A genuine sense of excitement surrounded today’s Budget within the alternative finance space. The red box did not disappoint. Reaction has been flooding into the AltFi mailbox from all over the industry (see below). Mr. Osborne issued an update on ISA extension, the referral scheme, announced increased support for high growth firms, a change to bad debt relief and continued efforts to bolster the budding UK FinTech industry. We’ve summarised the noteworthy changes.
First up, the government will issue a response to the consultation that ran for a month from October 2014 on how best to structure the P2P ISA. That response is set for Summer 2015. Alongside the response will be issued yet another consultation, this time designed to explore whether to extend the list of ISA eligible investment products to include a broader range of “debt and equity securities offered via crowd funding platforms”.
Does this mean that we can expect the Government to consider wrapping up equity crowdfunding and perhaps invoice finance investments within ISAs? The language above certainly suggests that it’s a possibility. Louise Beaumont of GLI Finance, for one, is fully behind that line of thinking. A joined-up approach, she would argue, makes lot more sense than addressing the alternative finance space in piecemeal fashion.
Dr. Beaumont explained:
“We welcome the government’s decision to extend the range of investments eligible for ISAs in 2015-16 and in particular its decision to hold a consultation on how to include peer-to-peer loans. Whilst this would represent a huge step forward for the industry, it must be accompanied by proper regulation and oversight. As an industry, we must ensure that when the inevitable happens and a platform does blow up, any resulting loss of investor confidence does not signal the end of a sector which is beginning to fill a critical gap in the credit ecosystem.”
The British Business Bank will soon be accepting expressions of interest from Credit Reference Agencies and finance platforms that wish to be designated by HM Treasury to receive data from banks. It will soon be required that data of this kind be referred onwards to the alternative finance space, under powers contained within the Small Business, Enterprise and Employment Bill that currently sits before Parliament. We must assume that "finance platforms", the term used by the Budget, refers to the various SME-facing navigational tools that have sprung up over the past year or two, such as Alternative Business Funding, The Funding Centre and Funding Options.
Keith Morgan, CEO of the British Business Bank, explained the significance of the above announcement:
"The referral process highlighted in today's Budget is a landmark programme which will help smaller businesses, rejected for finance by a bank, to access finance through alternative finance providers. This in turn will raise awareness among smaller businesses of the full variety of funding options available to them. Our research shows two thirds of smaller businesses only go to one provider when seeking finance and that 38% of businesses appear to give up their search for finance and cancel their spending plans after their first rejection. The aim is for new finance platforms to be created so that lenders can find businesses that are looking for a loan but have been rejected first time around. Today’s announcement starts the process of selecting the finance platforms to participate in this new system."
Increased SME Support
The British Business Bank is clearly playing an instrumental role in the delivery of many of the Budget’s plans. The BBB has £100m of firepower at its disposal – but never engages in direct lending relationships with individual small businesses. Instead, the organisation has officially opened its doors to proposals from “private sector delivery partners”. In other words, firms capable of distributing the available capital to high potential firms. This will of course widen the eyes of many an alternative financier, many of whom specialise in catering to the financial needs of smaller, high growth companies.
Keith Morgan weighed in once more:
"We know from British Business Bank research that almost half of UK firms (46%) want to expand this year yet there is a market gap for smaller businesses seeking finance in the £0.5m to £2m range. Growth Loans has been designed to target that market failure in access to finance – we estimate as many as 500 businesses a year might be suitable for a Growth Loan. We are inviting proposals for partners to help deliver this scheme, to ensure more smaller businesses in the UK can access the finance they need to scale.”
Bad Debt Relief
The Autumn Statement in December 2014 stated that peer-to-peer lenders would soon benefit from a new type of tax relief that would allow them to offset any losses incurred through bad debt against other P2P income. The inclusion of bad debt relief in the red box boosts the likelihood of its implementation. The new rule will reportedly be effective from April 2016, and through self-assessment individuals will be allowed to make a claim for relief on losses incurred from April 2015 onwards.
“It’s great to see the Chancellor tackling an out-dated tax law that disadvantages alternative financial models like peer-to-peer lending (P2P). Overturning this tax law means thousands of consumers will keep more of their returns from lending as they will now be able to offset any losses against their P2P interest when calculating tax due on that interest. Zopa and the P2PFA have campaigned hard on this issue and we very much welcome the change. This is a progressive reform from the Treasury that reflects the growing importance of the UK’s alternative financial services sector.”
The Budget also revealed the government’s intention to spur on competition in the Banking market by buttressing the UK’s alternative finance and FinTech industries. More detail on this front may be discovered in the recent report: “Banking for the 21st Century: driving competition and choice”. This is all part of the government’s desire to cement the UK’s position as the global capital of financial innovation. To that end, three new measures were unveiled within the budget:
So what do some of the industry’s biggest names make of these changes?
