Funding for Lending Scheme to be "put on steroids"

Bank of England building

A report in the Financial Times* has suggested that the Funding for Lending Scheme (FLS) may be extended and skewed in favour of small business, due to fears that it is falling short of its requirements with regards to small business lending. Chancellor George Osborne is expected to confirm this as part of the budget announcement next week (20 March).

The FLS is a measure whereby banks can access funds cheaply from the Bank of England, provided that they then lend the funds to mortgage borrowers and small businesses. Following the announcement by the Bank of England last week that lending to businesses had slumped, Deputy Prime Minister Nick Clegg reportedly said that he wants the scheme to be "put on steroids".

A specific set of measures to improve the scheme is apparently not yet ready to be implemented; rather, Mr Osborne is simply expected to announce his intention to improve lending to businesses. However, bankers believe that the government may listen to Labour's calls to split the scheme in two, with one half devoted to small business lending and the other to mortgage lending.

This way, if a bank that was decreasing its mortgage lending planned to increase its small business lending, it could still access the cheapest FLS funds.

The Treasury has apparently also been in talks with trade bodies and mortgage lenders regarding the introduction of risk guarantees such as mortgage indemnity guarantees (MIGs) in order to improve access to low deposit mortgages. MIGs are insurance policies which protect the mortgage lender against loss in the event of repayment defaults. Whilst strictly speaking only of benefit to the mortgage lender, such policies would reduce risk and encourage more diverse lending.

More new properties

In advance of the forthcoming budget announcement, the Confederation of British Industry (CBI) and British Chambers of Commerce (BCC) have also urged the government to focus on the building of new properties.

The CBI has said that 75,000 jobs would be created by the reallocation of £2.2bn to build 50,000 new properties, whereas the BCC advocates the spending of £30bn over the next three years to build 100,000 new properties.

Whilst both lobby groups have said that the government should continue to cut borrowing, the BCC have said that if there is no growth within six months, the government should consider borrowing more – but only "to fund areas that the market would forgive."

*To read the Financial Times report in full click here.

This information should not be interpreted as financial advice. Mortgage and loan rates are subject to change.