What could Brexit mean for P2P lending?

8th July 2016
With the news last week that 51.9% of the UK voting populous opted to leave the EU many people, both in finance and beyond, may very well be wondering just what this means for their investment and capital over the short, medium and long terms. 

The weight of the financial crash in 2008 still casts a dreary cloud over the nation, with many businesses and individuals from SMEs to multinationals still dealing with the consequences.

Though the banking industry may have recovered it had to withstand a huge blow during the last crash. That said, it could be argued that the 2008 recession was the making of the P2P industry, particularly in the UK. As the public lost confidence in the traditional banking system, P2P and other methods of alternative finance have been said to have plugged a sizeable gap. With swathes of SMEs and individuals turning to P2P lending as a way of securing capital for themselves or their businesses in the last recession, it has been argued that, in the wake of Brexit, the same could potentially happen again. But, as always in finance nothing is without risk or relative uncertainty.

Rhydian Lewis, CEO of RateSetter spoke of how the forward-thinking nature of FinTech and P2P means that it is, in his eyes, able to adapt quicker to the changes that an EU exit has brought forward.  Before the referendum he said, “Leaving the EU may discombobulate big banking conglomerates and FinTech businesses will look to fill any spaces. This may prove to be an opportunity for FinTech.” 

What happens now?

As with all huge financial changes, the real fear can be is uncertainty as this could cause stagnation in the lending market which could affect all institutions, including alternative finance and the regular banking industry.
Leaving the EU common market could also make it more difficult for P2P companies to work alongside investors across the continent which may affect their growth. That said, there are many P2P platforms which operate solely in the UK. This lack of reliance on the EU market could enable them to better protect themselves against the lack of investment from overseas. This could help potential growth in the market in the UK, especially if banking interest rates fall and investors seek alternative means of investment.
If interest rates don’t fall and people’s faith in the system remains then it’s really just business as usual for P2P lending providers. Despite the uncertainty, some of the big providers who don’t trade across the continent have offered respite words for their investors also.

P2P platform ThinCats, like other UK-based platforms stated that, “Our Strategy at ThinCats is very much business as usual. As the implications of the vote to leave start to unfold, we will see both a positive and negative impact on the businesses that have been funded via the platform. 
“We will continue to monitor the market and act in your best interests.”

In a press release, Assetz Capital said, “Expect to see continuation of the attractive interest rates paid by Assetz Capital and a widening of the gap with bank savings account interest rates.” 

MarketInvoice CEO Anil Stocker, a firm backer of the Remain campaign, also stated that, “It is business as usual at MarketInvoice. .”
“The majority of our funding comes from UK investors who take a long-term view of the asset class and its potential to perform through the cycle."

What does this mean for investors?

Though Brexit poses a potential risk to all aspects of financing in the UK, P2P has survived a crash before when just in its infancy. 
In a press release Assetz Capital stated that as bank interest rates on business loans are likely to rise and savings accounts rates may fall, banks could become less competitive.
The press release went on to say, “This will allow us to continue to grow strongly and deliver more lending to quality businesses who can provide us with solid loan security and also deliver more interest to our lenders.”
With this in mind P2P may very well end up being the go-to option for savers wishing to reap higher returns on their investment in a time of low interest rates. With many P2P investments able to bring in 3-9With P2P investments being able to bring in potentially higher returns%, it may be an attractive option for savvy investors who are able to cope with the potential risks. 

In order to safeguard the investments, Assetz also spoke of how their credit team may have to make some changes to the way that they lend to borrowers and possibly be harsher with their scrutiny of borrowers.  
These sentiments were echoed by James Meekings, Co-Founder of Funding Circle, who said, "Clearly there will be economic and political uncertainty over the short term and we will react accordingly, including factoring this into our credit models.

With all of this in mind, it’s important to remember that P2P investments are not savings accounts and thus not covered by the FCSC. This means that if the platform were to go bust you could potentially lose all of your investment. 

What does this mean for repayments?

With Brexit, there is of course the potential for another recession. As we are now separated from the most affluent continent in the World there is no doubt that this will affect the ‘people on the ground’ which could potentially lead to increased default rates. That’s why it’s important to always research the P2P platform which you’re investing in and decide whether you need to use a platform with a safeguard option like a provision fund or security fund. To find out more about these, see our blog.

That said, these are by no means complete safeguards against your capital risk and you should read all of the fine print, particularly with regards to defaults and safeguards before investing any money in a P2P platform. 

What about the IFISA?

Interest rates may also affect the return on any money placed in an ISA, whether that’s a Cash ISA or a Stocks and Shares ISA. 
With that in mind, now may be a good time to consider a switch to the Innovative Finance ISA if you’re looking to invest in a P2P platform. The IFISA will allow you to put a tax-free wrapper around your investment up to the full amount of your ISA allowance. Read more about it here.  

In conclusion

Though small challenger P2P platforms could potentially struggle, the same may not be immediately true for the larger UK-based platforms.  
One of the potential drawbacks of leaving the EU was uncertainty. If you’re a new investor looking to avoid the low rates of interest offered by banks, P2P may offer you an alternative but it’s not without its risks. To find out more about how P2P works and whether it can work for you, click here. 
If you’re already invested in a P2P platform, we believe that key point to take away is not to panic. If you’re with a platform which offers a provision fund or similar security measure you may wish to look into the detail of how it all works. If in doubt, you may wish to speak with a financial advisor to see what your investment’s potential currently is and how you can provide the best security for your investments.

As most forms of investment, peer-to-peer lending carries a degree of risk, and you could end up with less than you put in. Your capital is at risk if you lend to businesses. Tax treatment is dependent on an individual’s circumstances and may be subject to change in the future. 

For more information see: 

Your capital is at risk if you lend to businesses. Peer to peer lending is not protected by the Financial Services Compensation Scheme. Please read our full risk warning here.