Today’s Autumn Statement has massive implications for the alternative finance industry.
Many a platform employee will have tuned into today’s Autumn Statement. Mr. Osborne’s yearly address – a less concrete version of the spring time Budget – lays out the government’s plans for the British economy over the coming months. Those that did tune in will not have been disappointed.
The landmark announcement for the peer-to-peer sector came in the form of item 2.184. Peer-to-peer lenders will henceforth benefit from a new type of tax relief that will allow them to offset any losses incurred through bad debt against other P2P income. The move will be implemented in April 2016, and lenders will be able to make a claim for relief from April 2015.
This tweak to the tax regime was buried fairly deep within the detail of the Statement, but it’s a huge leap forward for the industry. The ability to offset losses will essentially place individual peer-to-peer lenders on an equal footing with the high street banks and other major financial institutions – which should mean that an even greater flow of retail money will soon come pouring into the P2P space. The major platforms, which have long been lobbying for this move, are understandably elated.
“This change in the tax system will make lending to small businesses via our marketplace much fairer for individual investors, putting them in an equal position to larger lenders such as banks. It’s something we have campaigned for since we launched four years ago, so we’re delighted with today’s news. More than 35,000 people currently lend through Funding Circle and the average investor could earn up to 25% more overnight per year as a result of this change. This could potentially be significantly higher depending on an individual's investment strategy. It will have a hugely positive impact on the peer-to-peer lending industry and is a win-win-win for investors, borrowers and the economy at large."
Giles Andrews, CEO of Zopa, also weighed in:
“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.
One consideration to keep in mind is that this development – while fantastic for the industry in general – will mean more to some platforms than to others. For those without provision funds (Funding Circle, for instance) it’s an absolute game changer. RateSetter, on the other hand, already has a market leading provision fund in place – which has thus far absorbed all bad debt on behalf of its lenders.
We also learnt that a withholding regime for income tax may be applied across peer-to-peer platforms in the not too distant future. Government will consult on the matter, with a view to having the measure implemented from April 2017. This will enable individual lenders to resolve their tax liability without having to file for self-assessment.
Item 2.183- more of a statement of intent than anything – represents further good news for the industry:
“2.183 Removing regulatory barriers for peer-to-peer (P2P) lending – The government announces its intention to review financial regulation which currently stands in the way of institutional lending through P2P platforms.”
The nation’s peer-to-peer lenders were doubtless perched on the edge of their seats hoping for some mention of a date for the creation of the peer-to-peer ISA – but none was forthcoming.
The Funding for Lending Scheme – which extends cheap funds to banks on the condition that those funds are then channeled through to small businesses – is due for a boost. The FLS will reportedly be extended, although we’re not sure of the specifics at this stage. We recently reported that the scheme continues to fall off in terms of its impact on small businesses, whilst on the other hand the alternative finance providers are facilitating increasingly large amounts of lending to SMEs. So much so, in fact, that they are now more than filling the quarterly SME lending gap opened up by traditional lender inactivity under the FLS scheme.
So is an extension of cheap funding to traditional SME lenders going to worry the platforms? Unlikely. The banks face multiple issues when it comes to small business lending – it’s not simply a case of having the money to lend. In many cases traditional lenders simply aren’t especially interested in lending to small businesses.
“Any additional sum of funding for SMEs is welcome but the amount pledged falls disappointingly short of what is needed; and more importantly, banks face other commercial and regulatory challenges discouraging them from lending more to the SME sector. It’s much easier for them to deploy money to large corporates.
“The government must find ways in which to encourage SME lending by either forcing banks to lend more to SMEs or perhaps allowing alternative lenders into the FLS. Many financially strong businesses are being rejected by banks even though they pose little risk of not repaying their credit. In our first 10 months, we have lent over £3 million and we expect to triple our book size over the next year. A large number of our clients were turned away by the big banks when they applied to them for credit, yet they are excellent clients of ours.”
Another consequence of the banks being offered a cheap source of funding under the FLS is that they are then less incentivized to offer attractive interest rates to everyday savers. All the more reason for those consumers to chance their arms in the world of peer-to-peer lending, where interest rates range from 4% into the high teens – depending on the platform, risk band, etc.
Mr. Osborne also heralded the coming of a £900m plan to gee up the country’s small businesses. £400m of that figure will be distributed by the British Business Bank. That news will doubtless pique the interest of many an alternative funding platform. We’ve already seen the BBB pump upwards of £100m into SMEs via a number of online marketplaces. Will we see a string of new platforms become the beneficiaries of further BBB funding? And, if so, there’s also a question about where and how to allocate funding. The most established platforms are, generally speaking, short on borrowers and saturated with investors. Such platforms are forced to carefully manage the amount of investor capital that they take on board, lest they find themselves incapable of fully deploying it. Bearing that in mind – where would the BBB's money affect the greatest impact on the nation’s SMEs? We’ll have to wait and see.
"The Chancellor's support for peer-to-peer lending reflects the impact the industry is having on the economy. Peer-to-peer business lending drives job growth, boosts exports and helps solve one of the Government's biggest headaches - getting good quality finance into good quality small businesses.
"The measures announced by the Chancellor will help accelerate the already rapid growth of peer-to-peer lending."