Written evidence submitted by Aldermore Bank (GSB 23)

 

 

About Aldermore Bank

 

  1. Aldermore is a British bank providing award-winning savings, mortgages and commercial finance to Small and Medium-sized Enterprises (SMEs), homeowners and savers. Operating with modern, scalable and legacy-free infrastructure, Aldermore does not have a branch network but serves customers and intermediary partners online, by phone and face to face through its network of twelve regional offices located around the UK. Building on our core values of being reliable, expert, straightforward and dynamic, we aim to deliver banking as it should be.

 

  1. We welcome the opportunity to submit evidence to this inquiry. As a fast growing financial services provider we are keen to ensure that the UK has in place the right policy environment to support the UK business community and to improve access to finance for SMEs.

 

  1. Aldermore was launched in 2009 and supports SMEs, homeowners and savers. The Bank has seen significant growth and is firmly established as an alternative to the high street providers. In the first half of 2014, its balance sheet reached £4.8 billion, up 13 per cent on the end of 2013. Lending to SMEs increased by 16 per cent to £2.0 billion highlighting the Bank’s commitment to supporting UK businesses.

 

  1. Aldermore also continued to support UK homeowners in 2014, increasing lending by 21 per cent to £2.0 billion in the first half of the year. The vast majority of Aldermore’s funding remains deposit-led and customer deposits rose by 11 per cent to £3.9 billion in the same period. Aldermore is backed by funds advised by AnaCap Financial Partners LLP, a specialist private equity investor in the financial services sector and other institutional investors.

 

Executive Summary

 

  1. This submission is focused on our experiences of the Funding for Lending Scheme (FLS) and the British Business Bank (BBB).

 

  1. We welcome the support the Government has provided to UK businesses through the FLS and the BBB. However we feel that there are improvements that could be made to both schemes to maximise the impact on access to finance for UK businesses. This submission will give details on the specific improvements that we would recommend for each scheme.

 

Funding for Lending

 

  1. As at December 31 2013, Aldermore had FLS drawings of £485 million (2012: £205 million). Through our participation in FLS, we have seen first-hand the positive impact it has had on lending to retail customers and businesses. As a bank with a particular focus on SMEs, we were delighted that the scheme was refocused on business lending in 2014, as many small businesses are still finding it hard to access finance.
  2. We welcome the fact that appropriate recognition and encouragement was given to lending institutions that participated in the scheme. We also welcome the high level of engagement from the Government and the Bank of England with participating lenders.

 

  1. One concern we have is that lenders have not drawn more funding from FLS. The appetite of tier Two and Three banks has been comparatively low for a number of reasons. One factor is that the set-up and approval of funding pools was initially too slow and the collateral team within the Bank of England lacked the appropriate experience in dealing with anything other than bricks-and-mortar lending. For instance, several counterparties we have dealt with experienced a slow response when seeking the Bank’s approval of the eligibility (pre-positioning) of SME/Commercial assets for funding. This problem has since been acknowledged by the Bank of England.

 

  1. FLS drawdown was initially seen as a cheap alternative source of funding by many businesses. However, with investor appetite for sterling denominated assets increasing, we have noted that many UK lenders have been able to issue the UK Public market space at comparable costs when taking into account haircuts/credit enhancement.

 

  1. One issue we currently see is that, once haircut values are taken into account, the all-in cost of FLS funding is not materially different to that available from external markets. A potential solution to this would be for the Bank of England to consider a lower credit enhancement, which is more closely correlated to the UK residential mortgage-backed security market, in conjunction with a choice offered to institutions of a lower haircut or a higher fee.

 

  1. Action along these lines would benefit challenger banks, as they are currently constrained by the provision of assets/security to creditors (asset encumbrance), due to the fact that they are starting from a smaller asset base than larger banks. This in turn means that they have a higher risk ratio, which causes concern to their management and constrains their participation in the Scheme.

 

  1. Another general issue we have noted is that a perceived over-reliance on Government funding can have negative connotations for banks participating in FLS. This means that many banks will look to diversify their funding sources, with internal limits on the extent of their participation in the FLS.

 

  1. Overall we consider the FLS to have been a success, especially in its initial aim to kick start and support increased lending to British businesses

 

British Business Bank

 

  1. We fully support the work of the British Business Bank (BBB) and believe that it has an important role to play in providing alternative funding options for UK businesses.

 

  1. We have an ongoing dialogue with the BBB about how it can most effectively support UK businesses. We have discussed several schemes with them, but have found that many of these schemes tend to be too complex and incur a heavy administrative burden. For this reason we have decided not to participate to date. Bearing this in mind, we believe that the BBB should consider developing simpler schemes in order to attract more participants.

 

  1. We have also worked with the BBB to consider alternative programmes which would enable increased access to funding for SMEs. Specifically, we are currently working with the BBB on a pilot scheme involving an extension of the Enterprise Finance Guarantee (EFG) to the alternative finance market. We have also responded to the ‘Help to match SMEs rejected for finance with alternative lenders’ consultation, which will be legislated for in the Small Business, Enterprise, and Employment Bill. 

 

  1. We believe that these pilot schemes are vital and that it is important that the BBB continues to work with lenders on schemes such as these, in order to develop further funding options for SMEs across the UK.

 

  1. The BBB should also examine the work of their international counterparts to develop further initiatives to stimulate new lending. For example, the BBB could consider developing new initiatives based on ones successfully run by the European Investment Bank. In these initiatives the BBB would need to commit as an investor to asset-backed securities on the basis that the lender can demonstrate that the monies raised have been lent back to SMEs.

 

Holly Marshall

Head of Corporate Affairs

24 October 2014