The Small Business, Enterprise and Employment Act 2015 (the Act) received Royal Assent on 26 March and has become law in the UK. The Act forms part of a general trend in Government policy in recent times towards promoting competition amongst finance providers whilst also increasing SMEs’ access to credit.
Amongst other things, the Act sets out a framework for the sharing of key information on lending to SMEs between established banks and less well-known alternative finance providers via ‘designated Credit Reference Agencies’. This was an idea first floated in last year’s budget (see our previous blog post for more information).
SMEs are defined under the Act as businesses with an annual turnover of less than £25m which carry on commercial activities and which do not carry on regulated activities as their principal business. The definition also excludes businesses that are owned or controlled by public authorities.
The key details of how information sharing will operate will be set down in regulations made under the Act and, as we write, they are only in draft form. However, the draft indicates that some of the UK’s largest banks will be obliged to share data which will potentially lead to increased administrative costs and aid competitors wishing to attract new business.
The draft regulations grant the Treasury the power to classify established banks as ‘designated banks’ on the basis of the value of their current lending to SMEs in the UK and as a proportion of all lending to SMEs in the UK. If a bank is ‘designated’ it will be obliged to provide ‘credit information’ on all SME customers (subject to their consent) within 30 days of it receiving a written request from the designated CRA. Information provided will then need to be updated on a monthly basis.
For challenger banks and alternative finance providers, the draft regulations allow them to make requests for information from the ‘designated banks’ via the ‘designated CRAs’. However, once such a request is made, they too will be obliged to start providing ‘credit information’ to the designated CRAs within 12 months.
What’s to be shared?
At present, the ‘credit information’ to be shared is basic. For loans to SMEs, this includes simple details on the start and end or termination date, repayment schedule and any defaults or missed payments. For current accounts, this will also include average balances, current balance, overdraft limit, days in which the customer has exceeded the approved limit and the number of cheques or direct debits that have not been paid because of insufficient funds. In both cases, this data will include the name and registered number of the SME customer.
Whilst the new Act, and the regulations to follow, will help to increase the options available to SMEs seeking finance, it poses a direct challenge to the dominance of established banks and will lead to unprecedented data sharing in the sector. Whether this information sharing will improve or hamper choice for SMEs who are already struggling to service debts remains to be seen.
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