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UK policymakers should arguably be commended for the steps they have taken to build a competitive and open environment for the provision of credit to businesses and consumers over recent years. Their pragmatic approach has enabled a range of players and business types to operate within the UK - often meaning a greater range of options and more competitive prices for those looking for such services. A vital part of this is the non-bank specialist lending sector (NBSLS).
The NBSLS is diverse and particularly active in the areas of small and medium sized enterprise (SME) finance, mortgage lending and in the provision of consumer credit. It is estimated that about 30 per cent of all SME finance comes from non-banks. The sector often utilises innovative technology that allows it to provide short-term finance quickly and efficiently to SMEs and microenterprises, which employ a large proportion of the UK workforce. For mortgage lending, non-banks provide mortgages worth £82 billion to over 750,000 customers in often under-served markets, especially self-employed customers and those with complex incomes. Almost ten per cent of overall mortgage lending to owner occupiers and landlords is supplied through such firms.
The NBSLS contains a wide range of business and funding models, and there is no typical non-bank. NBSLS are often funded through securitisation and warehousing facilities rather than customer deposits. The services they provide, such as mortgages or credit cards, are regulated in the same way as banks. However, NBSLS have faced the challenges that Covid-19 has caused - in terms of their own operations, the impact of the current economic environment on their customers and new business - with limited access to government support schemes that are available to other sectors.
Irrespective of the funding challenges they face, non-banks are doing everything they can to support their customers through this crisis. They have rapidly adjusted their business models to manage demand for lending, have provided customers with mortgage payment deferrals, have preserved equity and headroom under loan facilities, and have refinanced debt and negotiated additional lending from wholesale banks and the capital markets where possible. Non-banks do not have access to Bank of England liquidity schemes, and many have not been in a position to participate in government lending schemes. This has placed significant pressures on them.
As we begin to look at recovery it is important that the government takes account of the crucial role the NBSLS plays and identifies ways to support non-banks. This is to ensure a diverse and competitive landscape in the provision of credit to businesses and consumers, often in sectors that may otherwise be overlooked. This will be particularly important in the coming months as there is expected to be a significant demand for their services as businesses look to fund investment and consumers adjust their finances. The NBSLS needs to have the capacity and a fair competitive environment to play its part. Now is the time to consider again how support mechanisms could be structured to include this vital sector.
The industry welcomes the announcement that HM Treasury has devolved authority to the British Business Bank (BBB) to consent to the assignment of government guarantees on lending schemes, improving the value of such collateral which could provide the basis for securitisation. While an important element, we believe there are other changes that can be developed to support different funding models.
For example, other jurisdictions such as the US and Australia have policies in place to sponsor asset-based lending, where secured and unsecured pools of credit can be packaged together to support borrowing. This can either be through direct support/purchase by government or indirectly through independently rated instruments sold to government. An alternative option would be government guarantees of bank facilities to non-banks to open up the market and promote bank lending to non-banks. Considering such a framework in the UK would enable the NBSLS to continue to support an important and often under-served customer base during and after the current crisis.
UK Finance has been working closely with members and other representative trade associations to highlight the impact of the Covid-19 crisis to policymakers and identify possible ways to support this crucial part of the financial services ecosystem. We will continue to do so as our members look to support the economy to recover from the crisis. For more details please contact Michael Jefferson.
Michael Jefferson, Principal, Capital Markets and Wholesale, UK Finance