Brexit, banks and the new lending landscape

The United Kingdom’s recent referendum vote to exit the European Union has so far changed everything and nothing. Two months since voters opted for Brexit, the UK remains a full EU member state and no clear path to leaving has yet been articulated. It may well be a more complicated, protracted process than anyone expected: to paraphrase Lord O’Donnell, the former Cabinet Secretary, it took Greenland around three years to leave the European Economic Community (EEC) although its only issue for serious negotiation was fish.

Nobody yet knows what Brexit is going to entail – whether a relationship with the EU similar to that of Norway’s – plus or minus similar features; EEC membership; World Trade Organisation (WTO) membership; or something else entirely. So if there have been any significant changes to the UK’s financial landscape, they’ve come about from the reaction to the vote rather than the vote itself. When it comes to lending, however, this reaction has been strong indeed.

Anticipating a slowdown, the Bank of England (BoE) has already boosted high street lending capacity by £150bn (US195bn). Financial services brand Virgin Money has postponed its launch into the small business and unsecured finance markets. In the wake of Brexit-inspired rate cuts, Royal Bank of Scotland (RBS) has warned its enterprise customers that it may start charging for deposits. Trade body the British Bankers’ Association (BBA) reports that borrowing by business in the UK’s non-financial sector declined by £526m in June, and lending to business is expected to fall by 1% this year, 1.8% next year, and a further 1% in 2018.

The UK has not yet left the EU, but the effects of the vote are being felt keenly by banks. This was, however, always going to be the case. What’s a little less clear is how it affects the availability of credit to small and mid-sized enterprises (SMEs). With the advent of peer-to-peer (P2P) lending, they have alternative avenues to finance – but the extent to which these avenues will themselves be impacted by Brexit is a grey area.

Post-EU P2P lending

Despite the UK’s recent ambiguity, the country’s P2P lending scene is in robust health: although we’re still in August, the collective value of all loans to date this year already exceeds £2.1bn.

Post-Brexit, there is not yet much to go on, but there have been isolated incidents of post-referendum uncertainty. For example, shortly before the EU referendum in June, Funding Circle announced that the European Investment Bank had committed £100m to lend to UK SMEs via the direct lending platform, but that deal appears to have been put on hold in the wake of the leave vote.

Last month, the P2P Finance Association (P2PFA) reported that UK P2P lenders lent £658m in the second quarter of 2016, down 8% from the Q1 figure of £715m and the first quarterly decline since P2PFA started issuing data in Q3 2014. However, the drop was concentrated in lenders specialising in property loans, while volume for other business loans was generally flat.

That said, only two months have passed since the referendum and there is no real reason to be overly cynical about this form of finance – yet. If the banks remain true-to-form and their lending appetite remains cautious, it may well present opportunities for alternative financiers. Britain’s businesses will, after all, require funding, and if they can’t get it from traditional sources, they’ll find it somewhere else. P2P and other non-bank lenders are ideally placed to take advantage of this need.

Fixing the holes

To do that, however, these lenders will need to address some long-standing issues – which predate the referendum, and may inhibit their growth and their disruptive capability. Most pressing will be their laissez-faire attitude to financial standards. Technology companies launching P2P funding platforms are less familiar than traditional lenders with basic anti-money laundering (AML) and Know Your Customer (KYC) regulatory requirements. This will, act as a disincentive to post-referendum investors seeking assured returns, and will be equally off-putting to small businesses looking for stable lines of credit.

From a certain perspective, it’s understandable. New age P2P flexibility, relative to the banks, is a major selling point: SMEs are cash flow sensitive, so regulation-induced bureaucratic holdups are often unhelpful. But the need to do a deal quickly and the need to do a deal properly are often unbalanced – and not helped by their internal issues.

This imbalance has already caused some problems. FundingKnight, for example, is a high-profile P2P lender, specialising in business loans to SMEs, property bridging loans and green energy project finance. However, the UK company’s future was recently uncertain: it had to be rescued from administration in June by a former key investor, GLI Finance, which had cut off its credit four months earlier. The acquisition meant that FundingKnight’s 900-strong lenders avoided losing their cash, although not before the media had reported on the episode as exemplifying the risks involved in P2P investing.

The future of finance?

Of course, some lenders will be more robust than others, and very few will be that dependent on particular creditor relationships. Yet the fact remains that nobody knows what’s going to happen as the UK negotiates its new future, and if the quirks and flaws of P2P platforms were tolerable pre-Brexit, they will likely be intolerable afterwards.

There is, again, plenty of appetite for alternatives to conventional bank funding. As someone who himself runs an alternative finance firm, the writer can attest to this first-hand: sales enquiries have increased markedly since June 24. On an industry-wide scale, however, there needs to be further reform. Lenders must diversify their sources of credit, seeking more investors and keeping cash reserves of their own. There must be rigorous adherence to the relevant laws and standards. They must combine the higher returns of P2P lending with the relative security of bank finance.

More than anything, however, in this post-referendum landscape, they need to be consistent, reliable, and credible. If they’re anything else, they’ll be treated with suspicion – and with justification.

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