It’s natural to be cautious about the future in a world where the UK government has yet to reveal its plan to leave the European Union, where the value of sterling is tanking and where the US recently gave out its own anti-establishment message by voting for Donald Trump as president-elect. But amid the chaos and uncertainty, one group of people seem to be thriving: peer-to-peer lenders.
While the Brexit effect has resulted in currency depreciation, market volatility and historically low interest rates, the UK’s P2P sector has been reporting record results, as more and more new investors start to consider alternative finance for the first time in the face of diminishing bank returns.
In fact, things have never looked better for the P2P sector. According to a new index from OFF3R, eight of the UK’s largest P2P lenders lent £2.6bn between October 2015 and October 2016, with a sharp uptick in loan funding in September 2016, just after the base rate was cut. With the recent acceleration of IFISA approvals, a slowdown in bank lending to SMEs and many savings accounts offering little more than zero per cent to customers, it’s no wonder that more borrowers and investors are willing to consider P2P lending.
“We’ve had a lot of success in the aftermath of the Brexit with the base rate cut prompting people to look at their options,” says Luke O’Mahony, PR manager for RateSetter. “We think we’re well positioned to prosper in any kind of environment. We were founded in a difficult economic environment and we continue to prosper in it.”
But despite the recent success of the P2P lending market, there are still some concerns that Brexit could stymie Britain’s emerging industries. London has built up a reputation as the fintech hub of Europe, but Berlin is hot on its heels.
In early October, Zopa chief executive Giles Andrews, Abundance managing director (and Zopa co-founder) Bruce Davis and Daniel Morgan, head of policy and regulation at Innovate Finance, appeared before a select committee in the House of Lords, where they warned of a possible migration of talent from London to Berlin. Andrews noted that the European fintech sector was “catching up fast and probably growing quicker than the industry here.”
Davis added: “In terms of the EU we are seen as a leader but the catch-up rate is remarkably swift. Before the Brexit vote we had ministers coming to the UK to talk directly to fintech firms – I’m talking about finance ministers from Ireland and Germany in particular.
“They were really wanting to understand how they could develop their regulations to attract businesses and also to keep businesses, so they were slightly bemused when they were met by three or four German guys as to why they hadn’t stayed in Germany.
“I think we’re going back in time and that does reduce opportunities for expanding businesses.”
The UK’s P2P sector is staffed by a diverse mix of UK, EU and non-EU citizens, and the ability to continue to attract international talent is vital to the continuing growth and success of these rapidly growing companies. In lieu of any concrete information on how passporting rights will be affected post-Brexit, industry experts are forced to make their own assumptions.
“I don’t think at this stage that people are fretting too much about this because they assume that the talent they have will be allowed to stay and that the UK government is going to make it easy to bring in better talent in the future whatever happens,” says Emily Reid, a partner at Hogan Lovells. “I think everyone’s just assuming that it won’t turn out to be an actual problem.
“I would have thought that if anything, fintech companies might have easier access to a broader range of talent because if the government is persuaded that the lifeblood of the sector depends on recruiting people from outside the UK, then I think they would have to extend that to easier job permits for people outside the EU.”
Anecdotally, it is believed that between 25 per cent and 35 per cent of the UK’s P2P sector are EU nationals, and Peer-to-Peer Finance News is aware that most of the bigger platforms have made a point of reassuring these employees that their jobs are safe. However, until the thorny issue of passporting rights has been resolved, the truth is that no one really knows how Brexit will impact recruitment and the existing workforce.
On the other hand, the movement of people (and businesses) across the continent does not appear to be giving P2P lenders much cause for concern. Cross-border lending is so difficult that it almost never happens in the consumer finance industry, so most business models should remain unaffected.
“Very broadly speaking, under English law you can generally do something unless the law says you can’t,” explains Reid. “Whereas on the continent it tends to be the opposite – you can’t do something unless the law says you can and has a regulatory framework that is relevant and works. So the whole concept of individuals lending to individuals or small companies using spare cash to lend to individuals isn’t easily transferable to the continent. Where it does happen, the whole structure has to be different.”
Thus far, there has been very little crossover between the UK and European lending markets, with the exception of Funding Circle, which has a presence in Germany, Spain and the Netherlands thanks to last year’s acquisition of German P2P platform Zencap (since rebranded as Funding Circle). In 2014, RateSetter established a base in Australia and Reid predicts that it may be easier for UK platforms to expand into commonwealth countries such as South Africa, Canada and New Zealand, rather than grappling with the complexities of EU law.
“Almost all the fintech companies that we know have global rather than European aspirations,” she says. “I think the modus operandi is to perfect your systems and your product in one jurisdiction – and the UK is a good place to do that – and then take what you’ve developed and test it in another jurisdiction.
“A lot of the commonwealth countries will have a historic link to English law so it would be reasonable to expect there to be a strong similarity in those countries.”
This is certainly true for RateSetter who has “no short term plans to expand into the EU” according to O’Mahony. However, it is hard to grow a business when expansion is limited to the domestic market and long-distance trading partners.
There is a hope that the UK government will step in to protect the fintech sector by encouraging STEM education in schools and offering new graduate and post-graduate training programmes, as well as offering support at a regulatory and taxation level.
But no matter what the future holds, there is every reason to be optimistic about the UK’s post-Brexit P2P sector.
“We were founded in a time of massive disruption and so were other companies like us,” says O’Mahony. “Obviously some big changes are to be expected, but it’s not something that we can’t deal with.
“There is opportunity in change, and if anyone’s going to make the most of it it’s going to be fintech companies.”