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Funding For Lending Scheme to be refocused on supporting small businesses

Changes to the Funding for Lending Scheme (FLS) extension, announced on Thursday by the Bank of England and HM Treasury,  mean that incentives in the scheme will be refocused on supporting business lending to small and medium-sized enterprises (SMEs) in 2014, as it is no longer considered necessary for the FLS to provide support to household lending due to growth in the housing market.

Although household loan volumes are moderate, housing market activity is said to be picking up and house prices are increasing. Therefore the bank has decided that there is no longer a need for the FLS to provide further broad support to household lending. The FLS was created to support lending in general and these changes will not impact upon the HM Government’s Help to Buy scheme, which is designed to provide access to mortgages for borrowers without large deposits.

The bank said the first phase of the FLS ends on 31 January 2014 and will be unaffected by the changes. The extension to the FLS will continue to allow participants to draw from the scheme from February 2014 until January 2015, however household lending in 2014 will no longer generate any additional borrowing allowances and these additional allowances will now only reflect lending to businesses in 2014. Initial borrowing allowances in the FLS extension that have already been earned by household and business lending in 2013 will be unaffected.

According to the Bank of England, since the launch of the FLS scheme in July 2012 there has been a substantial fall in bank funding costs, which has fed through to significant improvements in credit conditions for households. While there has been an improvement in credit conditions for smaller businesses, lending to businesses overall remains subdued. Therefore the bank and the treasury have agreed that the FLS extension will continue to provide substantial support for lending to businesses next year and incentives in the scheme will be directed towards lending to SMEs. Banks will be allowed to draw GBP5 in the scheme for every GBP1 of net lending to SMEs and the fee for all drawings from the FLS extension will be set at 25 basis points, the lowest point of the previous fee scale.

These changes are said to have been welcomed by the Financial Policy Committee (FPC) and the Monetary Policy Committee (MPC) has said that there will be no material impact on the stance of monetary policy, also noting that its policy guidance will not be affected.


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