How will the market adapt to the end of FLS?

09 August 2017

The Government’s Funding for Lending scheme (FLS) was five years old on 13th July, but is due to come to an end next January. Designed alongside quantitative easing to bolster the economy, FLS incentivised banks and building societies to boost their UK lending more than they would otherwise be able to do by making funding more readily available.

FLS provided government funding to institutions for an extended period linked to their lending performance.  In its most simplistic form, this meant that if a lenders performance was good then the amount of funds they had access to was larger and available at a lower rate of funding.  In the first two years of the scheme 46 lenders accessed £41.8billion, which fed through to borrowers as lower cost loans, but quite possibly made lenders more margin than they would have done by funding through more traditional methods. 

In December 2014 the Bank of England extended the scheme until January 2018 and altered the criteria to include lending to small and medium sized enterprises (SMEs).  Up to 31st March this year under the FLS extension, over £51billion had been lent out with the biggest users of the scheme being Lloyds Banking Group and Nationwide Building Society. Interestingly, when the scheme was first launched Barclays was the biggest user, although they appear not to have accessed any funding under the extension scheme for SMEs.

With the FLS and its extension scheme coming to an end in early 2018, institutions that have taken advantage must be re-evaluating funding options. The growth in deposit taking will continue to fund lending, but with an estimated 34 banks and building societies having taken funding through FLS, there is the potential for an impact on gross lending. That said, some participants could undoubtedly have funded their lending volumes without FLS, but have taken advantage of the scheme as it was there to do so and therefore they fully utilised it as a funding option.

The end of FLS also comes at a time when the Term Funding Scheme (TFS) also comes to an end. This scheme provides liquidity to qualifying lenders at an unprecedented low flat Bank rate and has caused the UK securitisation market to be at best “stagnant”, albeit with a few noticeably successful issuances over the last year or so. In June the UK’s first insurance premium lending securitisation took place indicating the appetite is there to securitise if the margin is there to make it a success for all parties.

2018 will of course present its challenges to our industry, and one of course could be the effect of a rate rise. However, a continued healthy growth in deposit taking backed up with what will be a recovering securitisation market post TLS should mean a healthy gross lending market, albeit the actual effect of the end FLS will probably not be understood until Q2 next year or beyond.

 

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Debbie Staveley
Director and Owner,
bClear Communications

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