Bright future for alternative finance following Osborne’s announcement
by Conor Brennan on 28 Aug 2014
The American business magazine, Forbes, recently crowned London ‘the world’s most influential city’, paying special attention to the role it plays in leading innovation in technology. The accolade comes on the coattails of Chancellor George Osborne announcing the launch of a major new trade body for the UK FinTech industry, in London’s Canary Wharf.
The new organisation, called Innovate Finance, seeks to promote and give a voice to new startups as well as established financial services companies. The body will be headed by Claire Cockerton, who is the Deputy Head of Level39, Europe’s largest accelerator space for FinTech. Cockerton has also co-founded Pivotal Innovations, another accelerator space for FinTech business growth.
Opening up non-traditional finance
So what lies ahead for Cockerton and the future of Innovative Finance? Osborne’s speech had plenty of previously trailed policies to mull over. These included a £100 million of additional funding for the FinTech sector, a review into the sector conducted by chief scientific advisor to the UK Government, a programme of work to investigate ‘new’ digital currencies, a consultation into 5G mobile broadband and a consultation on the need for future digital infrastructure.
Hidden among all of these was one crucial policy announcement: new legislation that will see larger banks direct businesses they reject for loans to alternative lenders. With the aim of improving access to finance for smaller companies, Osborne claimed “this government will legislate to require the big UK banks to pass on information on small businesses they reject for loans, so that FinTech companies and alternative lenders can step in and offer finance instead”. If implemented correctly, this has the potential to open up the market for innovative FinTech and spur the growth of alternative financing.
The idea, which was consulted on over the summer, was led by Andrea Leadsom MP (HM Treasury) and David Gauke MP (Department for Business, Innovation and Skills) and is included in the Small Business, Enterprise and Employment Bill that is currently being debated in Parliament. The legislation is due to pass through Parliament in the coming months and ahead of the end of the current coalition government‘s term.
Some SMEs struggling to secure finance feel it cannot come sooner. Currently, the largest four banks hold over 80% of primary banking relationships with SMEs. The provision within this Bill will fragment the market and require larger banks to refer the details of SMEs that they reject for a loan to alternative finance companies. These may include asset-based lending, peer-to-peer or equity crowdfunding, business angels or venture capital companies.
Obstacles to a consensus
This idea appears to be a straightforward way of addressing the lack of liquidity available particularly for SME’s across the UK. However the recent consultation has highlighted obstacles that need to be ironed out before actors on all sides jump on board.
Firstly, which providers of alternative lending can avail of the referrals from banks? Alternative finance represents a broad and dynamic group of innovative financial institutions. For example, would the legislation list specific types of financial providers that SMEs may be referred to or let the banks decide who is on the list of alternative lenders? The latter leaves door open for manipulation of the service. Policymakers should ensure that banks do not retain control over which institutions the information is passed on to, as the banks may avoid passing on details to alternative lenders that they deem to be future competitors or even give preference to their own partners or subsidiaries which may be operating as alternative lenders themselves.
The other major obstacle which the government is seeking a consensus on is the information which larger banks are allowed to pass on to the third parties. This element of the legislation will have to be well thought through so that it does not impinge on current and future regulation regarding data protection and investors rights. As well as this, the regulation should clarify the role the SME plays in the policy. For instance, can the SME opt out of having its information passed on to others?
The rise and rise of the FinTech sector
Overall the policy has been welcomed. The UK Federation of Small Businesses (FSB) has broadly welcomed the government’s efforts to help businesses find alternative lenders and introduce more competition into the market. The Confederation of British Industry (CBI) also gave a cautious welcome to the announcement, welcoming the news but stating that SMEs need to be able to opt in or out of the initiative.
Chancellor George Osborne announced this policy at a keynote speech in front of some the capital’s FinTech heavyweights - the sector which stands to gain the most, both from increased liquidity but also from increased business from the referral system. In a recent UK Trade & Investment financial services report, the Government body suggested that the FinTech market in payments, platforms, software and data analytics is worth £20 billion to the UK annually. If the government, with the help of the newly-formed Innovate Finance, can overcome the obstacles mentioned, this figure looks set to grow further.
(Photo / CC BY-SA 2.0)
Written by Conor Brennan
Conor is an experienced consultant who advises clients in the data economy, insur-tech, and energy sectors.