Funding for Lending Focuses on Small Business
The Government’s Funding For Lending Scheme drops lending for mortgages and refocuses on getting cheap finance to small firms.
When it was launched in July 2012 the Government’s flagship Funding for Lending Scheme (FLS) was supposed to provide financial institutions with cheap credit, just as long as the low credit costs were passed on to customers.
The two targets of the joint Bank of England and HM Treasury initiative were both the consumer market, to stimulate mortgage lending, and commercial customers, who were expected to use cheap credit to invest in business development.
However, only a few months ago the Funding for Lending Scheme was ciriticised for failing to lend to small businesses. Even earlier, in Q1 of 2013, despite drawing down £2.7 billion of government money, only £300 million of cheaper credit was passed on to small firms.
Business Secretary Vince Cable said that "some adjustments" were needed and the new Governor of the Bank of England, Mark Carney, has announced that FLS will now only be for business lending.
The move to withdraw financial assistance for personal mortgages comes after the Government’s recent Help to Buy scheme was launched, allowing buyers to put down just 5% deposit on a property with the rest of the money underwritten by the taxpayer.
The result of that initiative and an upturn in the economy has seen house prices rise 7% nationally with price increases "gaining momentum" according to the Bank of England Governor.
Shares in some of the larger housebuilding companies fell on the news with some seeing a 5% fall in their value.
Speaking at a conference on the Bank of England’s Financial Stability Report, Mr Carney said:
"We are leaving in place an incentive for additional funding to business, in particular small and medium sized enterprises."
Having looked at rising levels of household indebtedness and balancing that against a rapidly heating housing market, the decision may cool off the market as the threat of rising interest rates.
John Allan, the National Chairman of the Federation of Small Businesses, said of the latest changes to the Funding for Lending Scheme;
“This is a surprising yet refreshing announcement which will make a difference to lending to thousands of our members and millions of small firms.”
Speaking further about the Bank of England’s moves, Allan continued;
“It is encouraging that he has recognised the contribution small firms make to job creation and the real economy has been given priority over the housing market, which is receiving assistance in other areas such as Help to Buy.”
“FLS has already helped to reduce the cost of finance for businesses. What we now need is to see a focus on increasing the number of firms getting access to the finance they need to grow.”
The withdrawal of funding for mortgages will take place from January 2014 with the full scheme expected to end in January 2015.