Samir Desai, Co-Founder and CEO of Funding Circle, shared his thoughts on the bad debt relief measures:
"It's fantastic that the 37,000 people lending to small businesses through Funding Circle will be able to offset their losses from April. This change in the tax system will make lending much fairer for individual investors, putting them in an equal position to larger lenders such as banks, and boosting the average investor return by up to 25% per year overnight. We also look forward to further discussion around a third 'Lending ISA' over the coming months."
Andrew Holgate, MD at Assetz Capital, estimated the impact of those measures:
“Tax has a disproportionate effect on returns for P2P investors, but allowing investors to offset losses against tax reduces that burden. According to Government figures, bad debt relief on P2P loans will save investors £10m on interest earned over the next year. This amount should increase to £15m on interest earned in 2016-17 and £20m on interest earned in 2017-18.
“The amount saved per individual will vary depending on circumstances, but an investor with £10,000 in P2P loans earning 10% gross interest and experiencing losses of 1% would expect to retain an additional £40 interest at the higher rate of tax, earning £640 rather than £600.
“This is another sign that the Government is firmly behind peer-to-peer lending: George Osborne has rightly recognised that investors lending through P2P platforms are the victims of a tax trap, and taken a positive step to help them. At the same time, the Government expects more from P2P lenders – we will be required to withhold tax at source from 2017 – but this is a reasonable step.”
Kevin Caley, CEO of ThinCats, commented on increased pensioner freedoms and the potential of an ISA extension:
“The real winners from the Chancellor’s budget are the 2.4 million pensioners who have been compelled to take an annuity over the last six years. Savers should have the flexibility to choose their own investments and the opportunity to escape the dismally low interest rates that have hampered savings growth since 2007. Prudent savers have had their choices severely restricted for too long, but now they have to the chance to seek real growth and sustainability by shopping around.”
“People should be trusted with their hard earned money, so the expansion of the ISA to include a wider range of investments, and the greater flexibility for those that occasionally need to dip into it, is supportive of exactly the sort of financial innovation the economy needs to see. A Budget for savers, and a Budget for businesses, can only be supportive of UK growth.”
Christine Farnish, Independent Chair of the P2PFA, offered her take on the ISA news:
“We are delighted that today’s Budget continues to signal Government support for the inclusion of peer-to-peer lending within the ISA wrapper. This is undoubtedly a positive step. How this is done will be critical to the success of these reforms. Placing P2P lending within the existing stocks and shares wrapper is bad for consumer choice and fails to recognise the distinct difference between P2P loans and equities. A recent survey conducted by the P2PFA show 74 per cent peer-to-peer lenders like the idea of a separate lending ISA and 81 per cent believe a Lending ISA (LISA) would introduce more choice across the investments market. We urge the Government, whoever that is this summer, to listen to the clear wishes of consumers and deliver the LISA."
Paul Moravek and James Codling, Co-Founders of VentureFounders, touched on the proposals for increased small business support:
"We are broadly in favour of the changes to SEIS and EIS outlined by the Chancellor, George Osbourne, in today's budget. We particularly welcome removing the 70% threshold on the amount of SEIS investment that needs to be spent by a company before they can raise new investment. However, we would have liked to have seen an extension of the SEIS limit in order to bolster UK industry and support the entrepreneurial businesses that are catalysts for economic growth and job creation. Increasing the SEIS limit to £250,000 would have given early stage businesses the capital they need to achieve their growth potential. By doing this, Osborne could have sent out a further positive message to would-be investors and business owners that this Government backs entrepreneurship, jobs and wealth creation for the benefit of all."
Paul Mildenstein, CEO of Liberis, also offered comment, and an interesting perspective on the Help to Grow scheme:
"There were some very positive announcements in the budget for SMEs, especially the review of business rates and simplification of the tax system.
Confirmation that The Treasury is inviting expressions of interest from platforms wanting to act as intermediaries for banks to refer businesses on to non bank funders is welcome news; although some timescales are needed. Mandatory referral was announced last June and until this is operational, access for SMEs to non bank funding will remain patchy.
Whilst the £100m capital for the Help to Grow scheme is a positive one, it's only helping those businesses seeking finance in the £500,000 to £2m range. There's a massive funding gap at the smaller end of the SME market left by the downturn in bank funding. That's why we need to get the mandatory referral scheme up and running as soon as possible."
And finally, Rhydian Lewis, Founder and CEO of RateSetter, weighed in on ISAs:
“Peer-to-peer investors will have to wait until the summer for confirmation of the exact details of how P2P lending will work within ISAs. Maybe the Chancellor is buying some time to properly consider the Lending ISA, which after all, would be a game changer for the industry”
“LISAs would offer a much needed middle ground between low yield cash and high risk investments, opening up choice for consumers, reinvigorating a tired ISA market and allowing a higher return on their investments*”