FLS: Who's it really benefiting?

On the anniversary of the government's Funding for Lending Scheme (FLS), B&C takes a closer look at whether it's really working and who has benefitted so far.

The FLS scheme was launched in July 2012 primarily to get lenders to kick-start lending to both UK households and businesses, by borrowing from the Bank of England (BoE) at cheaper than market rates for up to four years.

The BoE has made billions of pounds in financing for banks available through Funding for Lending, partly in response to many small businesses' ongoing struggle to secure funding. But figures released last month showed that lending had fallen by £300 million in Q1 2013.

In total, net lending has fallen by £1.8 billion since the scheme came into effect, despite £16.8 billion being made available by the BoE.

Mortgages
The Council of Mortgage Lenders (CML) recently said that the 26 per cent rise in mortgage lending in June was a sign of a "meaningful recovery" in the housing market, while Savills said house prices were on course to hit their 2007 peaks over the next two years. The upmarket estate agent raised its forecast for rises this year from 0.5 per cent to 3.5 per cent and to 18.1 per cent over the next five years.

Investors
Specialist buy-to-let investors are taking advantage of funding for lending offers to remortgage. The improvement in buy-to-let mortgage availability and affordability, aided by FLS, has encouraged more property investors to refinance in order to make purchases later in the year.

Savers
A major factor in the last 12 months for plunging rates is that the Government’s FLS is eroding the value of savings. The extension of FLS is further bad news for savers because it could keep interest rates for bank accounts low.

It is especially bad news for those savers, such as the elderly, who need to draw on their savings in the short term and so cannot afford to lock their money away in longer term or higher risk investment products.

According to research by UHY Hacker Young, savers are losing more than £17 billion a year as inflation continues to wipe out the low interest earned by their savings and current accounts.

High Street Banks
The FLS has almost certainly helped banks to balance their books and also at a time of capital adequacy targets and stress tests. Banks such as RBS have even retracted net lending by £1.6 billion in the first quarter of 2013, despite tapping the FLS for £750 million worth of cheap finance.

The news that RBS has an abundance of cash came as no real surprise as the banks are extremely risk-averse and too often decline funding applications.

Following news that RBS is to launch a review of its lending to businesses after uncovering £20 billion in untapped cash though it is clear that alternative providers are not able to access funds on the same playing field as banks.

Alternative forms of finance
While FLS seems to have failed in its mission to get banks to lend, it could be argued that it has benefitted other, non-traditional, forms of lending.

Firstly, challenger banks must be mentioned here... Aldermore Bank was the sixth highest net lender in Q1 2013 under the scheme and Shawbrook Bank and Metro Bank are also part of the scheme, both increasing lending.

A survey by think-tank The New City Network reveals that of the companies refused loans, 93 per cent only approached banks in their search for funding. By contrast, those that sought more diverse financing – from invoice discounting and mezzanine loans to venture capital and private equity – were more successful. The lesson is clear: when it comes to borrowing, British business needs more options.

P2P
With the relative failure of banks to get money out to small firms and seemingly cherry-picking deals, peer-to-peer lenders have really come into their own. P2P is expected to reach £500 million this year, and pension-led funding has now passed £250 million. There has also been a resurgence in invoice finance.

Lending platforms, like Funding Circle, which have helped over 2,000 businesses receive over £100 million since its launch, have benefitted not just from the bank’ failure but also receiving funding from the Government too.

SMEs
FLS is failing quite simply because the regulatory banking environment is not in order and the government has forgotten the importance of supporting SMEs in the economy. There are 4.8 million SMEs in the UK, employing 60 per cent of UK’s workforce and representing 50 per cent of GDP. It is these companies which create the most new jobs and apprenticeships, but with British businesses still currently getting 80 per cent of their finance from banks, they are being badly let down at the moment.

Bank of England data showed £4.5 billion of lending was sucked out of the business sector in the three months to May, a month when lending fell by £3.8 billion alone.

Liberal Democrat peer Lord Oakeshott called the lending data for businesses diabolical. He said it was a wake-up call to the chancellor that Funding for Lending, which provides cheaper credit to lenders to pass on to borrowers, was not working for the business sector.

A study carried out by Bibby of 1,000 UK SME managers and directors during the second quarter of this year showed that just 6 per cent believe the proposed Business Bank would benefit their company.

Future
The FLS has failed to increase bank loans to business, but is fuelling higher demand for mortgages and leading to a fall in the savings ratio. Arguably, this is not helping the economy to ‘rebalance’ away from consumer spending and the housing market.

Since last August, £1.8 billion of credit has been drained out of the system, but at the same time up to 40 participating lenders have accessed £16.5 billion in funding.

Lenders prefer mortgage lending because the asset is tangible and perceived as safe. But mortgage lending makes no meaningful contribution to economic growth, is fundamentally a political activity and is only contributing to an increased risk of a property crash. Another intiative which is seemingly not working... The government really needs to rethink its strategy... again!

The FLS is currently expected to last until January 2015.