The Funding for Lending Scheme (FLS) was introduced in July 2012 by the Bank of England and the Treasury and was designed to boost the economy by allowing businesses and UK households to borrow money more easily from lenders who sign up to the scheme. Lenders wish to sign up because it means that they can borrow money at better rates than before.

The government wanted to introduce this scheme for a number of reasons. The first was to provide the housing market with a boost.
After the financial crisis came to a head in 2008, lenders stopped approving mortgages and mortgage rates became unfavourable for anyone trying to borrow to buy a property. Mortgage lenders also stopped offering the low deposit mortgages so this excluded a large number of people from being able to secure funding for a mortgage.

The Funding for Lending Scheme was designed to ensure that the lenders participating in the scheme would increase their lending to home buyers and that this would improve the housing market that has flat lined since the financial crisis. In turn the improvements in the housing market would then boost the economy and kick start signs of a recovery.

It does seem as though the Funding for Lending Scheme is working for people looking to borrow to buy a home as the statistics from the scheme show that much of the lending is going into mortgage lending.

The other reason the Funding for Lending Scheme was introduced was to make funds available to small and medium sized businesses (SME). The government is looking towards the private sector to provide a boost needed to get the economic recovery going. Unfortunately the picture for SMEs is not looking so rosy though and many are finding it difficult to access funding.

Although lending increased initially, lending actually contracted by £2.4 billion in the last quarter of 2012 and only £13.6 billion of the £68 billion has been utilised.

These figures do not paint a very promising situation for the Funding for Lending Scheme, and many people are calling for changes to the scheme such as splitting the scheme for mortgages and SMEs, which would assist lenders that are reducing loans for mortgages but increase loans to SMEs.

What is clear is that the housing market has seen a boost, with a year on year increase in house prices, but the benefits to small business seem less certain.

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Author: Nicholas Jervis