Is access to funding improving?

In the wake of the financial crisis, stories of banking scandals and increased regulation in respect of banks seem to have followed continuously.  However, in 2014 the Financial Conduct Authority was in addition handed the remit to promote competition within banking.  The result was legislation passed in the UK to enable finance companies to form new banks in order to take on the dominant market position of the big four banks and seek to promote competition within the banking markets.  

This route chosen to achieve this has been by making it easier for 'challenger banks' to be formed by cutting the length of time it takes to apply for a banking licence and lowering the amount of new capital that those banks must hold (compared to existing banks).  

In January this year Charter Savings Bank was established, being the third new UK bank to be established since the change in rules and joining the likes of Aldermore,  Metro Bank and others as the Government's newly heralded challenger banks.  

This change of emphasis is in stark contrast to the amount of regulation put in place to control banks following the financial crisis, but  the Government has indicated their present view is that the promotion of competition between banks is more important than additional legislation regarding the operation of those banks.  This is quite a shift of position bearing in mind that the published minutes of the Bank of England during the financial crisis indicated that they wished to see fewer loan providers. 

In order to create this competition, there has had to be some relaxing of the rules.  It might be beneficial, however, because Government sources indicate that they are presently talking to some 25 potential new banks that may be established under the new regime.  

The question is, will this really create competition for the big four banks who hold such a dominant market position?  

Certainly, it would seem that increased competition and additional licensing of new banks is unlikely to lead to an increase in high street presence.  Charter Savings Bank is not proposing to have a high street presence at all, but will provide access to finance via internet and telephone banking.  Of course, the big four banks continue to close high street branches and move customers to online and telephone banking but their overhead in this regard is substantially greater than new entrants to the market and that too may lead to a competitive advantage for the new banks.  This 'digital tipping point' is much-heralded in financial services. 

By any yardstick, there will not be a quick rise for the new banks to a position where they are competing wholeheartedly with the big four banks.  However, if the change in rules enables more companies to enter the banking market, then surely that must at least mean that there is more choice for those seeking finance.  It has been widely reported that the availability of finance for fast growing companies and those with limited assets but a growing order book or a good idea, have found finance hard to come by.  Challenger banks, asset based financiers and alternative lenders have been growing to fill this void which has become increasingly difficult for the big four banks to compete in but where there is clearly the grassroots demand for finance.  More novel and alternative finance products, including the use of auction sites and crowd funding, are now much more widely accepted.  

As the economy continues to improve and the market for financial competition opens, let us hope that the SMEs who struggle to obtain finance will find it slightly easier to do so in the future.  However, we cannot dismiss the fact that this is an election year and the impact of political uncertainty may mean that things remain difficult for SMEs in the short term before they get better.  Time and again, Governments and would be Governments refer to the importance of the SME business market as being a vital component of the UK economy and the driver of growth for the future.  However, these businesses tend to be disproportionately vulnerable to uncertainty. Politics aside, it would appear by the number of businesses talking to the Government about utilising the quicker route to open for business as a licensed bank that there may at least be more opportunity for SME businesses to obtain funding from a wider variety of sources in the not too distant future.

For more information please contact Charles Maunder, Head of the Banking, Restructuring & Insolvency team, on charles.maunder@michelmores.com or +44 (0)20 7659 7680