names, addresses and possibly the required level of borrowing from the platform. Other information regarding the target of their interest is freely available elsewhere and should not therefore be divulged to the platform. The alternative providersshould then follow their own risk assessment procedures and not expect to receive information from the original prospective lender regarding their risk evaluation of the prospect.Q5 What information do you think banks rejecting SMEs applications for finance should be required to provide? Do you agree that this should include information about the SME’s name, business type and loan request parameters?
2.11Taking into account our comments made in response to Question 4(paras 2.7 – 2.10) we agree that the supply of the SME name, business type and limited information about the loan request parameters would be acceptable, provided the SME gives its permission for the information to be shared.Q6 Do you think there are other types of finance applications that should be included in addition to SME business loan applications? If you think other types of finance applications should be included, please supply the reason for your answer.
2.12AAT has responded to this outline consultation in the context of ordinary business loans, we would not support an extension of the proposals to include hire purchase and finance leases. We believe that the market for the aforementioned is operating in an orderly fashion as it currently stands.Q7 Do youagree that information about SMEs rejected for finance should be referred on to private sector platforms? If you agree, how would you work alongside existing private sector referral arrangements?
2.13AAT does not have any objection to referrals being made to private sector platforms, where the SME has opted-in (para2.6). Provided that the referral is made to properly authorised and regulated agencies (such as credit reference agencies which are regulated by the Financial Conduct Authority (FCA)).
2.14However, the agency would need to be properlylicensed and regulated by the FCA (and subject to ongoing oversight by HM Treasury) in respect of the activity that is the subject of this particular consultation, to operate a private sector platform additional legislation may be required in this respect.Q8 What factors would promote the development of a market of completing platforms?
2.15AAT does not have any comment to make in respect of this question.Q9 If you agree that rejected loan information should be referred (to a platform, or somewhere else), how do you think that compliance with this requirement should be reported and enforced.
2.16Compliance could be reported,monitored and subsequently enforced through a statutory requirement for all lenders to maintain and forward statistics on a regular, say quarterly, basis to a receiving authority (paras2.13and 2.14) that detail the number of declinations in a period, the number of referrals to platforms, and the number of SME that have not opted-in (para2.6).
2.17The returns (para2.14) could be lodged either with a Government Department, such as BIS or the FCA, or alternatively with a not-for-profit organisation set up for the express intention of providing such a service and which has appropriate authority enshrined in statute. There would of course need to be a level of random auditing of the information lodged.Q10What criteria should be used for designating platforms? How should ongoing adherence to these criteria be monitored?
2.18AAT does not have any comment to make in respect of this question.Q11 Do you agree that all of the information that is made available should be accessible to all providers of SME credit? Do you agreed that the information should also be available to commercial finance brokers, accountants and advisers?
2.19AAT supports the proposal for this information to be made available to all providers of SME credit, commercial finance brokers, accountants and advisers provided:
a)the SME has given his opt-in permission (para 2.7)
b)the information supplied should be limitedas outlined in 2.8 and 2.9.Q12 Are any additional protections and reporting requirements or restrictions needed to ensure SMEs are protected from issues such as poor advice, malpractice and mis-selling?
2.20AAT does not wish to add further comment to those made earlier in the document other than to reiterate the following:
a)The information supplied to the platform should be limited (para 2.8 - 2.9)
b)Information should only be supplied to a platform where the prospective borrower had opted-in to the process (para2.6)
c) The platform should be properly licensed and regulated (paras 2.13and 2.14)
3.1AAT agrees that there is “a market failure, of imperfect information” (para 1.2).
3.2AAT gives its qualified support to the proposal to encourage banks to share information (para2.5). However, we would like to see much more detail of the emerging proposal in the future as part of an ongoing consultation exercise.
3.3AAT has some concern regarding the nature of the information to be supplied to a platform. We believe that great care will need to be taken to ensure that it is strictly limited to avoid the disclosure of commercially sensitiveinformation (paras 2.8 -2.9). Furthermore,information sharing between a major lender and a platform should only be permissible where a prospective borrower hasexpressly opted-in to the process (para 2.6). Finally we believe that the receiving platform should be properly licensed and regulated (paras 2.13 -2.14).
3.4In summary, AAT acknowledges the issue and supports the concepts proposed in the condoc, however, whether these proposals will work effectively in practice will depend on the detail of the proposals.
4.1AAT has over 50,000 full and fellow members and 75,000 student and affiliate members worldwide. Of the full and fellow members, there are 4,000 Members in Practice (MIPs) who provide accountancy and taxation services to individuals, not-for-profit organisations and the full range of business types. (Figures correct as at 31 March 2014).
4.2AAT is a registered charity whose objectives are to advance public education and promote the study of the practice, theory and techniques of accountancy and the prevention of crime and promotion of the sound administration of the law.
4.3In pursuance of those objectives AAT provides a membership body. We have drafted ourresponse on behalf of our membership.
5.1If you have any questions or would like to consult further on this issue then please contact AAT at:
telephone: 020 7397 3088
FAO. Aleem Islan
Association of Accounting Technicians
140 Aldersgate Street