By Ryan Weeks on 11th September 2014
On September 18th Scotland will decide whether it will remain a part of the United Kingdom or become an independent nation. The YouGov opinion poll suggests that the vote is going to be nail-bitingly close. On September 7th the poll showed 45% “No” against 47% “Yes” – based on a survey conducted between the 2nd and 5th of September. The opinion poll can’t be relied upon as conclusive evidence of what will happen on the day, but certainly it suggests that it’s going to come right down to the wire.
As the moment of truth draws near, we at AltFi have been pondering what impact Scottish independence might have upon the UK’s budding alternative finance sector. In an effort to find out, I caught up with four of the industry’s guiding lights – Zopa, MarketInvoice, RateSetter and Funding Circle. Based upon my conversations with these platforms, there are three key areas of interest: general operations, currency and regulation.
“In the event of a vote for Scottish independence the short term impact on our operations would be negligible.” – MarketInvoice
What I mean by the rather vaguely phrased issue of “general operations” is this: will platforms be able to accept borrowers and lenders from an independent Scotland? A number of the country's top platforms sport cross-border models. Crowdcube and Seedrs have both entered continental Europe, ThinCats is in Australia, and Funding Circle crossed the pond to the US last year. These types of platforms – that have already ventured far afield – might consider a similar move up to an independent Scotland.
Many of the top performers are UK-only in terms of their borrowers and lenders. The ascendant secured lender Wellesley & Co., for example, lends “throughout the UK except Northern Ireland”. Zopa will currently accept any lender aged 18 or over “who is a UK resident and has a UK current account”. So what happens if Scotland is no longer a part of the UK?
There are two things to consider: what happens to existing funding arrangements, and whether the platforms will be able to strike up further contracts in the future. Zopa weighed in on the first issue:
“If Scotland exited the UK, we assume that transitional arrangements would mean that existing loan contracts would not be adversely affected.”
That certainly makes sense. It would not be a good start for the newly implemented Scottish government to start meddling with previously agreed contracts. Leading peer-to-business lender Funding Circle provided some cause for optimism:
"We have conducted legal analysis and believe our contracts will remain enforceable for historic loans."
As for the second matter – future peer-to-peer lending, crowdfunding and invoice funding activity – the next two sections are perhaps the key issues in determining how things will pan out.
"Independence will bring a lot of unknown factors, particularly around tax and currency union, and we would need to wait until these decisions had been firmed up to know what impact this would have on future activity." - Funding Circle
Alex Salmond is of the belief that Westminster will be forced into sharing the pound if the Yes vote prevails. Others are understandably more skeptical – including Mark Carney (Governor of the Bank of England), the UK government and the three major UK political parties. What would a change in Scottish currency mean for English alternative finance platforms?
The vast majority of UK P2P platforms transact exclusively in Sterling. Any change in currency for an independent Scotland would mean that Scottish lenders would have lent money in a currency other than the one which they use on day-to-day basis. And perhaps more worryingly, existing Scottish borrowers would have a liability in a currency different to the currency of their assets and income . This would expose borrowers to FX risk and could increase the relative cost of repaying the loan, making the loans more risky for lenders.
MarketInvoice suggested a currency change would not present a huge issue for them. The reason for this is that currently about 1 in 4 of the invoices traded on the platform are not Pound Sterling invoices. This is due to the fact the MarketInvoice funds a significant number of exporting businesses.
But as discussed, most platforms won’t be in a position to accept deals funded by a new Scottish currency. A currency change would either forced them to adapt their policies or to cease operations north of Hadrian’s Wall.
A new currency in Scotland would surely mean, for any platforms that tried to operate cross-border, that a small slice of every deal would be lost to currency exchange along with the extra risk that this could bring to investors, as discussed above. That’s one reason why the various platforms might not bother with a newly independent Scotland. One way around the issue might be for platforms to establish a physical presence in Scotland – in the same way that Funding Circle has in the States – as opposed to remaining an English platform that accepts Scottish users. But is there a demand in Scotland to justify the cost of setting up a new Scottish Platform?
“If Scotland exited the UK, we assume that transitional arrangements would mean that existing loan contracts would not be adversely affected. Otherwise we would need to explore whether new Scottish and UK laws, as well as practical issues such as currencies, access to credit reference data, enforcement rules, make it possible or feasible for Scottish residents to lend or borrow on Zopa, before permitting them to agree new loans outside any applicable transition period.” – Zopa
The FCA’s regulation of the peer-to-peer and equity crowdfunding sectors applies specifically to UK platforms. In other words, alternative finance activity within an independent Scotland would likely not need to be covered by the FCA. This would not necessarily be an enormous issue for the English platforms – as they would continue to be bound by the regulatory framework of the FCA whether they chose to roll out operations or not.
And it’s not as though any Scottish platforms would suddenly drop from within the FCA’s potential remit. If the Estonian consumer lender Bondora can hold an FCA licence, I’m quite sure that Scottish crowdfunders like BloomVC and ShareIn wouldn’t be excluded based on location.
But in time an independent Scotland would doubtless develop an FCA-like industry watchdog of its own – one with the power to clamp down on UK involvement in the Scottish economy.
Another issue that UK platforms are already very aware of is accessing credit data. The majority of the platforms rely upon electronic credit rating facilities, provided by companies like Experian, in order to gauge the suitability of prospective borrowers. It’s of course totally unclear at present whether alternative finance providers would have that same level of access to Scottish borrowers – and if they did not it would further complicate the task of operating in Scotland.
RateSetter, which currently has over 800 investors and more than 4,000 borrowers from Scotland, shared this insight:
“Scotland already has a slightly different legal process on the borrower side which we accommodate.”
Though the legal pitfalls identified above might prove problematic, I am not for a moment suggesting that the UK platforms would simply give up on making headway in an independent Scotland. I think it more likely that they’d make a few structural tweaks – and RateSetter already has – rather than foregoing the Scottish market.
What will happen?
“We would obviously welcome a solution that allow consumers in Scotland to continue to lend and borrow through Zopa, legislation permitting.” – Zopa
Who knows! At this stage this is purely conjecture – not least of all because we don’t even know yet whether Scotland will remain a part of the UK. I think perhaps the most important point to make is that each of the platforms that I have spoken with indicated a desire to continue to fund and accept funding from Scotland should it part ways with the United Kingdom.
The only thing left then is to determine whether an independent Scotland would welcome the continued contributions of the UK’s alternative finance scene. And in answer to that, MarketInvoice had this to say:
“The Scottish Government would no doubt see the value of channeling funding into its small businesses in the same way the UK Government has. Any analysis of small business finance is going to show that new, innovative lending models like ours work to benefit a growing economy and should be encouraged.”