By Sam Fleming

Banks that reject loan applications from small and medium-sized companies will be forced to refer them online to other sources of funding.  George Osborne, the chancellor, will on Wednesday confirm plans to legislate to improve SME access to finance as part of a series of measures that aim to encourage choice and competition in financial services.

The move comes as Britain struggles to boost competition in the banking sector: the four biggest banks control 85 per cent business current accounts and 90 per cent of business loans.

Last month the Competition and Markets Authority recommended an inquiry into business lending and current accounts, warning that new entrants face significant barriers.

Under the rules, which will come under the Small Business, Enterprise and Employment Bill, banks that reject SME loan applications will have to ask them if they want their information to be shared with designated online platforms.
These will then match the businesses with other banks and alternative “FinTech” lenders, such as crowd-funding sites and peer-to-peer lenders.
Among the other initiatives to be announced on Wednesday are an investigation of the possibilities for regulating digital currencies such as Bitcoin.

Mr Osborne will also say that the government-run British Business Bank has won a £100m extension to its investment programme, in order to address “long-standing gaps” in finance for smaller companies.  The chancellor will say: “It’s only by harnessing innovations in finance, alongside our existing world class knowledge and skills in financial services, that we will ensure Britain’s financial sector continues to meet the needs of businesses and consumers . . . and create the jobs and growth we all want to see.”

Mr Osborne and Vince Cable, the business secretary, have been considering mandatory requirements for banks to refer businesses they turn down for credit to alternative providers.  Banks have warned ministers that legislation would be complex and costly for them to implement.

Mr Cable said: “Forcing banks to refer businesses to alternative lenders is something I’ve been determined to make happen. It’s good that more SMEs are making use of alternative finance but the big banks still dominate and small businesses often give up if they’re turned down for finance by their bank.”