Regulatory developments in the UK
The UK watchdog has promised changes to its much-vaunted crowdfunding regime – changes that are set to arrive in the early stages of 2017. Strengthening investor protections and sharpening standards of disclosure are at the forefront of the regulator’s mind for both debt and equity platforms. But in truth the FCA left no stone unturned in its latest update on the post-implementation review process, and it’s very possible that changes could be sweeping. Some of the more unexpected points to be raised – and to keep an eye out for action on in 2017 – include the strengthening of rules surrounding wind-down plans, extending mortgage-lending standards to platforms, the enforcing of additional “requirements or restrictions” on cross-platform investment, and the potential for investment limits in peer-to-peer lending.
Of course, authorisations are another hotspot. There was a sudden spree of authorisations towards the end of last year, including a few larger platforms like Landbay and Folk2Folk, to go alongside smaller players such as LandLordInvest and Peer Funding. But the very largest peer-to-peer/marketplace lenders in the UK continue to await the green light from the regulator. Funding Circle,RateSetter and Zopa, each of which has lent over £1.5bn to date, continue to languish under interim permissions. You have to believe that this will change in the first quarter, or at least first half of the year ahead.
The regulatory status of platforms is especially relevant because of the Innovative Finance ISA, which formally launched in April of last year, but has yet to truly take off, due to the current lack of fully authorised platforms. Platforms have to hold full permissions in order to apply for ISA manager status.
Finally, keep an eye out for certain platforms choosing to branch away from retail investment in 2017. As part of its authorisation, Landbay was forced to make changes to its investment process such that it no longer pre-funds loans using institutional capital. The firm was forced to make this tweak to suit the regulator’s requirements and to remain 36H eligible. Other peer-to-peer lenders may take a similar approach, and change their approaches in order to continue to accept retail money. But whispers would suggest that some platforms will opt to simply drop out of the 36H race, thus ending their pursuit of retail capital altogether.
Referral scheme pulse check
The mandatory bank referral scheme finally went live on November 1st in the UK, ending years of back and forth over exactly how the process of SME referral would function. Opinions differed on exactly what volume and quality of loan referrals would be delivered by the scheme, even among those operating the three designated referral platforms.
At the time of the scheme's launch, Conrad Ford, CEO of Funding Options, said that his firm “already sources tens of millions of pounds a year in vital alternative finance to hard-pressed UK firms,” and that this number could soon become hundreds of millions.
2017 should signal the end of referral scheme prognostication, as we should finally be able to gauge the impact of the initiative in practical terms – i.e. how many businesses rejected by the banks for credit will ultimately be funded via the referral scheme in year one?
Come in, Marcus
Similarly, the long-rumoured online lending play from Goldman Sachs finally went live in early October of last year. The currently ultra-minimalist landing page doesn’t give much away, but many are expecting big things from the so-called Marcus platform. Would-be borrowers can apply for unsecured loans of up to $30,000, with initial requests only open to those in the US. Goldman, which has poached a number of Lending Club and Prosper executives over the past year and a half, is said to have mailed out millions of pre-approval codes to prospective borrowers in conjunction with the Marcus platform’s launch.
Marcus loans are reportedly being funded with deposit money from Goldman’s New York State-chartered banking subsidiary, which was birthed in the wake of the 2008 financial crisis when Goldman became a bank-holding company. Given the funding struggles that have plagued marketplace lenders and online lenders alike during 2016, the success of a competitor with access to deposit money will be watched very closely indeed.
Marcus by Goldman is headed up by Harit Talwar, who was hired in May 2015 from Discover Financial. He was made a partner at Goldman from the get-go – one of only c. 400 across the entire firm.
Article 50 deadline
Finally, Prime Minister Theresa May is insistent that Article 50 – the clause which begins the process of the UK leaving the European Union – will be triggered at the end of March. This will be a fascinating test for the UK’s alternative finance and broader fintech and non-bank sectors. The overwhelming sentiment among alternative lenders and fintech firms alike in the wake of the Brexit vote has been that of optimism. And while it may seem a little naïve, it makes sense that times of greater economic uncertainty might yield opportunities for alternative finance providers, both in terms of boosted origination and increased investment interest. After all, the peer-to-peer lending industry took off in the wake of the global financial crisis, with industry leaders Funding Circle,RateSetter,Seedrs and Crowdcube all launching in 2010.
But Brexit and broader economic uncertainty will unquestionably cause tension in certain areas. Take Funding Circle, for example. The future of the firm’s relationship with the European Investment Bank was cast into doubt by the referendum result, and co-founder James Meekings has been calling on the British Business Bank to step up. Funding Circle was also been forced to accelerate its stress testing plans as a show of post-Brexit resilience for its institutional investors over the past few months.
For now, it’s difficult to say whether such events as Brexit and Trump’s victory in the US election race will be net negative or positive for the alternative finance space – and that’s largely because the true impact of these events is yet to crystalise. 2017 will likely provide greater clarity as to exactly how alternative finance platforms fare in more challenging economic times, something that industry observers and detractors alike have long been keen to find out.
