See EU later
The UK’s decision to split from the rest of the bloc sent shockwaves around the world, but what does it mean for peer-to-peer lending?
THERE is a blight on the land, and its name is Brexit. As we progress towards B-day (29 Mar 2019 in case it slipped your mind), that seems to be the message booming loud and clear from most of the UK’s largest financial and corporate institutions.
Would Nissan have demanded its famous guarantee letter, for example, if it were not so? Would the Bank of England have warned that Brexit will cost 75,000 jobs in the City? Or would Paul Drechsler, the president of the Confederation of British Industry – traditionally the voice of corporate Britain in Westminster and not given to hyperbole – have likened the negotiations to a “prime-time soap opera”?
So it’s clear that for those in the rarefied atmosphere of the multinational, many more glasses are half empty than half full. But what about life closer to ground level, the millions of ‘ordinary’ small- and medium-sized enterprises (SMEs) and consumers who between them account for such a large chunk of the UK economy? And who also make up the population of borrowers and investors that the peer-to-peer lending sector relies on. Could a bad Brexit bring the slick new machinery of alternative finance shuddering to a halt?
It certainly doesn’t seem to be having that effect so far, says John Goodall, chief executive of Landbay, a P2P provider of buy-to-let mortgages with a total of £67.42m of loans under its belt to date. “Has Brexit had an effect on our business so far?
“The short answer is no,” he affirms. “We’re a UK business serving UK borrowers with UK mortgages. We don’t import anything from the EU for example so we are not directly affected by Brexit.”
The point that the majority of P2P platforms are essentially domestic and thus less at risk from the threat of downgraded access to the single market – or even the dreaded prospect of having to resort to World Trade Organisation rules – seems like a fair one. It’s also helped insulate the sector from the sharp decline in the pound against the euro since referendum day that has been the most obvious economic consequence of the Brexit decision so far.
Goodall is also pretty sanguine about recent signals from the property market. Estate agent Savills has forecast that house price growth across the UK is set to halve over the next five years, and the bosses of big housebuilders (including the famously canny founder of Berkeley Homes Tony Pidgley, and Redrow’s Steve Morgan) have been cashing in shares, suggesting harder times ahead.
“The housing market is not rising like it was three years ago,” he says. “Partly due to increases in stamp duty but also because prices got out of sync with earnings. But I am not someone who thinks there will be a big crash; it doesn’t keep me awake at night.”
Companion to the falling pound, the other recent macroeconomic shift has been the first rise in the Bank of England base rate in a decade, up a modest 0.25 per cent in November to 0.5 per cent.
“It won’t be a one-off but there will be a gradual tightening,” says Howard Archer, chief economic adviser to the EY ITEM Club.
Inflation may not get much higher than three per cent, he says, and may well fall once the impact of the shift in sterling drops out of the calculations. But no-one should be blind to the fact that Brexit has hit the economy hard.
“There is no sign of real wages growth, and businesses are already being very cautious because of not knowing what is going to happen, or whether there will be a transition agreement or not,” Archer explains. “It’s clear given the strength of the global economy that the UK would be growing at more than 1.5 per cent if it weren’t for Brexit.”
Karteek Patel, chief executive of curated business loans platform Crowdstacker, agrees that the uncertainty over the outcome of Brexit is a problem. “The Brexit fog – we’re in it now and it is unhelpful,” he says.
“It could slow business investment. A slowdown would impact all of us – investors and borrowers – so we all hope it will be a soft one.”
But for many SMEs, worries over the political and macroeconomic climate come a distant second to the more pressing day-to-day concerns of running a fast-growing business.
“The rate rise is marginal: long-term the spread [between savings and P2P returns] will be squeezed but with the guidance saying there will be two more 0.25 per cent increases by 2020, there’s a long way to go before that becomes an issue for us,” says Patel.
“Right now we are seeing a positive impact – a dramatic increase in enquiries to borrow. The banks are taking a more cautious stance, possibly as a result of Brexit, and companies are looking to widen their options in terms of funding.”
And who can blame them? Many SMEs were abandoned by their banks following the 2008 crash so who would be surprised if they are eager not to put all their eggs in one basket again.
Chairman of the Federation of Small Business Mike Cherry says that there has been an impact on his members already and there could well be more to come.
“It seems as though Brexit uncertainty is impacting on small business investment decisions,” he asserts. “Seven in 10 are not planning to increase capital investment in the next three months.
“Nine in 10 small firms that sell overseas export to the EU, and one in five small business employers have EU staff on their books. A bad Brexit deal could massively stifle growth amongst these firms.”
Even Landbay’s upbeat Goodall admits that hardening official attitudes to immigration are a worry. Partly because fewer overseas workers could hit the rental income of the landlords who are his customers, and partly because of fears that recruiting good people to help grow the business could get harder.
“Several of our employees especially on the tech side are from the EU,” he comments. “I think that everyone who is here already will get the right to remain, but will we still find it as easy to attract tech talent in 2020?”
He’s not the only one concerned about the impact of free movement changes. Earlier this year Zopa chairman Giles Andrews told Peer2Peer Finance News that the decision to open an office in Barcelona was largely a defensive measure against any Brexit-related damage to the UK skills market.
“Opening the Barcelona office is an acknowledgement of the challenge of recruiting highly skilled developers in this country, and a concern that the situation might get worse because of Brexit,” he said. “I don’t think it makes you a radical pessimist to say that now.”
It’s also possible that anyone looking to branch out overseas might put plans on hold until the Brexit fog clears, although the differences in regulatory regimes across the EU are already large enough to put off most P2P platforms. Zopa’s Barcelona office is strictly a tech hub, with no lending done there, and only Funding Circle has been tempted to take on much in the way of EU expansion so far.
Rising levels of consumer debt – unsecured lending on cards, personal loans and car finance have hit a whopping £200bn – have also led to fears that a big household spending squeeze is on the way.
“We are worried about consumers,” says economist Vicky Pryce, board member at the Centre for Economics and Business Research. “They have sustained the economy so far – last year’s growth was all consumer spending.”
This has led to speculation that consumer P2P lenders are in for a harder time than their SME lending counterparts.
“That’s the perception, but is it reality?” asks Iain Niblock, chief executive of P2P analysis firm Orca. “Whatever market you are in the reality is that risk changes over time, it’s not as simple as saying that one market is less risky than another. Just like any other investment, the only free lunch is diversification.”
Read more: UK bridging finance hits pre-Brexit high
One thing that is unlikely to change as a result of the interest rate rise is the paltry return on bank savings accounts. “Savings rates are unlikely to go up, because the banks need to boost their margins,” says Pryce.
Good news for the P2P sector which has benefitted from the negative real returns offered by deposit accounts in recent years.
Another point in the industry’s favour when it comes to surviving troubled times is that the risks of P2P lending are relatively simple and discrete – no CDOs or CDSs or PPI scandals here. “P2P doesn’t pose a systemic risk,” says Pryce. “Look at the banks and the trouble they have had – P2P lenders can say we are cleaner and better.”
Crowdstacker’s Patel agrees. “One area where P2P has done well is on transparency,” he asserts. “It’s very important that people understand the nature of the risks they are taking, and our investors appreciate that we are open with them.”
So long as it can maintain that openness, he thinks the sector will continue to outperform more secretive rivals.
So even in the event that the Brexit blight does take hold of the economy, there is a fair chance that P2P will stand up to it at least as well, if not better, than traditional lenders.
This feature appeared in the December edition of Peer2Peer Finance News, which you can now read online by clicking here.